Protection of Minority Shareholders in Texas

Article by Joanne Cassidy

Many Texas corporations are closely held companies, meaning they have a small number of shareholders and shares are not publicly traded. Shareholders in those companies usually work in the company or otherwise take an active role in the management of the business.

Rights of Minority Shareholders

It is commonly believed that a majority shareholder, one who owns more than 50% of the shares, can do whatever he wants and will always prevail in the event of dispute among the shareholders. Texas law, however, recognizes the rights of minority shareholders and courts will not tolerate shareholder oppression.

Shareholder Oppression

Texas courts have ruled that actions constituting shareholder oppression include:

  1. Burdensome, harsh or wrongful conduct
  2. Lack of probity and fair dealing in the company’s affairs to the prejudice of some members
  3. Visible departure from the standards of fair dealing and a violation of fair play on which each shareholder is entitled to rely.

Specific acts include:

  1. Malicious suppression of payment of dividends
  2. Improper personal loans to majority shareholders
  3. Paying personal expenses from corporate funds
  4. Diverting corporate opportunities
  5. Making excessive payment of dividends to majority shareholders
  6. Attempts to deprive a minority shareholder of the value of his shares
  7. Inadequate payment of dividends
  8. Paying excessive salaries to majority shareholders and their families
  9. Conspiring to deprive a minority owner of his stock ownership.

Essentially, the courts have told majority shareholders that they have to play fair. They can make business decisions about how to run the company but they cannot cross the line into treating minority shareholders unfairly.

So, if a minority shareholder believes he is being treated unfairly by the majority, what can he do? One thing he can do is apply to the court to appoint a receiver. A receiver is an independent person who is appointed by the court to run the company. As one can imagine, this is a very harsh remedy and one that usually results in destruction of the company. A better alternative is for the majority and minority shareholders to go to the negotiating table and be willing to work jointly for a solution to the disputed issues. If they are unsuccessful, either of them may file suit and allow the court to decide the fate of the company.

Buy-sell or Shareholder Agreement

One way to proactively deal with potential disputes is for the shareholders to enter into a buy-sell or shareholder agreement when they first acquire their shares. Part of the buy-sell agreement deals with the sale of shares and specifies how the sale will occur and the value of the shares if one shareholder wants to sell his shares. That’s one way for the minority shareholder to get value for his shares if he believes he is being unfairly treated and does not want to go to court. The buy-sell agreement can also provide for the majority to bring along the minority in the event the majority wants to sell his shares, thereby transferring control to a third party. That protects the minority shareholder from the control of a new owner who may not know how to run the business. It also allows the majority shareholder to get value for his shares while protecting the interests of the minority.

Reasonable Shareholder Expectations

While this article deals with minority shareholder oppression, it’s important to remember that fairness is a two way street. Minority shareholders should be reasonable in their expectations and make an effort to avoid deadlock in the management of the company. They should also have sufficient interest and involvement in the company to know if something is wrong before an undesirable situation gets out of hand. Communication is essential and all shareholders must understand that it is in their best interests as well as the best interests of the company that they work together to reach their common goals of growth and prosperity.