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

Heading: Definition of Oppression

Text: The Court’s first misinterpretation of the statute (that there is but one remedy) results in a second: that oppression must have an unduly restrictive definition. The Court observes that receivership is a harsh or drastic remedy, designed for situations that pose a serious threat to the corporation and its shareholders.31 __ S.W.3d at __; see also Balias v. Balias, 748 S.W.2d 253, 257 29 Murdock, supra note 4, at 464. 30 Douglas K. Moll, Shareholder Oppression and “Fair Value”: Of Discounts, Dates, and Dastardly Deeds in the Close Corporation, 54 D U KE L.J. 293, 309 n.56 (2004) (quoting 1 F. H ODGE O’N EAL & R O BERT B. T H O M PSO N , O’N EAL ’S C LO SE C O RPO RATIO NS § 1.16, at 1-97 (3d ed. 2002); see also id. at 308–09 (“The most common remedy for oppression . . . is a buyout of the oppressed investor’s stockholdings. A buyout is advantageous because it provides a mechanism for an oppressed shareholder to extricate his investment from a venture without having to dissolve the corporation. The majority shareholder continues to operate the close corporation and to participate in the company’s successes and failures, while the minority shareholder recovers the value of his invested capital and removes himself from the company’s affairs.”); Murdock, supra note 4, at 470 (“The most common form of alternative remedy is the buy-out of the minority shareholder.”). 31 The remedy of receivership is harsh or drastic when compared to other remedies such as compelling dividends or a buyout because it replaces the shareholders’ chosen managers with court-chosen managers. __ S.W .3d at __; Balias, 748 S.W .2d at 257. But this does not mean that even a receivership for dissolution will cause the corporation to cease 14 (Tex. App.—Houston [14th Dist.] 1988, writ denied). The Court has taken a position commentators previously warned against: “the view of dissolution as a ‘drastic’ remedy generally works to the disadvantage of minority shareholders.”32 Because the Court concludes that receivership is the only remedy under the oppression statute and that it is drastic or harsh, it adopts a novel and strict definition of oppression: when [directors or managers] 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. __ S.W.3d at __. The business judgment rule shields directors and managers from liability for rational decisions made for the benefit of the corporation.33 If there is no harm to the corporation, the director or manager has not violated the business judgment rule (and might not have violated the rule even if there is harm to the corporation if the decision was made in the honest exercise of business judgment). Thus, the Court’s definition of oppression will only allow recovery if a director or manager fails to honestly exercise her business judgment and harms a minority shareholder as well as the corporation itself. The Texas oppression statute and the court of appeals cases construing it did not develop in a vacuum. The developing body of law in Texas and beyond indicates why the Court’s restrictive to be a going concern. The majority shareholders may well purchase the corporation from the receiver, essentially buying out the minority shareholder. 32 Murdock, supra note 4, at 426. 33 See Texarkana Coll. Bowl, Inc. v. Phillips, 408 S.W .2d 537, 539–40 (Tex. Civ. App.— Texarkana 1966, no writ) (holding that a shareholder was not entitled to a remedy for oppression because the directors’ decisions were “not inconsistent with the honest exercise of business judgment and discretion”). 