The doctrine of shareholder oppression is to the minority shareholder what the United States Constitution is to the political minority: a right to be treated fairly in the face of majority rule. The board of directors and management of corporate¹ entities still have broad rights to manage day to day operations and the "business judgment"² rule remains alive and well. There comes a point, however, when the majority owner(s) of an entity may manage the business in such a manner as to oppress one or more minority shareholders and, hence, trigger the right of such minority shareholder to seek legal redress. This author has handled many bitter corporate disputes over ownership and control of corporate entities, but over the last few years a new trend seems to be developing (at least in this author's practice) whereby the minority shareholder files a claim of shareholder oppression against the corporate entity and the majority/controlling shareholders of the corporate entity. Recently this author represented the majority shareholder/company³ in defending a minority shareholder's claim for shareholder oppression which was successfully resolved by final arbitration award; and in the very next shareholder oppression case represented a minority shareholder claiming shareholder oppression which was resolved via buyout on the proverbial courthouse steps (one week before trial was to begin). Shareholder oppression cases are what we call in the legal trade, "bet the ranch" cases, creating high levels of stress for the parties and their counsel.

Shareholder Oppression cases are not as glamorous as the take-over suits of Wall Street, however, because by definition the shareholder oppression case is usually marked by characteristics such as relatively few shareholders, substantial participation by at least some of the shareholders in the management of the corporation, and a limited market or no market for the corporation's stock. Because of these unique characteristics, the majority shareholder of a close corporation has the ability to significantly impact the minority shareholder's interests. Commonly referred to as a "freeze-out" or "squeeze-out" of the minority shareholder, denying any return on investment, as well as any input into the management of the business may leave the minority shareholder with no benefit of continued investment, yet no market to sell his shares and escape the situation. As a result, the law has developed ways to resolve these problems, including statutory provisions, as well as common law developments in fiduciary duties and in the doctrine of shareholder oppression.

I. The Business Corporations Act

Article 7.05 of the Business Corporations Act provides for the appointment of a receiver for the assets and business of a corporation, in an action by a shareholder where it is established that the acts of the directors or those in control of the corporation are illegal, oppressive or fraudulent, and there are no other adequate remedies available at law or in equity.⁴

Article 7.06 of the Business Corporations Act provides that the court may order the liquidation of the assets and business of the corporation when circumstances demand, if all other remedies are inadequate and if the corporation in receivership presents no plan to the court within twelve (12) months, which the court finds will remedy the problem that necessitated the receivership.⁵

Thus, it appears that these statutes provide a statutory action for shareholder oppression, which could lead to the appointment of a receiver and the possibility of liquidation when the aggrieved shareholders establish that "the acts of the directors or those in control of the corporation are illegal, oppressive or fraudulent." (Business Corporations Act Art. 7.05(A)(1)(c)). It is important to note, however, that the statute does not define "oppressive" conduct.

Moreover and from a practical standpoint, the minority shareholder may not wish to damage the business of which he is an owner. A statutory receivership is an extreme remedy, potentially devastating to the corporation and to all shareholders. As such, an aggrieved shareholder should carefully consider the impact from pursuing a receivership. The courts will be quick to recognize a receivership as a potential death blow, establishing a receivership only in the most egregious of circumstances. Receivers are expensive, typically know little or nothing about the business, and will charge to listen to the complaints and conflicting advice from all of the contentious shareholders. Aggressive minority shareholders sometimes relish the thought of wrecking havoc on the adverse majority, believing that the threat of a receivership will force the majority to deal on the minority's terms. However, the majority shareholder(s) are typically just as anxious to be rid of the minority shareholder, but they do not wish to pay, nor in some cases do they have the means to pay, fair value for the minority shareholder's interest. Thus, it is often a question of price, not a lack of desire to separate from one another.

Shareholder disputes require more forethought and discretion than firepower. For example, if the business does not hold patents, real estate or other income producing assets that can be divorced from management and the majority shareholders, the value of the business may plummet if the threatened receivership is granted. The majority shareholder may be free to walk across the street and start a new business, without non-competes in place (can one have a non-compete with a business in liquidation which has been shut down?), and without difficult minority shareholders. Thus, the majority shareholder may be in a position to negotiate a very low price for the purchase of the business placed in a receivership; and the receiver is typically charged with simply maximizing the total value of the business through liquidation or otherwise. This is not meant to suggest that a majority shareholder really wants to face a receivership; but it is important to understand that brinkmanship diplomacy is not the exclusive tool of the minority shareholder. Moreover, the majority shareholder usually has corporate money available (based on director indemnification provisions or otherwise) which usually gives it the upper hand in litigation and/or arbitration. Thus, while pursuit of a receivership may conjure macho images as in "nuke em", it can have devastating and usually unpredictable consequences for the minority shareholder as well.

