The last post discussed the Texas Supreme Court’s recent decision in Ritchie v. Rupe eliminating shareholder oppression as a cause of action in Texas. However, all is not lost for minority owners in small corporations or limited liability companies who are treated unfairly. In fact, the same court made it clear that board of director members and officers continue to owe fiduciary duties to their corporations that can be enforced by shareholders through derivative actions.
Lessons that can be learned from this decision are:
1. The court favors that shareholders use shareholder agreements to govern their respective rights and obligations. The court mentions the use of shareholder agreements multiple times throughout the opinion. I anticipate corporate attorneys will utilize these agreements more frequently in forming corporations and representing minority investors.
2. Shareholders in closely held corporations (corporations with fewer than 35 shareholders) may file suit against directors or officers in control of a corporation who breach their fiduciary duties without jumping over all the procedural hurdles typically required in derivative actions.
3. A shareholder has statutory but not common law rights to inspect a corporation’s books and records.
4. The directors of a corporation cannot refuse to pay dividends for an improper purpose such as devaluing the shares of the other shareholders.
5. In limited instances, if the controlling officers or directors terminate a minority shareholders employment, they may be liable for breach of fiduciary duty.
6. Officers and directors will continue to be held accountable to a corporation for misapplying corporate funds or diverting corporate opportunities.
7. If controlling directors or officers take action to deflate the value of a corporation’s shares, “perhaps to allow the company or its shareholders to purchase a minority shareholder’s shares for less than their true market value,” the corporation may have a cause of action for breach of fiduciary duty.