On March 28, 2011, the Dallas Court of Appeals issued a significant shareholder oppression opinion in Ritchie v. Rupe, No. 05-08-00615-CV, ___ S.W.3d ____, 2011 WL 1107214 (Tex. App.—Dallas 2011, ____). [Read Full Opinion] This is the first Fifth Court of Appeals case to recognize a cause of action for minority shareholder oppression. The prior case law on issues of shareholder rights in that court had left some doubt as to the viability of shareholder oppression claims in Dallas. See, e.g., Schoellkopf v. Pledger, 739 S.W.2d 914, 918 (Tex. App.–Dallas 1987), rev’d on other grounds, 762 S.W.2d 145 (Tex. 1988). The case involved a closely-held Texas corporation called Rupe Investment Corporation (“RIC”). The opinion does not indicate the nature of the business, but it had been founded by two gentlemen, and by the time of the dispute in question, all of the stock was owned by various trusts set up for the benefit of the founders’ descendants. The corporation was a very valuable asset for its shareholders. The court of appeals indicated that, as of 2007, the corporation had net sales of over $152 million and $55 million in assets. Moreover, the corporation regularly paid dividends to its shareholders. The Plaintiff was the wife of one of the founders’ children, who became the trustee for the trust holding her family’s shares after her husband died in 2002. The trust controlled by the plaintiff owned approximately 18% of the voting stock.
Plaintiff’s husband had been on the RIC’s board of directors, and dissension started appearing within months of plaintiffs’ husband’s death. In 2003, plaintiff announced her desire to sell her shares in RIC and initially offered them to the corporation. At first, the corporation declined to make an offer, but later offered to purchase all the stock for $1 million cash and subsequently raised the offer to $1.7 million, consisting of a combination of cash and debt. The book value on the shares was approximately $3.9 million. During this period, there were also discussions relating to the Plaintiff’s participation on the Board of Directors. There was no shareholders’ agreement or any other restriction prohibiting the sale of the stock to third parties, and so plaintiff decided to seek an outside buyer.
In 2004, Plaintiff hired a broker, a retired capital fund manager, to seek a third- party buyer for the stock. The broker met with the other shareholders and directors and sought their cooperation with his efforts to sell the stock. The broker testified that RIC’s president told him that no member of RIC's management would meet with any prospective purchasers of the Stock. The defendant confirmed this in writing on February 1, 2006. The broker testified that he offered the stock for sale at $3.4 million, a $500,000 discount off book value, but that the stock was impossible to sell because of the refusal of RIC management to meet with prospective buyers. Plaintiff filed suit on July 21, 2006 against three of the four directors, directly and as trustees of trusts owning the majority of RIC’s stock. Plaintiff also sued RIC on a claim for failure to permit inspection of corporate records. There appears to have been disputes and motions filed regarding the correct capacity in which the defendants should have been sued. Ultimately, claims were asserted and a judgment was rendered against the Defendants in both their individual capacities and as directors.
The case was tried to a jury, which returned a verdict in favor of plaintiff. The appellate court’s opinion does not make clear what liability questions were submitted to the jury. In addition to the jury verdict, the trial court also issued findings of fact and conclusions of law.
The trial court held that the conduct of the defendants constituted shareholder oppression as a matter of law. This holding was principally based on the defendants’ refusal to cooperate with Plaintiff’s attempts to sell the Stock to third parties. However the trial court also concluded that the Defendants had acted oppressively by causing RIC to withhold corporate books and records from plaintiff; making redemption offers to plaintiff that were not in accordance with RIC's policy (apparently meaning the low-ball offers for a fraction of book value); making plaintiff a conditional offer to be on the board of directors in exchange for her not pursuing legal action against another RIC shareholder; and causing RIC to pay some personal expenses for one of the defendants. The jury was instructed to find the “fair value” of plaintiff’s shares and was specifically instructed to exclude any discount for minority status or marketability. The trial court entered an order compelling the three defendants to cause RIC to purchase plaintiff’s shares for $7.3 million, the fair value found by the jury. The trial court also entered an award for a portion of the attorneys’ fees sought by plaintiff against RIC. The Dallas Court of Appeals reversed the valuation and award of attorneys fees, but affirmed in every other respect and remanded the case for a redetermination of the value of the Stock.