15 definition of oppression is unwarranted. Like many other states, Texas’s statute was similar to the Model Act.34 As discussed above, the overwhelming majority of courts have construed their oppression statutes to allow for remedies other than receivership. See supra Part II.A. As commentators have observed, “less drastic remedies [than dissolution] may be justified by less oppressive conduct than that required to dissolve a corporation.”35 Accordingly, courts have “almost uniformly taken a broad approach to defining oppressive conduct, and where alternatives to dissolution do not exist by statute, have upheld the general equitable power of the courts to fashion such alternatives. The pattern appears firmly established”—except as of today in Texas.36 New York has primarily shaped the definitions of oppression in the United States.37 The first New York court to squarely address the issue observed that “[w]hether the controlling shareholders discharged petitioner for cause or in their good business judgment is irrelevant;” rather, what was relevant was the minority shareholder’s “reasonable expectations.” In re Topper, 433 N.Y.S.2d 359, 362 (N.Y. Sup. Ct. 1980). The reasonable expectations test for oppression has been further refined 34 The Court believes the Model Act compels its conclusion here because the Act expressly provides a buyout as a remedy. __ S.W .3d at __ n.25. But the Model Act only changed in 1984 to expressly provide a buyout. Compare M O D EL B U S . C O RP . A CT § 14.34 (1984) (establishing procedure for buyout in lieu of dissolution) with M O D EL B U S . C O R P . A C T § 97 (1971) (allowing court to liquidate corporation due to oppressive conduct without specifying other remedies) and M O D EL B U S . C O RP . A CT § 90 (1960) (same). Presciently, the Texas Legislature added in 1955 the flexibility the Model Act did not have until recently by expressly allowing lesser legal and equitable remedies. Former art. 7.05. The Texas Act should not have to expressly enumerate lesser legal and equitable remedies to give the plain statutory language its intended effect. 35 Murdock, supra note 4, at 459. 36 Id. at 470 (citations omitted); compare favorably McCauley, 724 P.2d at 236 (“The absence of a rigidly defined standard for determining what constitutes oppressive behavior enables courts to determine, on a case-by-case basis, whether the acts complained of serve to frustrate the legitimate expectations of minority shareholders, or whether the acts are of such severity as to warrant the requested relief.”). 37 Murdock, supra note 4, at 465. 16 as “when the majority’s conduct substantially defeats the expectations that objectively viewed were both reasonable under the circumstances and were central to the minority shareholder’s decision to join the venture.” Davis, 754 S.W.2d at 381 (citing In re Wiedy’s Furniture Clearance Ctr. Co., 487 N.Y.S.2d 901, 903 (N.Y. App. Div. 1985)). High courts in Alaska, Iowa, Maryland, Montana, New Jersey, New Mexico, North Carolina, North Dakota, Rhode Island, and Washington have followed New York’s lead in adopting the reasonable expectations test.38 And this test is firmly established in Texas jurisprudence, with the Amarillo, Corpus Christi, Dallas, El Paso, Fort Worth, Houston (1st and 14th Districts), San Antonio, Texarkana, and Tyler courts of appeals having applied the test in shareholder oppression cases.39 But the reasonable expectations test can be a poor fit when the minority shareholder, such as the one here, inherited her shares (perhaps indicating she had no investment expectations at all).40 38 See Baur v. Baur Farms, Inc., 832 N.W .2d 663, 674 (Iowa 2013); Boland v. Boland, 31 A.3d 529, 542 (Md. 2011); Scott v. Trans–Sys., Inc., 64 P.3d 1, 6 (W ash. 2003); Hendrick v. Hendrick, 755 A.2d 784, 791 (R.I. 2000); Brenner v. Berkowitz, 634 A.2d 1019, 1028–29 (N.J. 1993); Balvik, 411 N.W .2d at 387 (N.D. 1987); McCauley, 724 P.2d at 237–38 (N.M. 1986); Stefano v. Coppock, 705 P.2d 443, 446 n.3 (Alaska 1985); Meiselman v. Meiselman, 307 S.E.2d 551, 563 (N.C. 1983); Fox v. 7L Bar Ranch Co., 645 P.2d 929, 933 (Mont. 1982); see also Adler v. Tauberg, 881 A.2d 1267, 1269 (Pa. Super. Ct. 2005); Ford v. Ford, 878 A.2d 894, 904 (Pa. Super. Ct. 2005); Morrow v. Prestonwold, Inc., No. CV000445844S, 2002 W L 652369, at  (Conn. Super. Ct. Mar. 22, 2002). 