Business Case Law
Comprehensive Analysis of Court Cases from Knowledgeable Houston Attorneys
At Brewer & Pritchard, we monitor legal developments that have an impact on businesses not only in Houston, Texas, but across the nation. The articles on this page examine recent cases that could have a dramatic effect on your business or you as a shareholder.
We will continue to update this page with analysis of case law. If you have questions or need immediate legal assistance, call us today at 800-445-8710.
ATP Tour v. Deutscher Tennis Bund Corporate Immunity Decision Harmful to Investors
In a letter to the editor of the Wall Street Journal on Nov. 26, 2014, AAJ President Lisa Blue Baron writes in response to Lisa Rickard's Nov. 14 Op-Ed titled "Delaware Flirts With Encouraging Shareholder Lawsuits" that Delaware's status as the most attractive state for incorporation in the US is threatened by a May 2014 Delaware Supreme Court ruling in ATP Tour v. Deutscher Tennis Bund.
Baron argues the decision will accelerate the trend of firms to unilaterally adopt bylaws eliminating investors' legal rights and granting civil immunity for boards of directors and officers who violate state and Federal securities laws.
Baron contends that corporate boards alone will benefit from such immunity-evading provisions, and that shareholders rely on such safeguards.
In the WSJ letter, Baron states:
"Market participants recognize that Delaware's corporate boards are the only entities that stand to benefit from fee-shifting and other one-sided immunity provisions. Shareholders and businesses rely on the important safeguards provided by our civil justice system, and the unilateral revocation of these protections erodes investor confidence and reduces market participation, hurting both investors and the very businesses in which they invest."
Several Companies Across Nation Adopt Immunity Granting Provisions
In the wake of the ATP Tour v. Deutscher Tennis Bund decision, 37 U.S. companies (as of November 2014) have begun implementing immunity-granting provisions similar to the provisions weighed by the Delaware court. In some cases, companies have adopted even more extreme versions of the measures.
These "fee-shifting" provisions ultimately can hurt investors. The following are a few examples cited by American Association for Justice in a news release of companies that adopted immunity granting provisions:
- LGL Group, Inc. took such action after an earnings forecast miss, the resignation of its CEO and the termination of its Controller.
- Hemispherx BioPharma, Inc. took such action in response to a pending derivative action one week after discovery requests were served on the company. If shareholders wanted to file new or continue pending litigation against the company, they would have to post a pond.
- Imperial Holdings, Inc. took such action to only allow shareholders who had at least a 3 percent interest of the company's outstanding shares to file a claim in a court of law. This action came on the heels of shareholders brings a fraud and derivative class action against the company.
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Ritchie v. Rupe Case Creates New Test for 'Oppressive' Conduct by Corporation's Directors, Managers
In Ritchie v. Rupe, the recent case dealing with the issue of shareholder oppression, the Texas Supreme Court clarifies the meaning of "oppressive" within the context of the Texas receivership statute, creates a new test to determine when a corporation's directors or managers engage in "oppressive" conduct that warrant the appointment of a receiver, and declines to adopt a common law cause of action for shareholder oppression. Ritchie v. Rupe, No. 11-0447, 2014 WL 2788335 (Tex. June 20, 2014), reh'g denied (Oct. 24, 2014). In that case, Ann Rupe, a shareholder in a closely held corporation, sought rehabilitative receivership under former article 7.05 of the Texas Business Corporations Act (currently Texas Business Organizations Code Section 11.404) due to illegal, oppressive, or fraudulent actions. Id. at *3. Specifically, Rupe alleged that the corporation's majority shareholders/directors engaged in "oppressive" actions and breached their fiduciary duties by refusing to either buy her shares for fair market value or meet with prospective outside buyers. Id. Houston business law attorneys know both the trial court and the Court of Appeals found that the other directors' refusal to meet with Rupe's prospective purchasers constituted oppressive conduct, although the Appellate Court remanded the case to the trial court for a new determination of the shares' value. Id. Afterwards, the majority shareholders petitioned for review. Id.
What Constitutes "Oppressive" Actions Under the Receivership Statute
First, the Texas Supreme Court determined what constitutes "oppressive" actions under the Receivership Statute. Because the Texas Legislature failed to define "oppressive" in either the Business Corporations Act of the Business Organizations Code, the Court analyzed the commonly-used "fair dealing" test and the "reasonable expectations" test and determined that neither one adequately captured the Legislature's intended meaning of "oppressive" under former article 7.05. Id. at *6, 9. Instead, the Court concluded that a corporation's directors or managers actions are "oppressive" if "(1) the actions justify the harsh, temporary remedy of a rehabilitative receivership; (2) the actions are severe and create exigent circumstances; and (3) the actions are inconsistent with the directors' duty to exercise their honest business judgment for the benefit of the corporation." Id. at *9. Second, the Court determined that rehabilitative receivership is justified when directors "abuse their authority over the corporation with the intent to harm the interests of one or more of the shareholders, in a manner that does not comport with the honest exercise of their business judgment, and by doing so create a serious risk of harm to the corporation." Id. at *9. Third, the Court stated that rehabilitative receivership based on oppressive actions applies to all corporations, not only closely held corporations, and that the availability of receivership is restricted and (1) must be necessary to conserve a corporation's business and assets and to avoid damage to parties, (2) legal requirements must be complied with, and (3) all other available remedies at law or in equity must be inadequate. Id. at *7.
Applying the above to the facts of the case, the Court held that the majority shareholders had no contractual, statutory, or other duty to meet with potential buyers, and their refusal to meet did not constitute "oppressive" action. Id. at *10. Further, the Court held that the buy-out remedy that Rupe sought was not authorized by the receivership statute; instead, the exclusive remedy is the appointment of rehabilitative receiver. Id. at *10.
No Common Law Cause of Action For Shareholder Oppression
Next, the Court considered whether a common law cause of action for shareholder oppression should be created. First, corporations may declare themselves to be "close corporations" under the Business Organizations Code, which contains special provisions and exempts them from some rules that govern other corporations. Id. at *14. Second, shareholders in closely held corporations can institute proceedings to enforce close corporation provisions, or appoint a provisional director or custodian. Id. Third, shareholders in closely held corporations can more easily bring a derivative suit under Texas Business Organizations Code Section 21.563. Id. at *15. Fourth, shareholder agreements containing buy-sell, first refusal, or redemption provisions may prevent and resolve disputes. Id. at *10, 15. Fifth, other common law causes of action are available to address corporate director and officer misconduct such as: "(1) an accounting, (2) breach of fiduciary duty, (3) breach of contract, (4) fraud and constructive fraud, (5) conversion, (6) fraudulent transfer, (7) conspiracy, (8) unjust enrichment, and (9) quantum meruit." Id. at *15.
In conclusion, shareholders in closely-held corporations will benefit most by electing to operate as closely-held corporations and entering into shareholders' agreements to govern their respective rights and obligations. Although the Supreme Court has restricted the protection for minority shareholders, other avenues still remain that enable minority shareholders in closely-held corporations to seek redress for corporate directors' or managers' oppressive actions.