February 05, 2014 Articles

Shareholder Oppression: Texas Supreme Court to Weigh In on National Debate

Resulting decisions could have impact far beyond the state

by Kelli Hinson and Lyndon Bittle

The Texas Supreme Court is currently considering three cases that could drastically alter the legal landscape for owners of close corporations in that state. Each case was brought by a minority shareholder alleging that the majority shareholders had wielded their majority power so as to unfairly prejudice or "oppress" the minority. The minority shareholders all prevailed in front of Dallas juries on the theory of "shareholder oppression," but then had mixed results in the Dallas Court of Appeals. The Texas Supreme Court is now considering all three cases. The resulting decisions could have impact far beyond Texas, however, as other states similarly struggle with whether to recognize, and how to define, this increasingly popular cause of action.

"Two guys go in on a bar." This could either be the start of a bad joke or a petition for shareholder oppression. But imagine that two guys do go in on buying a bar. Jack puts in $55,000; Daniel puts in $45,000; and they become 55 percent/45 percent shareholders. They initially contemplate that Daniel will tend bar and Jack will keep the books and that they will take their money out in modest salaries. But the two have a falling out, and Jack uses his majority vote to fire Daniel, depriving Daniel of the ability to earn his salary. And because Jack now has to tend bar too, he doubles his own salary such that there is no extra money to pay to Daniel in "dividends." The bar is never going to make enough money to pay Daniel back his $45,000 investment. Does Daniel have a remedy for this alleged "oppression"?

Premium Content For:
  • Litigation Section
Join - Now