The court of appeals held that Texas law provides remedies for shareholder oppression. The court held that shareholder oppression was defined as either:
1. majority shareholders' conduct that substantially defeats the minority's expectations that, objectively viewed, were both reasonable under the circumstances and central to the minority shareholder's decision to join the venture; or
2. burdensome, harsh, or wrongful conduct; a lack of probity and fair dealing in the company's affairs to the prejudice of some members; or a visible departure from the standards of fair dealing and a violation of fair play on which each shareholder is entitled to rely.
These two non-exclusive definitions are intended to be broad and to cover “a multitude of situations dealing with improper conduct.” The opinion provides considerable insight as to how to submit a shareholder oppression claim. “The jury determines what acts occurred (assuming those facts are in dispute), but whether those acts constitute shareholder oppression is a question of law for the court.” Therefore, the appellate court saw no error in a judgment based on both jury findings and on the trial court’s findings of fact and conclusions of law.
The court of appeals held that oppression could be asserted against a controlling group of shareholders and that a single majority shareholder was not necessary. Significantly, the court also held that a claim of oppression may be asserted against directors based on the clear provision in the dissolution statute authorizing equitable intervention when “the acts of the directors or those in control of the corporation are illegal, oppressive or fraudulent.”
In analyzing the oppressive conduct, the court recognized that the law protects both specific reasonable expectations and general reasonable expectations of shareholders. Specific expectations are rights or privileges that are specifically agreed to or reasonably expected as arising from the circumstances and transactions involved in forming the corporation—such as the expectation of continued employment or a place on the board of directors. General expectations are those rights and privileges that are common to all shareholders and stem from the shareholder’s status as an owner—such as the right to vote, access to corporate information, a proportionate share of corporate earnings, and the like.
The court held that the buy-out remedy was available for shareholder oppression. Next, the court held that, absent a contractual limitation, the right of free alienation of one’s stock is a general reasonable expectation that all shareholders have as a matter of law. The court held that this reasonable expectation of share ownership prohibited, not only an overt effort by the controlling shareholders or directors to restrict or thwart a potential sale, but also any policies or actions that constructively did so by interfering with the minority shareholder’s ability to identify potential third-party buyers and to provide those buyers with sufficient information to allow them to conduct a reasonable due diligence as to the proposed transaction. In fact, the court went so far as to impose an affirmative duty on the majority to cooperate with the minority’s efforts to sell by meeting with potential buyers so long as the burden on the corporation was reasonable. The court also rejected the argument that the business judgment rule protected the decision of the majority not to affirmatively cooperate in the effort to sell.
Nevertheless, the court of appeals reversed the trial court’s award of $7.3 million as the “fair value” of the stock. The court noted that two measures of “fair value” may be utilized: “enterprise value,” in which the minority shareholder receives her percentage of the total value of the corporation without any discount for marketability or minority status, and “fair market value,” in which the plaintiff would received the amount a willing third-party buyer would pay a willing seller of the minority shares and which would ordinarily involve discounts for lack of marketability and minority status. The jury was instructed to find the enterprise value. The court of appeals acknowledged that the enterprise value would usually be the appropriate measure in a squeeze-out scenario where the minority shareholder could not be characterized as a willing seller; however, in this case the oppressive conduct was interference with efforts to sell to third parties, and the stock had in fact been offered at a discount to book value—a price roughly half the value found by the jury. Under the facts of this case, the court held that it would be inequitable—that the plaintiff would receive a windfall—if enterprise value were used. Despite the fact that the defendants had made low-ball offers to the plaintiff, the court held that these offers were not oppressive because the plaintiff had solicited them, and the corporation was under no obligation to purchase or to make an offer. The case was remanded to the trial court for further proceedings on the issue of valuation. The court also reversed the award of attorneys fees based solely on the corporation’s interference with the plaintiff’s right of inspection of corporate records because the court held that there was no evidence of interference.