Justice BOYD delivered the opinion of the Court, in which Chief Justice HECHT, Justice GREEN, Justice JOHNSON, Justice LEHRMANN, and Justice DEVINE joined.
In this case, a minority shareholder in a closely held corporation alleged that the corporation's other shareholders, who were also on the board of directors, engaged in "oppressive" actions and breached fiduciary duties by, among other things, refusing to buy her shares for fair value or meet with prospective outside buyers. The directors essentially admit to this conduct but insist that they were simply doing what was best for the corporation. For the most part, the jury sided with the minority shareholder, and the trial court ordered the corporation to buy out her shares for $7.3 million. The court of appeals agreed that the directors' refusal to meet with prospective purchasers was "oppressive" and upheld the buy-out order. We hold that this conduct was not "oppressive" under the statute on which the minority shareholder relies, and in any event, the statute does not authorize courts to order a corporation to buy out a minority shareholder's interests. Moving beyond the statutory claims, we decline to recognize or create a Texas common-law cause of action for "minority shareholder oppression." We thus reverse the court of appeals' judgment. Because the court of appeals upheld the judgment based on the oppression claim and did not reach the breach-of-fiduciary-duty claim, we remand the case to the court of appeals.
Rupe Investment Corporation (RIC) is a Texas closely held corporation.
Ann Rupe joined the family when she married Buddy in 1983. Rupe was Buddy's second wife, and their marriage and the birth of their son, Guy, took place after the death of Dennard and Buddy's father, Gordon. Gordon's will created Gordon's Trust, which named Gordon's wife, his children (Dennard and Buddy), and Dennard's three children as beneficiaries. Buddy and Rupe wanted their son to be added as a beneficiary of Gordon's Trust, but Dennard and her children refused, and this created some friction between Rupe and Dennard. According to Rupe, Dennard treated Rupe "as an outsider" from the very beginning, and told her that she would "never get any money in this family." With Buddy's encouragement, Rupe began considering a lawsuit to reform Gordon's Trust to add Guy as a beneficiary.
Buddy died in 2002. His 18% interest in RIC had been placed in a trust for the benefit of Rupe and their son (Buddy's Trust), naming Rupe as trustee.
On behalf of RIC, Lutes later offered to redeem Rupe's shares for $1 million. With this offer, he told Rupe that "any further discussions regarding a possible stock redemption would be pointless until the Hutton Communications situation is finally resolved,"
Rupe subsequently terminated her relationship with her attorney and personally requested a new redemption offer from Ritchie. Ritchie reiterated that he did not recommend selling her shares at that time, but he agreed to raise the issue at an upcoming board meeting. After the board meeting, Ritchie made a new offer of $1,760,947, which he said was based on a formula that RIC had previously used to value RIC's shares and, in any event, was "the highest cash offer that RIC directors believed they could make without jeopardizing the company and its other shareholders." Rupe declined the offer and decided to try to sell her shares to an outside party. She hired a new attorney and a broker, George Stasen, to market her shares. At Rupe's request, Dennard and Ritchie met with Stasen in March 2005. The meeting did not go well. Stasen, who described the meeting as "hostile," informed Dennard and Ritchie that he felt RIC's financial performance was "very, very unsatisfactory" and accused them of mismanagement. Stasen admitted at trial, however, that he had only a limited understanding of the company at the time. Nevertheless, throughout late 2005, Ritchie and Lutes worked with Stasen and Rupe's latest attorney to draft confidentiality agreements to allow Stasen to disclose some of RIC's confidential business information to Rupe's prospective outside purchasers.
In January 2006, Rupe sent a note to Ritchie, asking for dates when he could meet with prospective purchasers. After conferring with Lutes and an outside attorney with expertise in securities law, Ritchie sent a reply to Rupe declining to participate in such meetings. Ritchie stated that, because RIC would not be a party to the sale of her shares to an outside buyer, "it would be inappropriate for me or any other officer or director of [RIC] to meet with your prospects or otherwise participate in any activities relating to your proposed sale of stock." Stasen prepared marketing materials and provided them to potential buyers, but he did not succeed in selling the stock because, in his opinion, "everybody wanted to be able to meet Lee Ritchie and talk to the executives... as part of their due diligence." Although he determined that the book value of Rupe's stock was $3.9 million, he discounted that to $3.4 million because of the directors' refusal to meet with prospective buyers. In his view, however, it would be "incredibly difficult" to market Rupe's shares without such meetings, and the likelihood of selling the shares was "zero."