II. Shareholder Oppression

The doctrine of shareholder oppression is designed to protect minority shareholders of closely held corporations from the improper actions of the majority. Though the doctrine has not yet been explicitly adopted by the Texas Supreme Court, the appellate courts have repeatedly recognized and applied it in their decisions.

Thus, if shareholder oppression is a recognizable action, we must first determine what constitutes "oppressive conduct." In Davis v. Sheerin, 754 S.W.2d 375, 380 (Tex. App. -- Houston [1st Dist.] 1988, writ denied), the Court defined "oppressive conduct" as follows:

1. majority shareholders' conduct that substantially defeats the minority's expectations that, objectively viewed, were both reasonable under the circumstances and central to the minority shareholder's decision to join the venture; or
2. burdensome, harsh, or wrongful conduct; a lack of probity and fair dealing in the company's affairs to the prejudice of some members; or a visible departure from the standards of fair dealing and a violation of fair play on which each shareholder is entitled to rely. Id. at 381-82; see also Willis v. Bydalek, 997 S.W.2d 798, 801 (Tex. App.-Houston [1st Dist.] 1999).

In finding oppressive conduct, it is a fact question as to what acts were performed, yet the determination of whether those facts constitute oppressive conduct toward a minority shareholder is a question of law for the judge. Davis, 754 S.W.2d at 380; Willis, 997 S.W.2d at 801. Further, courts must exercise caution in determining what shows oppressive conduct. Willis, 997 S.W.2d at 801 (citing McCauley v. Tom McCauley & Son, Inc., 724 P.2d 232, 237 (N.M. 1986)).

The minority shareholder's reasonable expectations must be balanced against the corporation's need to exercise its business judgment and run its business efficiently. Willis, 997 S.W.2d at 801 (citing Landstrom v. Shaver, 561 N.W.2d 1, 8 (S.D. 1997)). Therefore, despite the existence of the minority-majority fiduciary duty, a corporation's officers and directors are still afforded a rather broad latitude in conducting corporate affairs. Willis, 997 S.W.2d at 801 (citing Masinter v. WEBCO Co., 262 S.E.2d 433, 438 (W.Va. 1980)).

Obviously, these rules lend themselves to determination of shareholder oppression on a case by case basis. Thus, an examination of individual cases is instructive. In Davis, the majority shareholder refused to recognize the minority shareholder's 45% ownership interest in the corporation. The majority claimed that the minority had previously relinquished his stockholdings to the majority as a gift. The jury disagreed, as it found that the majority shareholder had conspired to deprive the minority shareholder of his ownership interest in the corporation. Referencing the first definition of "oppressive conduct," the Davis court stated that the majority's actions would "not only . . . substantially defeat any reasonable expectations [the minority shareholder] may have had . . . but would totally extinguish any such expectations." Davis, 754 S.W.2d at 382.

In addition, the jury found that the majority shareholder had breached his fiduciary duty by making profit-sharing contributions solely for his own benefit, and by wasting corporate funds on his own attorneys' fees. As a result of these findings, the Davis court affirmed the lower court's conclusion that "oppressive conduct" had occurred. After noting that a court "could order less harsh remedies" than liquidation under its "general equity powers," the Davis court upheld an order requiring the majority shareholder to buy out the stockholdings of the minority shareholder at a jury-determined "fair value." Id. at 382-83.

In Willis v. Bydalek, the First Court of Appeals again confronted a statutory action for shareholder oppression. In Willis, a minority shareholder was fired from his employment with a close corporation. The corporation paid no dividends, but the evidence indicated that the business had always been unprofitable. In conducting its shareholder oppression analysis, the Willis court cited the two definitions of "oppressive conduct" that were noted in Davis.

