Source: https://www.yalelawjournal.org/forum/ritchie-v-rupe
Timestamp: 2019-04-20 22:34:19+00:00

Document:
No matter. In June of 2014, the Texas Supreme Court flatly overruled Davis. The Court’s six-to-three opinion in Ritchie v. Rupe—labeled “astonishing” by one commentator8—gutted the cause of action for shareholder oppression in Texas.
Other states, this Essay argues, should hesitate before following Ritchie. The problem is not simply that Ritchie is bad law. Ritchie is also bad policy—indeed, it may have disastrous economic effects. Although the full impact of the opinion has yet to be seen, this Essay contends that Ritchie is likely to disincentivize investment in close corporations, ramp up the frequency of shareholder oppression, and imperil the financial health of many small businesses.
Ritchie v. Rupe involved a dispute between the majority shareholders of a small investment corporation and Ann Caldwell Rupe, who had inherited a minority stake in the business. When the majority shareholders became openly hostile toward her, Rupe requested that they purchase her minority stake so that she could exit the venture. The majority shareholders then offered Rupe $1 million for shares that a jury later valued at $7.3 million.11 Rupe declined the offer and sent a note to Ritchie, a majority shareholder, asking when he would be available to meet with potential outside buyers of her shares. Ritchie informed Rupe that he would not attend such meetings. Rupe then sued Ritchie. The trial court and the Court of Appeals held that, since no reasonable purchaser would ever buy Rupe’s shares without first meeting with the majority shareholders, Ritchie’s conduct functionally prevented Rupe from alienating her shares.12 Applying Davis, the Texas Court of Appeals found that Ritchie had defeated Rupe’s “general reasonable expectation of being able to market her unrestricted stock.”13 The court therefore ordered Ritchie to buy out Rupe’s shares at fair market value.
Ritchie is likely to have at least three major effects.
First, Ritchie will likely result in more abusive conduct toward minority shareholders. Under Ritchie, majority shareholders are not liable for oppression unless their conduct is irrational and harmful to the corporation. Given this framework, freeze-outs and squeeze-outs will become highly attractive to majority shareholders.
As other states continue to grapple with the contours of their own shareholder-oppression law, they may be tempted to follow Texas and cut back on shareholder oppression. That temptation should be resisted. Ritchie v. Rupe is misguided, formalistic, and at odds with a wealth of precedent. Other states would be well advised to ignore Ritchie entirely and to rely instead on the sound reasoning set out so long ago in Davis.
James Dawson is a Lecturer in Law at Yale Law School. He would like to thank Matthew Sipe, Daniel Herz-Roiphe, and the editors of the Yale Law Journal for their excellent suggestions and feedback.
Preferred Citation: James Dawson, Ritchie v. Rupe and the Future of Shareholder Oppression, 124 Yale L.J. F. 89 (2014), http://www.yalelawjournal.org/forum/ritchie-v-rupe.
754 S.W.2d 375, 381-82 (Tex. App. 1988).
Ritchie v. Rupe, No. 11-0447, 2014 WL 2788335, at *10 (Tex. June 20, 2014).
Shareholder Litigation, 26 Bus. Torts Rep. 267, 267 (2014).
Ritchie, 2014 WL 2788335, at *2-3.
Ritchie, 339 S.W.3d at 294.
Ritchie, 2014 WL 2788335, at *11 (majority opinion).
Tex Bus. Orgs. Code Ann. § 11.404(a) (West).
Id. § 11.404(b) (emphasis added).
Ritchie, 2014 WL 2788335, at *27 (Guzman, J., dissenting).
Brief of Amicus Curiae Erwin Cruz, M.D., supra note 24, at *12.
Basic Inc v. Levinson, 485 U.S. 224, 244-45 (1988).
Brief of Trial Lawyers Association, supra note 32, at *7 (citing Basic Inc., 485 U.S. at 244-45).
No. 13-0014, 2014 WL 2896002, at *1 (Tex. June 27, 2014).
See id. at 381. Texas law allows partners to withdraw from a venture and receive either a fair buy-out of their shares (if the partnership continues) or their portion of proceeds (if the partnership terminates). Tex Bus. Orgs. Code Ann. §§ 152.501(b)(1), 152.601(1) (West 2006). Shareholders of a public corporation may sell their shares on the open market at any time.
Respondents’ Brief on the Merits at *18, Ritchie v. Rupe, No. 11-0447, 2014 WL 2788335 (Tex. June 20, 2014) (No. 11-0447), 2012 WL 6047972 (collecting cases).