In July 2006, Rupe filed this suit against Dennard, Ritchie, Lutes, and RIC,
The court of appeals held that their refusal to meet with Rupe's prospective purchasers constituted oppressive conduct as a matter of law. Having reached that conclusion, it did not consider whether other actions by Dennard, Ritchie, and Lutes were oppressive, as Rupe had alleged. The court upheld the trial court's order requiring RIC to purchase Rupe's shares, but concluded that the trial court had erred by instructing the jury not to discount the shares' value to account for their lack of marketability and control. 339 S.W.3d 275, 301-02 (Tex.App.-Dallas 2011). The court thus affirmed the finding of oppressive conduct but reversed as to the $7.3 million purchase price, and remanded the case to the trial court for a new determination of the shares' fair value. Dennard, Ritchie, and Lutes petitioned this Court for review, which we granted.
Oppressive Actions Under the Receivership Statute
We begin by determining the meaning of "oppressive" as the Legislature used that word in the Texas receivership statute. This statute, former article 7.05 of the Texas Business Corporations Act, and its successor, section 11.404 of the Texas Business Organizations Code, authorize Texas courts to appoint a receiver to rehabilitate a domestic corporation under certain circumstances.
Former article 7.05 authorizes courts to appoint a rehabilitative receiver when it is "necessary" to do so "to conserve the assets and business of the corporation and to avoid damage to parties at interest," but only if "all other requirements of law are complied with" and "all other remedies available either at law or in equity, including
Former art. 7.05(A)(1) (emphasis added); see also TEX. BUS. ORGS.CODE § 11.404(a)(1). Rupe relies on subpart (c), and asserts that Dennard's, Ritchie's, and Lutes's actions were "oppressive." Thus, we must determine what the Legislature meant when it used the term "oppressive" in this statute, whether the refusal to meet with Rupe's potential buyers fits within that meaning, and what remedies the statute provides for such actions.
A. Cases Construing "Oppressive"
This Court has not previously construed former article 7.05 or current section 11.404. Initially, Texas courts of appeals construed the statute quite narrowly. In Texarkana College Bowl, Inc. v. Phillips, the court reversed a trial court order appointing a receiver based on oppressive actions, holding that a "stockholder's dissatisfaction with corporate management is not by [former] Article 7.05 made grounds for a receivership," and the shareholder was not entitled to a receivership based on acts that were "not inconsistent with the honest exercise of business judgment and discretion by the board of directors." 408 S.W.2d 537, 539 (Tex.Civ.App.-Texarkana 1966, no writ). The court thus incorporated the concept of the "business judgment rule" into its analysis of whether actions were oppressive under the statute. See id.; see also In re Schmitz, 285 S.W.3d 451, 457, 457 n. 33 (Tex.2009) (addressing the "business judgment that Texas law requires a board of directors to exercise").
Twenty-two years later, another court of appeals affirmed a trial court's denial of a petition for appointment of a receiver, holding that, in light of the statute's requirement that "`all other remedies available either at law or in equity' are inadequate," the trial court "properly required an emergency on which to base the relief sought." Balias v. Balias, 748 S.W.2d 253, 257 (Tex.App.-Houston [14th Dist.] 1988, writ denied). Both Phillips and Balias involved closely held corporations like RIC, but neither court held that such corporations were entitled to any special treatment under the receivership statute, which does not distinguish between closely held and other types of corporations.
When determining what constitutes "oppressive" action under the statute, the Davis court concluded that "[c]ourts take an especially broad view of the application of oppressive conduct to a closely-held corporation, where oppression may more easily be found," id. at 381, and then recited two standards for oppression:
Id. at 381-82. These two standards — generally referred to as the "reasonable expectations" test and the "fair dealing" test — have since echoed throughout Texas oppressive-actions cases.
In the present case, the trial court used the fair dealing test to define "oppressive" for the jury. On appeal, the court of appeals concluded that the directors' refusal to meet with Rupe's potential purchasers was oppressive under both tests: it substantially defeated Rupe's reasonable expectations and constituted a "visible departure from the standards of fair dealing and a violation of fair play on which each shareholder is entitled to rely." 339 S.W.3d at 297. In addition, the court rejected the application of the business judgment rule, reasoning that the rule applies only in derivative suits and only to protect
B. The Meaning of "Oppressive" Under the Receivership Statute
The construction of former article 7.05, like any other statute, is a question of law for the courts, and we review the court of appeal's determination of this question de novo. Atmos Energy Corp. v. Cities of Allen, 353 S.W.3d 156, 160 (Tex. 2011). "Our task is to effectuate the Legislature's expressed intent," In re Allen, 366 S.W.3d 696, 703 (Tex.2012); it is not to impose our personal policy choices or "to second-guess the policy choices that inform our statutes or to weigh the effectiveness of their results." Iliff v. Iliff, 339 S.W.3d 74, 79 (Tex.2011) (quoting McIntyre v. Ramirez, 109 S.W.3d 741, 748 (Tex.2003)). We focus on the words of the statute, because "[l]egislative intent is best revealed in legislative language." In re Office of Att'y Gen., 422 S.W.3d 623, 629 (Tex.2013).