After balancing "[the majority's] business judgment in the face of four profitless years of operation against the [minority's] reasonable expectations of participating in the business," the Willis court concluded that no oppressive conduct had occurred. As the court stated, "we hold [that the majority] did not oppress [the minority] by firing him when (1) the jury found no wrong besides a [firing], (2) the corporation and [the majority shareholder], personally, always lost money, both before and after the [firing], and (3) the [minority shareholders] were at-will employees. Though the court expressly stated "We are not holding that firing an at-will employee who is a minority shareholder can never, under any circumstances, constitute shareholder oppression; we simply hold that under these particular facts, it does not." Willis, 997 S.W.2d at 803. The court does seem to indicate that firing alone is not oppressive conduct, absent an employment agreement. Id.

The Willis case also describes several other cases whose facts were found to be oppressive. In In re Topper, 433 N.Y.S.2d 359, 361-62 (N.Y. 1980), the corporation flourished, but the majority shareholders never paid dividends, and they removed the minority shareholder as an officer and fired him. In McCauley v. Tom McCauley & Son, Inc., 724 P.2d 232, 237 (N.M. 1986), the corporation could have paid, but did not pay, dividends; the majority shareholders received corporate benefits denied the minority shareholder, whom they falsely accused of wrong; and the corporation's records and books were inaccurately and inequitably kept. In Baker v. Commercial Body Builders, Inc., 507 P.2d 387, 390-91, 398 (1973), the majority shareholder prevented the minority shareholder from reviewing the corporate books, took a salary increase while denying one to the minority shareholder, and removed the minority shareholder as officer and director and ceased notifying him of meetings.

III. Breach of Fiduciary Duty

Texas cases also allow shareholders to challenge oppressive conduct as a breach of fiduciary duty. There are two types of fiduciary relationships--a formal fiduciary relationship that arises as a matter of law, such as principal/agent or partners, and an informal fiduciary relationship arising from a confidential relationship "where one person trusts in and relies upon another, whether the relation is moral social, domestic or merely personal." Crim Truck & Tractor Co. v. Navistar Int'l Transp. Corp., 823 S.W.2d 591, 593-94 (Tex. 1992); Hallmark v. Port/Cooper, 907 S.W.2d 586, 592 (Tex. App.-Corpus Christi 1995, no writ). When a fiduciary relationship is found, the fiduciary duty requires the fiduciary to place the interest of the other party before his or her own. Id.

A director's fiduciary duty runs only to the corporation, not to individual shareholders or even to a majority of the shareholders. Gearhart Indus., Inc. v. Smith Int'l Inc., 741 F.2d 707, 721 (5th Cir.1984); Schautteet v. Chester State Bank, 707 F.Supp. 885, 888 (E.D. Tex. 1988). Similarly, a co-shareholder in a closely held corporation does not as a matter of law owe a fiduciary duty to his co-shareholder. Kaspar v. Thorne, 755 S.W.2d 151, 155 (Tex. App.--Dallas 1988, no writ); Schoellkopf v. Pledger, 739 S.W.2d 914, 920 (Tex. App.--Dallas 1987), rev'd on other grounds, 762 S.W.2d 145 (Tex. 1988).

However, though a majority shareholder's fiduciary duty ordinarily runs to the corporation, Schautteet, 707 F.Supp. at 889, in certain limited circumstances, a majority shareholder who dominates control over the business may owe such a duty to the minority shareholder. See e.g., Patton v. Nicholas,, 279 S.W.2d 848 (1955) (injunction issued against majority shareholder maliciously suppressed dividends); Davis v. Sheerin, 754 S.W.2d 375 (Tex. App.-- Houston [1st Dist.] 1988, writ denied) (court-ordered buy-out of minority shareholder where majority shareholder engaged in oppressive conduct); Duncan v. Lichtenberger, 671 S.W.2d 948 (Tex. App.--Fort Worth 1984, writ ref'd n.r.e.) (minority shareholders entitled to reimbursement of monetary contribution to corporation where majority shareholder completely excluded minority shareholders from management of business); Thompson v. Hambrick, 508 S.W.2d 949 (Tex. App.--Dallas 1974, writ ref'd n.r.e.) (fact issue existed as to whether majority shareholders wrongfully obtained premium for selling control of the corporation) Morrison v. St. Anthony Hotel, 295 S.W.2d 246 (Tex. App.--San Antonio 1956, writ ref'd n.r.e.) (former minority shareholder entitled to sue majority shareholder for malicious suppression of dividends).

