In the summer of 2014, the Texas Supreme Court handed down a decision that has caused quite a bit of controversy. It’s a new ruling that could bring bad policy to a number of other states, including here in South Carolina.
The decision, Ritchie v. Rupe, 443 S.W.3d 856, 867 (Tex. 2014), deals with the rights of minority shareholders in corporations, and the verdict upended a decision previously made by the Texas Court of Appeals in 1988.
The 1988 decision, Davis v. Sheerin, 754 S.W.2d 375, 377 (Tex. App. 1988), held that minority shareholders are entitled to a buy-out if majority shareholders are oppressing them. It also ruled that a court has the authority to appoint a rehabilitative receiver when the actions of a governing body within a corporation are deemed illegal, oppressive or fraudulent.
The decision went toward protecting minority shareholders from being completely controlled by majority shareholders, and was considered an important decision in corporate rights. This decision influenced case law in many other states.
Ritchie, however, reasserted the rules governing Davis, changing the definition of oppression as it applies to shareholders. Now actions are only considered oppression if shareholders are abusing their authority over the whole corporation, rather than over individual shareholders, and if the abuse is done with the intent to harm the interests of the shareholders.
This decision severely muzzles the rights that had been protected previously. Now minority shareholders are not protected from freeze-outs spearheaded by majority shareholders, since such an action would harm individual shareholders but not necessarily the whole corporation, and could even be said to be done for the benefit for the corporation at large, meaning it is not done with intent to harm.
Furthermore, the new ruling states that before a court may exercise its right to appoint a rehabilitative receiver, it must first assess all available remedies and deem them inadequate to the issue at hand. This new rule seriously delays aid that could save the interests of minority shareholders, further allowing majority shareholders to wield control over corporations with little to no concern for the welfare of minority shareholders.
In South Carolina, if such a case reached our Supreme Court, we hope it would be branded as astoundingly bad law.
Partnership Litigation in Closely Held Companies
At the Law Office of W. Andy Arnold, we work hard to protect your legal interests. If you have a partnership dispute or feel you’ve been victimized by shareholder oppression, contact us today at 864-242-4800.