Charles: Welcome to VLF’s Video Educational Series. Today’s topic is shareholder oppression after Richie versus Rupe. I’m Charles Vethan.
Olivia: I’m Olivia Mallory.
Joseph: I’m Joseph Colvin.
Charles: Olivia the Richie versus Rupee decision is now a little over two years old. Now if you can tell our friends a little bit more about that decision.
Olivia: Sure Charles, the Texas Supreme Court decided basically that minority shareholder oppression was no longer a cause of action.
Charles: How do courts deal with minority shareholder oppression cases today Joseph?
Joseph: Well, as Olivia mentioned, shareholder oppression is no longer a viable cause of action but there are many other tools in a plaintiff’s toolkit to evaluate a claim. Essentially now a minority shareholder needs to bring what’s called a Derivative Breach of Fiduciary Claim on behalf of the corporation against the control person.
Charles: Okay, let’s back up there. We talked about bringing a claim for a majority shareholder, why would this claim ever risen pre-Rupe anyway.
Joseph: Prior to the Richie, Rupe case, there is a line not of supreme court cases but appellate court cases that held under the Texas Receivership Stature a lesser remedy to permit a court order of the buyout of the minority shareholder rather than cause the disillusioned of the entire company in order to rectify the problem.
Charles: Olivia, under the present standard, after Richie versus Rupe was enacted, passed by the Texas Supreme Court, can a minority shareholder force a majority shareholder to buy him or her out?
Olivia: No they cannot Charles. It’s not readily available for minority shareholders.
Charles: What are some of the tools that the minority can use today if he, she or it believes that they are being treated unfairly or improperly by the majority shareholder who effectively controls a private company?
Joseph: Again, they still have a few options, under our breach of fiduciary claim, it would now be brought on behalf of the company, a derivative plan brought by the minority shareholder. I guess, the control person.
In that context, the minority shareholder has to show that it wasn’t merely a benefit of the majority shareholder. In fact, the actions of the control person harmed the corporation itself rather than the shareholders.
We’ve talked about a breach of fiduciary duty claim from the perspective of the plaintiff. Olivia what kind of defenses does a corporation or perhaps a control person have to a law suit brought on behalf of minority shareholder as a breach of fiduciary duty?
Olivia: There’s something called the Business Judgment Rule. Basically, what that asks is did the control person did the board, did the corporation act at based on informed decision making and two did they act in the best interest of the company.
Charles: In a situation that we ran into Joe is that small companies, if the board decided not to pay dividends out and they’ve decided to reinvest money into the company. Can I minority shareholder sue the board by saying, “We will pay dividends over the last ten years. All of a sudden, we weren’t paying dividends, is that a legitimate claim anymore?
Joseph: The short answer is no. As long as the court finds, there is a legitimate reason behind the decision, the business judgment rule, would be an absolute bar to that clan.
Charles: Olivia let’s go back to our short discussion of the business judgment business rule exists. Would it make sense that whoever is using that as a defense, exercise some judgment in making a decision.
Olivia: If you’re going to start a judgment rule as a defense, you need to show that like I said, earlier you act informed and you used some judgment and some discretion in making your choice.
Charles: I think we had a great conversation here today. If you want more information about the business judgment rule or fiduciary cases, Richie versus Rupe, please visit us at our website at vethanlaw.com
Joseph: Remember your problem is our business.