Minority Shareholders Dealt a Blow in Texas

AUSTIN (CN) - Minority investors in Texas companies can no longer depend on state courts to obtain fair market value for their stakes when majority investors cause their value to drop, the Texas Supreme Court ruled.

The landmark ruling issued Friday will make investors think twice about buying minority interests in closely held companies in the traditionally business-friendly state because it rejects a long-established common-law claim for shareholder oppression that can force majority investors to buy the smaller stake.

A six-justice majority also rejected claims that it constitutes oppression when majority investors refuse to meet with prospective buyers of the smaller stake.

The case involves widow Ann Rupe seeking to redeem shares in her husband's family business after his death in 2002. Lee Ritchie, the president of Rupe Investment Corp., offered Rupe up to $1.7 million for her 18 percent stake in the closely held investment trust.

She rejected the money because the company's sales exceeded $150 million and it had over $50 million in assets.

When company officials declined to meet with potential third party purchasers of Rupe's interest in 2006, she sued the company; Ritchie, the president; Paula Dennard, board chair; and the company's attorney, Dennis Lutes, in Dallas County Court.

A jury ruled for Rupe and said the majority owners had to pay the fair value of her shares, which they valued at $7.3 million.

The 5th District Court of Appeals affirmed the finding of oppressive conduct, but reversed the $7.3 million purchase price for a new determination by the trial court. This resulted in the current appeal before the Texas high court and its reversal.

Writing for the majority, Justice Jeffrey Boyd said majority owners had "no contractual, statutory, or other duty" to meet with possible buyers of Rupe's stake. He admits their refusal to meet with the buyers put Rupe "in a difficult situation" because she could not sell her stack quickly or for full value.

"But difficulty in - and sometimes even the impossibility of - selling one's shares is a characteristic intrinsic to ownership of a closely held corporation, the shares of which are not publicly traded," the 54-page opinion states. "Shareholders of closely held corporations may address and resolve such difficulties by entering into shareholder agreements that contain buy-sell, first refusal, or redemption provisions that reflect their mutual expectations and agreements."

Without such agreement, state law allows the appointment of a receiver for shareholder oppression which did not take place in this case, Boyd wrote.

"We recognize that our conclusion leaves a 'gap' in the protection that the law affords to individual minority shareholders, and we acknowledge that we could fill the gap by imposing a common-law duty on directors in closely held corporations not to take oppressive actions against an individual shareholder even if doing so is in the best interest of the corporation," Boyd wrote. "Ultimately, because the [common law standard for oppression] is so vague and subject to so many different meanings in different circumstances, we conclude that creating new and independent legal remedies for 'oppressive' actions is simply bad jurisprudence."

In a scathing dissent, Justice Eva Guzman decried the majority's "radical departure from settled precedents and expectations."

"The ultimate effect of this holding is to negate the very foundation of protection the legislature and U.S. courts have long afforded to minority shareholders in closely held corporations," Guzman wrote.

Texas was one of 37 states that had laws allowing courts to appoint a receiver over closely held companies when shareholder oppression takes place, according to the 30-page dissent, which Justices Willett and Brown joined.

Rupe Investment's attorney, Robert Gilbreath with Hawkins Parnell in Dallas, called the ruling "a clear victory for closely-held corporations and their controlling shareholders."

Follow @davejourno

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