Texasshareholderoppression

The Texas Business Corporation Act: The Texas Business Corporation Act sets forth the basic procedures for the formation, governance, and operation of a corporation formed in the State of Texas. Any action undertaken by the majority shareholders of a corporation must follow the procedures set forth in the Act. Although the Act is complex and covers virtually every aspect of corporate governance, some specific provisions are worth noting. Article 5.11 of the Act allows minority shareholders to "dissent" from certain actions taken by the corporation, and in some instances, the dissenting shareholder can force the corporation to buy back his shares at the fair market value. Article 5.14 enumerates the conditions under which a shareholder can initiate a lawsuit on behalf of the corporation to challenge actions taken by an officer or director that are not in the best interests of the corporation. The entire text of the Act is available on many different sites on the internet, including http://tlo2.tlc.state.tx.us/statutes/ba.toc.htm.

Minority Shareholder Oppression. Texas law related to "minority shareholder oppression" has been developed by Texas courts over the past 15 years. The court decisions are based on common law principles that recognize fiduciary duties that can arise in the context of closely-held corporations. Some key Texas decisions include:

Willis v. Bydalek involved a dispute between a majority shareholder and two minority shareholders who were also employees of the company. When the majority owner decided to close the business and locked out the shareholder/employees who had essentially been running the business, the minority shareholders sued. The court found that the majority owners decision was justified by the failure of the business to generate any profits. In explaining its decision, the court set forth the two conditions when minority shareholders can sue for shareholder oppression: (1) the majority shareholder's conduct substantially defeats the minority shareholder's expectations that, objectively viewed, were both reasonable under the circumstances and central to the minority shareholder's decision to invest in the company; or (2) the majority shareholder's conduct is burdensome, harsh, or wrongful, demonstrating a lack of probity and fair dealing in the company's affairs to the detriment of the minority shareholders, in a manner that is a visible departure from the standards of fair dealing upon which each shareholder is entitled to rely.

Davis v. Sheerin involved a dispute between a majority shareholder and a minority shareholder who owned 45% of the corporation, but was not actively involved in the management of the company. When the majority shareholder refused to allow the minority owner to inspect the books of the company, the minority owner sued. During litigation, the minority owner was able to show that he was entitled to not only 45% of the corporation's assets, but also 45% of six tracts of land that the majority owner had purchased and held in his own name. The court also recognized that, given the oppressive conduct of the majority owner, the minority owner was entitled to force the liquidation of the company to collect his share of the assets.

Redmon v. Griffith involved a dispute between a 75% owner and a 25% owner of a trucking company, both of whom were actively involved in the operation of the business. When the majority owner fired the minority owner, the minority owner sued. The court found that even though the corporation could fire any "at will" employee, the firing was evidence that could be considered as part of the oppressive conduct of the majority owner. The court also found that the majority owner's use of corporate funds to pay his personal bills supported the claims of shareholder oppression.