We begin by noting that the Legislature has never defined the term "oppressive" in the Business Corporations Act or the Business Organizations Code. And although it has used the terms "oppress," "oppressive," or "oppression" in a handful of other Texas statutes, they do not include a definition either.
"[W]hen an undefined [statutory] term has multiple common meanings, the definition most consistent within the context of the statute's scheme applies." State v. $1,760.00 in U.S. Currency, 406 S.W.3d 177, 180-81 (Tex.2013) (per curiam). To determine the meaning of "oppressive" in the receivership statute, our text-based approach to statutory construction requires us to study the language of the specific provision at issue, within the context of the statute as a whole, endeavoring to give effect to every word, clause, and sentence. In re Office of Att'y Gen., 422 S.W.3d at 629; Fitzgerald v. Advanced Spine Fixation Sys., 996 S.W.2d 864, 866 (Tex.1999). We therefore examine not only the language of the oppression provision but also the language and context of the entire receivership statute, including the other specific grounds on which it authorizes a receivership and the general requirements that apply to all of the specific grounds.
1. General Requirements for Receivership
The term "oppressive" in former article 7.05 occurs within a statute that authorizes courts to appoint a receiver to take over a corporation's governance, displacing those who are otherwise legally empowered to manage the corporation. Within this context, two aspects of this receivership statute are particularly relevant. First, both former article 7.05 and current section 11.404 are not limited to closely held corporations. See former art. 7.05; TEX. BUS. ORGS.CODE § 11.404. The Legislature has adopted a single standard for rehabilitative receivership based on oppressive actions that applies to all corporations (and, under the current statute, any "domestic entity") without regard to the number of its shareholders or the marketability of its shares. See id. Nothing in the language suggests that this statute provides a special right or remedy unique to minority shareholders in closely held corporations. See id. We must thus construe the statute in a manner that is meaningful and workable not only for the peculiarities of minority shareholders in a closely held corporation, but also for shareholders and owners of other business entities.
Second, the statute places significant restrictions on the availability of a receivership: (1) the receivership must be "necessary ... to conserve the assets and business of the corporation and to avoid damage to parties at interest," (2) "all other requirements of law [must be] complied with," and (3) "all other remedies available either at law or in equity" must be "inadequate." Former art. 7.05(A) (emphasis added); see also TEX. BUS. ORGS. CODE § 11.404(b). These requirements demonstrate the Legislature's intent that receivership — which replaces the managers the shareholders chose with the courts' chosen managers — is a "harsh" remedy that is not readily available. See Balias, 748 S.W.2d at 257. In fact, by requiring termination of the receivership immediately after the condition that necessitated the receiver is remedied, the Legislature has expressed its intent that receivership be a temporary fix for exigent circumstances. See former art. 7.05(B); see also TEX. BUS. ORGS.CODE § 11.404(c). We thus agree with the Balias court that, to qualify as the type of "oppressive" actions that justify a rehabilitative receivership, the complained-of actions must create exigent circumstances for the corporation. See Balias, 748 S.W.2d at 257.
2. Other Grounds for Receivership
In addition to the statute's three general requirements, a shareholder who seeks a rehabilitative receivership under former article 7.05 must also prove at least one of five specific grounds, one of which is the "illegal, oppressive or fraudulent" actions provision on which Rupe relies. See former art. 7.05(A)(1)(c); see also TEX. BUS. ORGS.CODE § 11.404(a)(1)(C). The other four specific grounds are (1) the corporation is insolvent or in imminent danger of becoming insolvent; (2) an unbreakable deadlock among the corporation's managers is causing or threatening irreparable injury to the corporation; (3) a deadlock among the shareholders prevents the election of the corporation's management; or (4) the corporation's assets are being misapplied or wasted. Former art. 7.05(A)(1)(a), (b), (d), (e); see also TEX. BUS. ORGS.CODE § 11.404(a)(1)(A), (B), (D), (E). These are all situations that pose a serious threat to the well-being of the corporation. We must construe "illegal, oppressive, or fraudulent" actions, when alleged as a ground for receivership, in a manner consistent with these types of situations. See, e.g., R.R. Comm'n of Tex. v. Tex. Citizens for a Safe Future & Clean Water, 336 S.W.3d 619, 629 (Tex.2011) (construing "public interest" to reference only public interest in natural resources, not public interest in traffic safety, when other considerations identified in statute exclusively concerned matters relating to oil and gas).