39 See, e.g., Kohannim v. Katoli, __ S.W .3d __, __, 2013 W L 3943078, at  (Tex. App.— El Paso July 24, 2013, pet. denied); Boehringer v. Konkel, 404 S.W .3d 18, 25 (Tex. App.— Houston [1st Dist.] 2013, no pet.); Argo Data Res. Corp. v. Shagrithaya, 380 S.W .3d 249, 265 (Tex. App.— Dallas 2012, pet. filed); In re Trockman, No. 07-11-0364CV, 2012 W L 554999, at  (Tex. App.— Amarillo Feb. 1, 2012, no pet.) (mem. op.); Guerra v. Guerra, No. 04-1000271-CV, 2011 W L 3715051, at  (Tex. App.—San Antonio Aug. 24, 2011, no pet.) (mem. op.); Gibney v. Culver, No. 13-06-112-CV, 2008 W L 1822767, at –17 (Tex. App.— Corpus Christi Apr. 24, 2008, pet. denied) (mem. op.); Redmon v. Griffith, 202 S.W .3d 225, 234 (Tex. App.— Tyler 2006, pet. denied); Cotten v. Weatherford Bancshares, Inc., 187 S.W .3d 687, 699–700 (Tex. App.— Fort W orth 2006, pet. denied); Gonzalez v. Greyhound Lines Inc., 181 S.W .3d 386, 392 n.5 (Tex. App.— El Paso 2005, pet. denied); Willis v. Donnelly, 118 S.W .3d 10, 32 n.12 (Tex. App.— Houston [14th Dist.] 2003) aff’d in part and rev’d in part on other grounds, 199 S.W .3d 262 (Tex. 2006); Pinnacle Data Servs., Inc. v. Gillen, 104 S.W .3d 188, 196 (Tex. App.— Texarkana 2003, no pet.). 40 See Ragazzo, supra note 6, at 10. 17 Due to such circumstances, New York courts developed a test for finding oppression if the conduct of the majority becomes “burdensome, harsh and wrongful.” Gimpel v. Bolstein, 477 N.Y.S.2d 1014, 1020 (N.Y. Sup. Ct. 1984). High courts in Maine, Mississippi, Oregon, Rhode Island, and Washington have followed this test,41 as have the courts of appeals in Texas.42 Because of the panoply of legal and equitable remedies Texas and other courts have recognized for oppression, these two definitions of oppression are firmly established in Texas and national jurisprudence and allow courts the flexibility to craft remedies for the varying types of oppression.43 There is no valid basis to overturn this mountain of jurisprudence, leave Texas out of step with other jurisdictions whose statutes are similar to ours, and chill investment in closely held corporations. 41 See Napp v. Parks Camp, Ltd., 932 A.2d 531, 538 (Me. 2007); Scott, 64 P.3d at 6 (W ash. 2003); Hendrick, 755 A.2d at 791 (R.I. 2000); Kisner v. Coffey, 418 So.2d 58, 61 (Miss. 1982); Baker, 507 P.2d at 393 (Or. 1973); see also Edenbaum v. Schwarcz-Osztreicherne, 885 A.2d 365, 378 (Md. Ct. Spec. App. 2005); Colt v. Mt. Princeton Trout Club, Inc., 78 P.3d 1115, 1118 (Colo. App. 2003); Morrow, 2002 W L 652369, at ; Jorgensen v. Water Works, Inc., 582 N.W .2d 98, 107 (W isc. Ct. App. 1998); Whale Art Co. v. Docter, 743 S.W .2d 511, 514 (Mo. Ct. App. 1987). 42 See, e.g., Kohannim, __ S.W .3d at __, 2013 W L 3943078, at ; Boehringer, 404 S.W .3d at 25; Shagrithaya, 380 S.W .3d at 265; Trockman, 2012 W L 554999, at ; Guerra, 2011 W L 3715051, at ; Gibney, 2008 W L 1822767, at –17; Gonzalez, 181 S.W .3d at 392 n.5; Willis, 118 S.W .3d at 32 n.12; Gillen, 104 S.W .3d at 196; Devji v. Keller, No. 03-99-00436-CV, 2000 W L 1862819, at  (Tex. App.— Austin Dec. 21, 2000, no pet.) (mem. op.); Davis, 754 S.W .2d at 382. 43 The Court holds that the Legislature cannot acquiesce to decisions that run contrary to a statute’s plain language and that long-standing Texas court definitions of oppression are thus invalid. __ S.W .3d at __ n.16. The first proposition is unquestionably true, but the Court’s application is incorrect. If, as the Court holds, the statutory definition of oppression should be more restrictive than the common-law definition because the statute applies to more than just closely held corporations, then the common-law claim for oppression should fill the “gap” in protection the Court admittedly leaves with its decision. 18