In Patton v. Nicholas, 279 S.W.2d 848 (Tex. 1955), T.W. Patton was the 60% owner of a close corporation. The other two shareholders, J.W. Nicholas and Robert R. Parks, each owned 20% of the company's stock. The corporation continuously earned profits and the net worth of the corporation steadily increased. Patton, however, refused to declare a dividend. Nicholas and Parks eventually sued, alleging that Patton had committed fraud and abuse of his controlling position. At trial, the jury found in part that Patton "wrongfully dominated and controlled the Board of Directors so as to prevent the declaration of dividends," and that Patton "did this for the sole purpose of preventing Nicholas and Parks from sharing in the profits to be derived from the operation of the corporation." In affirming these jury findings, the Patton court noted that "the malicious suppression of dividends is a wrong akin to a breach of trust, for which the courts will afford a remedy." The court crafted a mandatory injunction requiring the corporation to pay a reasonable dividend "at the earliest practical date" as well as in future years. Id.

In Duncan v. Lichtenberger, 671 S.W.2d 948 (Tex. App.--Fort Worth 1984, writ ref'd n.r.e.), Waldron Duncan owned 60% of a close corporation that operated a night club. C.F. Lichtenberger and D.M. Hogness each owned 20% of the corporation's shares. When the company began to experience financial difficulties, Duncan discharged Lichtenberger and Hogness from their corporate positions. Although Duncan continued to receive management fees and officer compensation, Lichtenberger and Hogness "never received any compensation as corporate officers and no dividends were ever distributed to shareholders." In response to Duncan's actions, Lichtenberger and Hogness asserted that Duncan had breached a fiduciary duty owed directly to them. The jury agreed, and damages were awarded to the two minority shareholders. The Duncan court upheld the jury's findings, observing that "[t]he breach of a fiduciary duty is the type of wrong for which the courts of this State will afford a remedy. Id.

IV. Remedies

Once the court determines oppressive conduct and/or breach of fiduciary duty has occurred, the court should "[tailor] the remedy to fit the particular case." Patton, 279 S.W.2d at 857. Though Article 7.06 of the Business Corporations Act allows for liquidation in certain circumstances, Texas courts have held that less harsh remedies may be fashioned under their general equity powers. Davis, 754 S.W.2d at 380. Again, we have a rule requiring a case by case determination. Some equitable remedies have included: an ordered buy-out of the minority's ownership interest at the fair value of the stock as in Davis, 754 S.W.2d at 383;¹ reimbursement of the minority's investment as in Duncan, 671 S.W.2d at 953; injunctive relief as in Patton, 279 S.W.2d at 848, where the court ordered reasonable dividends to be paid; and a constructive trust over the corporate property as in Willis v. Donnelly, 118 S.W.3d at 32.

As the Texas Supreme Court stated in Patton, "we agree with the practically unanimous judicial opinion that liquidation of solvent going corporations should be the extreme or ultimate remedy, involving as it usually will, accentuation of the economic waste incident to many receiverships and most forced sales." Patton, 279 S.W.2d at 857. Thus, while liquidation is possible, it should be a last resort in most instances.

V. Conclusion

Recalling the opening discussion analogizing the doctrine of shareholder oppression to the United States Constitution, it should not be surprising to find that there are few bright lines in dealing with the doctrine of shareholder oppression. It is not a panacea, nor is it a one-direction threat to harm an opposing majority shareholder; but it is a useful tool designed to balance against the business discretion rule enjoyed by the majority shareholders in control.

Martyn B. Hill, is an attorney licensed in Texas, managing the litigation section of Pagel, Davis, & Hill. P.C. The content was written with the considerable assistance of Michael Harris, Associate, Pagel, Davis & Hill, P.C. , who not only assisted in the authorship of this article but was also second chair on numerous matters in the last several years involving shareholder oppression and shareholder disputes generally. This article is intended as a general discussion only and not as legal advice. Further, while the article discusses shareholder oppression generally, the author is an attorney licensed only in Texas.