2. "Illegal, Oppressive, or Fraudulent" Actions
Finally, we consider the statute's specific provision, which requires a finding that the "directors or those in control of the corporation" engaged in "illegal, oppressive, or fraudulent" actions. This requirement provides two more essential pieces of guidance. First, receivership under this provision must be based on the actions of the corporation's "directors or those in control of the corporation." See former art. 7.05(A)(1)(c); see also TEX. BUS. ORGS.CODE § 11.404(a)(1)(C) ("governing persons").
Second, the Legislature grouped together three categories of conduct in this provision of the statute — actions that are "illegal," actions that are "fraudulent," and actions that are "oppressive." See former art. 7.05(A)(1)(c); see also TEX. BUS. ORGS. CODE § 11.404(a)(1)(C). It is a "familiar principle of statutory construction that words grouped in a list should be given related meaning," Riverside Nat'l Bank v. Lewis, 603 S.W.2d 169, 174 n. 2 (Tex.1980), and similarly that "the meaning of particular words in a statute may be ascertained by reference to other words associated with them in the same statute." City of San Antonio v. City of Boerne, 111 S.W.3d 22, 29 (Tex.2003). Thus, the meaning that the Legislature contemplated for the term "oppressive" must be consistent with, though not identical to, the meanings intended for the accompanying terms "illegal" and "fraudulent."
Illegal and fraudulent actions in corporate management share considerable similarities and in some circumstances overlap — fraud generally is itself "illegal," and may subject the actor to criminal liability. See, e.g., TEX. PENAL CODE, ch. 32 (fraud), ch. 35 (insurance fraud), ch. 37 (perjury and other falsification). Fraudulent and illegal actions in this context pose a danger to the corporation itself. Fraudulent or illegal actions by a corporation's directors may result in disregard of the corporate form, see, e.g., TEX. BUS. ORGS.CODE § 21.223(b); may vitiate the corporation's contractual interests, see Schlumberger Tech. Corp. v. Swanson, 959 S.W.2d 171, 179 (Tex.1997); and may even result in an involuntary judicial termination of the corporation, see TEX. BUS. ORGS.CODE § 11.301(a)(2), (5). We must construe the third of these terms — "oppressive" — in a
4. The Meaning of "Oppressive"
Considering the language and context of the statute, we have identified at least three characteristics of "actions" that the statute refers to as "oppressive": (1) the actions justify the harsh, temporary remedy of a rehabilitative receivership; (2) the actions are severe and create exigent circumstances; and (3) the actions are inconsistent with the directors' duty to exercise their honest business judgment for the benefit of the corporation. The term's common meaning and its usage in other statutes add a fourth characteristic: the actions involve an unjust exercise or abuse of power that harms the rights or interests of persons subject to the actor's authority and disserves the purpose for which the power is authorized.
In light of these considerations, we conclude that neither the "fair dealing" test nor the "reasonable expectations" test sufficiently captures the Legislature's intended meaning of "oppressive" actions in former article 7.05.
Considering all of the indicators of the Legislature's intent, we conclude that a corporation's directors or managers engage in "oppressive" actions under former article 7.05 and section 11.404 when they 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.
5. Application to Rupe
Applying the Legislature's intended meaning, we conclude that the refusal by Dennard, Ritchie, and Lutes to meet with Rupe's potential buyers does not constitute an "oppressive" action for which Rupe may obtain relief under former article 7.05. Dennard, Ritchie, and Lutes had no contractual, statutory, or other duty to meet with prospective buyers. Rupe does not dispute that they sought and received the advice of an outside attorney who had expertise in securities law before making that decision, and they declined to participate in the meetings because doing so would increase the risk of suit against RIC and its directors in the event of a dissatisfied purchaser.