See, e.g., Baur v. Baur Farms, Inc., 780 N.W.2d 249 (Iowa Ct. App. Feb. 10, 2010); Bedore v. Familian, 125 P.3d 1168, 1172 n.20 (Nev. 2006); Lien v. Lien, 674 N.W.2d 816, 825 (S.D. 2004).
See, e.g., Robert W. Hamilton & Jonathan R. Macey, Cases and Materials on Corporations Including Partnerships and Limited Liability Companies 500-07 (9th ed. 2005); see also John H. Matheson & R. Kevin Maler, A Simple Statutory Solution to Minority Oppression in the Closely Held Business, 91 Minn. L. Rev. 657, 678 (2007) (discussing Davis); Barry M. Wertheimer, The Shareholders’ Appraisal Remedy and How Courts Determine Fair Value, 47 Duke L.J. 613, 642 n.138 (1998) (same).
See Barry Barnett, Do Plaintiffs Stand a Chance in the Texas Supreme Court—Part 3, Blawgletter (June 23, 2014, 3:50PM), http://blawgletter.typepad.com/bbarnett/2014/06/do-plaintiffs-stand-a-chance-in-the-texas-supreme-court-part-3.html [http://perma.cc/M7HL-BUTQ] (documenting recent plaintiffs’ losses in the Texas Supreme Court).
Ritchie v. Rupe, No. 11-0447, 2014 WL 2788335, at *28 (Tex. June 20, 2014) (Guzman, J., dissenting).
Ritchie v. Rupe, 339 S.W.3d 275, 296-97 (Tex. App. 2011), rev’d 2014 WL 2788335 (Tex. June 20, 2014).
Ritchie, 2014 WL 2788335, at *10. Under Texas law, “rehabilitative receivers” are occasionally appointed to control the affairs of financially imperiled corporations. The purpose of rehabilitative receivership is “to conserve the property and business of the domestic entity and avoid damage to interested parties.” Tex. Bus. Orgs. Code § 11.404(b)(1).
See Columbia Med. Ctr. of Las Colinas, Inc. v. Hogue, 271 S.W.3d 238, 256 (Tex. 2008) (“The Court must not interpret the statute in a manner that renders any part of the statute meaningless or superfluous.”).
For an extensive collection of authorities supporting this proposition, see id. at *28 & nn. 26-30.
Brief of Amicus Curiae Erwin Cruz, M.D., in Support of the Respondent, Ritchie v. Rupe, No. 11-0447, 2014 WL 2788335 (Tex. June 20, 2014), No. 11-0447, 2013 WL 314975, at *6-9 (making this argument at length and collecting cases in accord).
Grapevine Excavation, Inc v. Maryland Lloyds, 35 S.W.3d 1, 5 (Tex. 2000) (“It is a firmly established statutory construction rule that once appellate courts construe a statute and the Legislature re-enacts or codifies that statute without substantial change, we presume that the Legislature has adopted the judicial interpretation.”).
Shareholders in a close corporation may elect statutory status under Texas law, in which case certain additional protections are due to minority shareholders. For example, statutory close corporations must be managed according to the terms of a shareholder agreement. Tex. Bus. Orgs. Code Ann. § 21.715 (West 2003).
See, e.g.,Texas Supreme Court Rejects a General Cause of Action for Minority Shareholder Oppression, Bracewell & Giuliani LLP (July 9, 2014), http://www.bracewellgiuliani.com/news-publications/updates/texas-supreme-court-rejects-general-cause-action-minority-shareholder-oppr [http://perma.cc/9GQK-FA7Q].
Douglas Moll, Majority Rule Isn’t What It Used to Be: Shareholder Oppression in Texas Close Corporations, 63 Tex. Bus. J. 434, 436 (2000); see also Ritchie, 2014 WL 2788335, at *13.
Brief of Amicus Curiae Texas Trial Lawyers Association in Support of Respondents at *5, Ritchie v Rupe, No. 11-0447, 2014 WL 2788335 (Tex. June 20, 2014).
See Robert B. Thompson, The Shareholder’s Cause of Action for Oppression, 48 Bus. Law. 699, 702 n.23 (1993) (citing Frank H. Easterbrook & Daniel R. Fischel, The Economic Structure of Corporate Law 230-31 (1991)).
Brief of Trial Lawyers Association, supra note 32, at *9. Under the business-judgment rule, “[a] board of directors enjoys a presumption of sound business judgment, and its decisions will not be disturbed if they can be attributed to any rational business purpose.” Sinclair Oil Corp. v. Levien, 280 A.2d 717, 720 (Del. 1971).

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