Opinion ID: 2831389
Heading Depth: 2
Heading Rank: 4

Heading: Common-Law Cause of Action

Text: The Court also determines “the foreseeability, likelihood, and magnitude of harm sustained by minority shareholders due to the abuse of power by those in control of a closely held corporation is significant, and Texas law should ensure that remedies exist to appropriately address such harm when the underlying actions are wrongful.” __ S.W.3d at __. But the Court concludes that the common-law standard for minority shareholder oppression is too vague47 and existing remedies provide adequate protection, thereby obviating the need for a common-law cause of action. Tellingly, the Court acknowledges that its interpretation of the oppression statute and failure to impose a common-law remedy for oppression “leaves a ‘gap’ in the protection that the law affords to individual minority shareholders” when the harm to the minority shareholders does not harm the corporation.48 __ S.W.3d at __. Until today, that gap has not existed because Texas courts have 47 One basis for the Court’s conclusion is its belief that the common-law reasonable expectations test is difficult to apply when a minority shareholder inherited her shares. __ S.W .3d at __. But this is precisely why courts in Texas and a host of other jurisdictions apply the test for burdensome, harsh, and wrongful conduct when addressing inherited shares. See supra Part II.B. 48 The Court takes solace in the fact that majority shareholders that harm minority shareholders might also be harming the corporation, thus allowing a rehabilitative receiver under the oppression statute or a breach of fiduciary duty claim if the facts support it. __ S.W .3d at __ n.53. The Court specifically opines that “[r]efusal to pay dividends, paying majority shareholders outside the dividend process, and making fire-sale buyout offers certainly can harm the corporation, for instance, by lowering the value of its stock.” Id. But such observation reflects a misunderstanding of closely held corporations. For example, refusing to pay dividends to any shareholder yields additional cash reserves. One buying a majority interest in the company would obviously pay more for a company with more cash, which they could extract with the powers associated with their majority interest. One buying a minority interest would not necessarily pay more if they have no legal recourse to compel the majority shareholder to pay a dividend to the minority shareholder (and they have no such recourse after today). Such an example is not difficult to find. It occurred the last time we addressed this issue. In Patton, the majority shareholder refused to pay dividends to the minority shareholders, and we held that such conduct did not harm the corporation. 279 S.W .3d at 853. 21 interpreted the oppression statute to allow lesser remedies for oppression that harms minority shareholders but not the corporation. No other existing remedy the Court discusses adequately protects minority shareholders from such oppression. The remedy that comes closest to affording some relief to the oppressed minority shareholder is a common-law claim for breach of fiduciary duty. But the Court’s logic expressly and impliedly negates such a claim. Expressly, the Court observes that we recognized this cause of action in Patton and treated it as a derivative action. __ S.W.3d at __. But a shareholder only has standing to bring a derivative action if she fairly and adequately represents the interests of the corporation.49 TEX . BUS. ORGS. CODE § 21.552(2). Thus, a derivative action would only lie in this context when the oppression of the minority shareholder harms the corporation itself. The Court espouses this principle by observing that “actions that are ‘oppressive’ under the statute ordinarily will not give rise to derivative suits.” __ S.W.3d at __ n.15. But in Patton, we recognized that the majority shareholder’s misconduct did not harm the corporation itself but nonetheless allowed the minority shareholder’s claim for breach of fiduciary duty. 279 S.W.2d at 853 (“[W]e find no evidence . . . that [the corporation] was damaged.”). Thus, if the Court is correct today and minority shareholders may only bring fiduciary duty claims for the benefit of the corporation, Patton is wrong.50 But, Patton is not wrong; it correctly allowed a minority shareholder claim for breach of 49 The Court observes that shareholders in closely held corporations that elect to be close corporations do not have to fairly and adequately represent the interests of the corporation. __ S.W .3d at __; T EX . B U S . O RGS . C O DE § 21.552. But this offers no remedy for minority shareholders in corporations like RIC that have not elected close corporation status. 50 The Court also notes that the Business Organizations Code allows courts to treat a closely held corporation’s shareholder claim as direct rather than derivative. __ S.W .3d at __; T EX . B U S . O RGS . C O D E § 21.563(c). But because the Court interprets the oppression statute to only allow a remedy if the corporation itself is harmed, treating derivative 22 fiduciary duty even when there was no harm to the corporation.51 279 S.W.2d at 853. Patton did not require a derivative claim. The Court’s logic also impliedly restricts fiduciary duty claims. As addressed below, the Court’s conclusion that the business judgment rule should apply to statutory shareholder oppression claims would seem to apply with equal force to fiduciary duty claims. See infra Part II.E. But the rule is fundamentally at odds with the remedy of the fiduciary duty claim, just as it is at odds with shareholder oppression claims. See supra Part II.C. In short, the Court acknowledges that its unduly restrictive interpretation of the oppression statute leaves minority shareholders unprotected from conduct that will harm them but not the corporation. It is precisely the Court’s restrictive view of the statute that creates the gap in protection and requires a common-law cause of action.