This is Not an Exit: The Texas Supreme Court Puts the Kibosh on Judicially Mandated Buyouts in Shareholder Oppression Actions
July 7, 2014
Last week, the Texas Supreme Court’s decisions in Ritchie v. Rupe and Cardiac Perfusion v. Hughes made it more difficult for a minority shareholder in a close corporation to liquidate his/her interests in a close corporation in the face of oppressive conduct. This line of cases makes it clear that moving forward, it will be increasingly important to contractually protect a minority shareholder’s interests (to the fullest extent possible) on the front end, and in the event of discord between shareholders on the back end, any causes of action based on oppression-like conduct must be meticulously pled so as to achieve the desired outcome.
First, in Ritchie v. Rupe,the Court held Texas law and statute do not allow for a judicially mandated buyout of a minority shareholder’s interests in a close corporation. Ritchie v. Rupe, No. 11-0447 (Tex. Sup. Ct. June 20, 2014).In so finding, the Court also declined to recognize a claim for common law minority shareholder oppression. The Supreme Court clarified that a claim for shareholder oppression is only available under section 11.404 of the Texas Business Organizations Code (the Texas Receivership Statute), and even then, the only remedy available under the Texas Receivership Statue is rehabilitative receivership.
The Texas Receivership Statute allows a court to appoint a neutral third party (the receiver) to take possession of the corporation’s property and business, and under supervision for the court, preserve the value of the property and the business for the benefit of the corporation. The appointment of a receiver, as the Texas Supreme Court has noted, is a drastic remedy that is only employed when all other available remedies are insufficient. Receivership is considered an extreme remedy because of the time and expense associated with it including the “reasonable fee” the receiver is entitled to for her work. Given that a court may administer a corporation in receivership for up to three years, the receiver’s fee can be substantial. For an oppressed minority shareholder, the Court’s decision in Ritchie means added expense and delay.
In reaching its conclusion in Ritchie, the Texas Supreme Court compared the provisions of the Texas Receivership Statute with the Model Business Corporation Act (the Act upon which the Texas receivership statute was modeled) and concluded that the differences in the statutory construction of the two suggest the Texas legislature intentionally omitted the alternative remedy of a judicially mandated buyout. The Court concluded if the Legislature intended such a remedy, it could create it, but the Texas Supreme Court declined to do so by reading this remedy into the Receivership Statute.
Also, after considering a series of factors that would allow the Court to formally recognize a common law cause of action for shareholder oppression, the Court declined to do so. The Court noted a shareholder’s rights are sufficiently protected by the Receivership Statute and other equitable causes of action (e.g. a derivative action based on breach of fiduciary duty). Further, the Court held, to the extent a minority shareholder’s rights are not protected, shareholders have the ability to contract for the necessary protections.
It appears the Court’s logic in Ritchie is here to stay. A few days following the Ritchie decision, the Supreme Court overturned another finding of oppressive conduct based on the same grounds in Cardiac Perfusion v. Hughes. In that case, the trial court found the defendant engaged in shareholder oppression and ordered “the equitable remedy” of a judicially mandated buyout. Relying on Ritchie, the Supreme Court overturned the trial court’s decision and remanded. Again, the Court noted that a minority shareholder may not recover equitable relief through a shareholder oppression action, and echoed that rehabilitative receivership was the only available remedy for shareholder oppression in Texas.
Notably, the Supreme Court’s decisions in Ritchie and Cardiac Perfusion do not prevent parties from contracting for buyout provisions in the event of disagreements between shareholders. Such contractual provisions circumvent the need for judicial intervention in the face of particular events. Further, while the appointed receiver has the power to liquidate the corporation altogether, the Supreme Court has not clearly prohibited the appointed receiver from mandating a buyout of the minority’s interest. Accordingly, while a forced buyout of a minority’s interest is not entirely off the table, the Court’s decisions in Ritchie and Cardiac Perfusion make it clear that these forced buyouts will not stem from the Court.