Ritchie v. Rupe: Segue to Private Company Agreements

Two weeks ago the Texas Supreme Court issued its opinion in  Ritchie v. Rupe.  While there's much to take from the majority opinion, I title this post "Ritchie v. Rupe: Segue to Private Company Agreements" because the case serves to connect our recent series on the use of proxies in private company situations with an upcoming series on negotiating and drafting private company agreements.

In the first installment of that proxy series —  called "Private Company Proxy Contest - Introduction" — I alluded to the importance of private company owners agreeing in writing among themselves on certain essential matters, like transferability restrictions for the ownership interests and election of management, and the bad consequences which can follow if they neglect that vital task.

Ritchie v. Rupe: The Facts, Heavily Condensed

Rupe Investment Corporation was a privately held family corporation.  The President, Buddy Rupe, married Ann Rupe.  Ann was his second wife and the rest of Buddy's family never approved of or accepted her.   And when Buddy died, his family no longer even had to invite Ann to Thanksgiving dinner.

Ann (for herself and Guy, the child born to her and Buddy)  held 18% of the corporation's stock.  She was content to sell those shares back to the corporation — at a fair price.

But Buddy's family members, who sat on the board and controlled the other 82% of the corporation's stock, declined to cause the corporation to redeem her shares except at a bargain basement price that Ann's attorney called "absurd."

Now we come to the heart of the matter:  "There was no shareholders' agreement."

So you can already figure out how the next few chapters of the story turn out.

The corporation won't raise its redemption offer;  Ann is left technically free to sell her shares to an outsider in a private transaction (because there was no shareholders' agreement restricting transferability), but no outsider will purchase her minority position because it is a minority position and because the corporation's board and officers refuse to disclose the corporation's affairs to a prospective outside purchaser [more on this later; let's just say the corporation, unlike Ann, has good attorneys in this case];  and the two sides wind up in a Texas trial court and, eventually, before the state's highest judicial body.

And that pithy bit of information — "no shareholders' agreement" — can also inform you why Ann has lost her case.

(Lost, for the time being.  The Supreme Court ruled that the appellate court beneath it had wrongly sanctified the "oppression" theory.  It was only that issue which reached the Supreme Court.  Ann's much better contention — at least I consider it superior — is that the corporation, its officers and directors stood in an informal fiduciary relationship with her and her child because of the "special relationship" among family members and that they breached their fiduciary duties to her and the child.  The Supreme Court remanded the case for consideration of that breach of fiduciary duty issue.)

Ritchie v. Rupe: What the Other Attorneys (the Litigators) are Saying About It

Before plunging into the key practical lesson private business owners should take from the Supreme Court's decision, I should point out what other attorneys think the court's decision means.

The blogs I've read on this decision focus predominately on the court's announcement that there is NO common law cause of action in Texas for minority shareholder oppression — as though that is actually news.  These commentators are certainly right — there is no "oppression" cause of action under Texas law — but what they don't mention is THERE WASN'T SUCH A CAUSE OF ACTION BEFORE THIS CASE.  Admittedly some lower courts  indulged that claim in several cases within the past few years, but the Supreme Court had never recognized it.

What the Court actually said in Ritche v. Rupe on this subject was

we decline to recognize or create [emphasis added] a Texas common-law cause of action for "minority shareholder oppression."

Because the Court also refused to be confused by the argument of the minority shareholder's attorneys that the subchapter on "Receivership" for Texas entities found in the Texas Business Organizations Code and its predecessor provisions in the Texas Business Corporations Act should apply where NO RECEIVER has been appointed or even requested, the plaintiff in this case also struck out in her assertion of a statutory basis for her claim of "oppression."

Ritchie v. Rupe:  What the Business Attorneys should be Saying About Private Company Agreements

This case perfectly highlights the risks that owners of a privately held company run when they do NOT enter into a comprehensive agreement governing the company's management and transferability of ownership interests, among other key terms.

The family members should have entered into a shareholders' agreement when the company was formed, and updated it as circumstances warranted.   Ann's late husband should have insisted upon rectifying that omission when he married Ann, realizing that his family might view her as an outsider and not treat her with the same beneficence and affection they accorded him.  As the estrangement between Ann and Buddy's family became obvious, the need to have a shareholders' agreement should  have become desperate for Buddy, but to the same degree probably was becoming less desirable to the other members of the Rupe family.

Maybe it will help to put this problem in quantitative financial language.

The corporation offered to redeem Buddy's shares for $1 million.  Ann said no.  The trial court ordered the corporation to purchase Buddy's shares from Ann for $7.3 million.  The Court of Appeals said that amount was a little too high, given the shares' lack of control and marketability.

The Texas Supreme Court said Ann can recover $0 based on the oppression theory.

 

 

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