Understanding Minority Shareholder Oppression

Posted on April 24, 2012 Updated on May 2, 2012

In Texas, a fiduciary duty can arise in two different ways, through a formal relationship or an informal relationship:

1) A formal fiduciary relationship is created where there is a legal duty created by law. In a corporation, officers’ and directors’ owe the following fiduciary duties:

a) Duty of Loyalty The duty of loyalty “requires an extreme measure of candor, unselfishness, and good faith on the part of the officer or director.” A corporate officer or director must act in good faith and must not allow his or her personal interest to prevail over the interest of the corporation. An officer or director is considered “interested” when he “makes a personal profit from a transaction by dealing with the corporation or usurps a corporate opportunity.”

b) Duty of Care Texas law imposes on corporate officers and directors a duty to exercise due care in the management of the corporation’s affairs. If they breach that duty, they are liable to the corporation for any loss it may suffer as a result of their neglect.

c) Duty of Full Disclosure The duty of full disclosure on all matters affecting the corporation, including disclosing when the officer or director will personal benefit for contracts or certain actions.

d) Duty of Obedience The duty of obedience “requires a director to avoid committing acts, i.e., acts beyond the scope of the powers of a corporation as defined by its charter or the laws of the state of incorporation.”

2) An informal fiduciary relationship is created where there is a level of reliance between parties. Share ownership does not ordinarily involve any duties to the corporation or other shareholders. In a corporation, majority shareholders may owe a fiduciary duty when the majority shareholder exercises control over the corporation, either directly as an officer, director or through a majority vote or indirectly through control and influence over the officers and directors. The peculiar duties of a controlling stockholder to deal fairly with the corporation, its stockholders, and creditors are broader than the trust-fund doctrine. It rests on his inside knowledge of the corporation’s affairs and his opportunity to manipulate them for his personal advantage. Informal fiduciary duties arise under Texas law “from a confidential relationship ‘where one person trusts in and justifiably relies upon another, whether the relation is moral, social, domestic or merely personal.’”

The Texas Supreme Court and several appellate courts in Texas have yet to recognize a cause of action for shareholder oppression, but suits by minority shareholders are on the rise. Many of these suits deal with the claims of breach of fiduciary duty, but many times they include claims for shareholder oppression. This cause of action may arise when the majority shareholders in a corporation take action that unfairly prejudices the minority, such as refusing to declare dividends, lock the minority out of the corporate office; refuse to allow an inspection of corporate documents.

Texas law does not formally recognize the concept of shareholder oppression, except in the receivership statute that mentions, but does not define, “shareholder oppression” as a ground for receivership. Tex. Bus. Orgs. Code Ann. § 11.404 (Vernon 2010). Regardless, the Texas Court of Appeals has applied this statute outside of the receivership context to create a vague cause of action with poorly-defined parameters sometimes referred to as “shareholder oppression.” Therefore, shareholder oppression becomes a fact issue for the trier of fact and is not created as a matter of law.

So if you are an officer, director or majority shareholder of a Texas corporation and you intend to take actions that may be detrimental to the minority shareholders, you should consult an attorney to ensure it does not constitute a breach of your fiduciary duty or shareholder oppression.