1. This article focuses on rights of shareholders in corporations, not limited partnership interests, partnership interests, membership interests in a limited liability company, etc. The principles may be applicable to these other entities but these alternative corporate forms often include contractual language specifying the rights not only of majority rule but of minority rights, including the right and/or restriction to sell membership interests, etc. Corporate forms of business seem more likely to face shareholder oppression issues in the absence of such contractual or governance documents. Of course, shareholder agreements including restrictions on the sale of shares, providing for reasonable buy-sell provisions, etc., can avoid most of the shareholder oppression issues if properly effectuated before disputes occur. [return]
2. The "business judgment" rule is usually defined as allowing the board of directors and management of a business entity broad discretion in managing the entity, even decisions which are not necessarily correct or even generally accepted business principles, so long as no conflict of interest exists in making such decisions. [return]
3. Representing both the majority shareholder and the corporation in the same proceeding raises its own potential conflicts of interest which must be carefully disclosed and approved by all clients. [return]
4. Article 7.05 of the Business Corporations Act reads:
   A. A receiver may be appointed for the assets and business of a corporation by the district court for the county in which the registered office of the corporation is located, whenever circumstances exist deemed by the court to require the appointment of a receiver to conserve the assets and business of the corporation and to avoid damage to parties at interest, but only if all other requirements of law are complied with and if all other remedies available either at law or in equity, including the appointment of a receiver for specific assets of the corporation, are determined by the court to be inadequate, and only in the following instances:
   (1) In an action by a shareholder when it is established:
   (a) That the corporation is insolvent or in imminent danger of insolvency; or \
   (b) That the directors are deadlocked in the management of the corporate affairs and the shareholders are unable to break the deadlock, and that irreparable injury to the corporation is being suffered or is threatened by reason thereof; or \
   (c) That the acts of the directors or those in control of the corporation are illegal, oppressive or fraudulent; or \
   (d) That the corporate assets are being misapplied or wasted. \
   (e) That the shareholders are deadlocked in voting power, and have failed, for a period which includes at least two consecutive annual meeting dates, to elect successors to directors whose terms have expired or would have expired upon the election and qualification of their successors.
   (2) In an action by a creditor when it is established:
   (a) That the corporation is insolvent and the claim of the creditor has been reduced to judgment and an execution thereon returned unsatisfied; or \
   (b) That the corporation is insolvent and the corporation has admitted in writing that the claim of the creditor is due and owing.
   (3) In any other actions where receivers have heretofore been appointed by the usages of the court of equity.
   B. In the event that the condition of the corporation necessitating such an appointment of a receiver is remedied, the receivership shall be terminated forthwith and the management of the corporation shall be restored to the directors and officers, the receiver being directed to redeliver to the corporation all its remaining properties and assets.
   [return]
5. Article 7.06 of the Business Corporations Act reads:
   A. The district court for the county in which the registered office of a corporation is located may order the liquidation of the assets and business of the corporation and may appoint a receiver to effect such liquidation, whenever circumstances demand liquidation in order to avoid damage to parties at interest, but only if all other requirements of law are complied with and if all other remedies available either at law or in equity, including the appointment of a receiver of specific assets of the corporation and appointment of a receiver to rehabilitate the corporation, are determined by the court to be inadequate and only in the following instances:

   (1) When an action has been filed by the Attorney General, as provided in this Act, to dissolve a corporation and it is established that liquidation of its business and affairs should precede the entry of a decree of dissolution. \
   (2) Upon application by a corporation to have its liquidation continued under the supervision of the court. \
   (3) If the corporation is in receivership and no plan for remedying the condition of the corporation requiring appointment of the receiver, which the court finds to be feasible, has been presented within twelve (12) months after the appointment of the receiver. \
   (4) Upon application of any creditor if it is established that irreparable damage will ensue to the unsecured creditors of the corporation, generally, as a class, unless there be an immediate liquidation of the assets of the corporation.

   B. In the event the condition of the corporation necessitating the appointment of a receiver is remedied, the receivership shall be terminated forthwith and the management of the corporation shall be restored to the directors and officers, the receiver being directed to redeliver to the corporation all its remaining properties and assets.
   [return]
6. "An ordered "buy-out" of stock at its fair value is an especially appropriate remedy in a closely-held corporation, where the oppressive acts of the majority are an attempt to "squeeze out" the minority, who do not have a ready market for the corporation's shares, but are at the mercy of the majority." Davis, 754 S.W.2d at 382. [return]