Undoubtedly, the directors' refusal to meet with prospective purchasers placed Rupe in a difficult situation that prevented her from selling her shares as quickly as she wanted and for their full value. But difficulty in — and sometimes even the impossibility of — selling one's shares is a characteristic intrinsic to ownership of a closely held corporation, the shares of which are not publicly traded. Shareholders of closely held corporations may address and resolve such difficulties by entering into shareholder agreements that contain buy-sell, first refusal, or redemption provisions that reflect their mutual expectations and agreements. In the absence of such agreements, however, former article 7.05 authorizes the appointment of a receiver only for specific conduct — in this case, allegedly oppressive actions — and the conduct relied on by the court of appeals here does not meet that standard.
C. Statutory Remedy
Although the court of appeals relied exclusively on the directors' decision not to meet with potential buyers of Rupe's shares, Rupe asserted that other actions by Dennard, Ritchie, and Lutes also constituted "oppressive" conduct under former article 7.05. We need not consider whether any or all of these other actions were oppressive, however, because we hold that, even if they were, the statute does not authorize the buy-out remedy that Rupe sought and obtained, and Rupe did not request the rehabilitative-receivership remedy that the statute does authorize.
Former article 7.05 creates a single cause of action with a single remedy: an action for appointment of a rehabilitative receiver. See former art. 7.05; see also TEX. BUS. ORGS.CODE § 11.404. It identifies:
The court of appeals relied on the statute's third requirement — a finding that all other remedies available at law or in equity are inadequate — to hold that the statute authorizes not only the appointment of a receiver but also any other appropriate equitable relief. 339 S.W.3d at 286. We disagree. Subsection (A) of former article 7.05, like subsection (b) of current section 11.404, identifies the inadequacy of other legal and equitable remedies as a prerequisite to the appointment of a receiver. See former art. 7.05(A); TEX. BUS. ORGS.CODE § 11.404(b). This provision is a restriction on the availability of receivership, not an expansion of the remedies that the statute authorizes.
Unlike the statute, which authorizes only a receivership, common-law causes of action, particularly those that invoke a court's equitable powers, often support a variety of remedies, and the same may be true of other statutes that authorize receivership. See, e.g., TEX. BUS. & COM.CODE § 24.008(a)(3) (authorizing appointment of a receiver among types of equitable relief available for fraudulent transfer). Additionally, as discussed later in this opinion, the kinds of actions that support a shareholder action for receivership under the "oppressive" prong of the statute are the kinds of conduct that also may support other causes of action, such as fraud or breach-of-fiduciary-duties to the corporation. See former art. 7.05(A); TEX. BUS. ORGS.CODE § 11.404(a). Finally, the statute
The statute thus recognizes that in many circumstances relief other than appointment of a receiver may be available, and it requires courts to consider such relief before appointing a rehabilitative receiver. See former art. 7.05(A); TEX. BUS. ORGS.CODE § 11.404(b)(3). If lesser remedies
In affirming the trial court's buy-out order, the court of appeals relied on this Court's decision in Patton v. Nicholas, 154 Tex. 385, 279 S.W.2d 848 (1955). But Patton involved neither a claim for oppression nor a court-ordered buyout of stock. Id. at 849-59. Rather, this Court held in Patton that the receivership statute in effect at the time, former article 2293,
The court of appeals also relied on Davis to support the availability of a buy-out order under the statute. 339 S.W.3d at 286-87 (citing Davis, 754 S.W.2d at 378-80). Davis likewise relied on Patton. Both courts' reliance on Patton is misplaced, and we reject the holding in Davis that former article 7.05 authorizes Texas courts to invoke their "general equity power" to award a buyout of stock as a remedy for oppressive actions under the statute (rather than under a common-law cause of action for which equitable remedies are otherwise available). Cf. Davis, 754 S.W.2d at 379; see also ARGO Data Res. Corp. v. Shagrithaya, 380 S.W.3d 249, 265 (Tex.App.-Dallas 2012, pet. filed) ("The statute authorizes the court to fashion an equitable remedy if the actions of those in control of a corporation are illegal, oppressive, or fraudulent."). Although the Legislature has made a broad range of equitable remedies available for violations of other statutory causes of action, see, e.g., TEX.
D. Conclusion on Statutory Oppressive Actions
We hold that the decision by Ritchie, Dennard, and Lutes not to meet with Rupe's prospective buyers does not constitute "oppressive" action under former article 7.05, and the court of appeals erred in concluding otherwise. We also hold that appointment of a rehabilitative receiver is the only remedy that former article 7.05 authorizes for oppressive actions. Because the trial court's judgment does not appoint a receiver, we need not consider the other conduct that Rupe alleged was "oppressive."
A Common-law Cause of Action for Shareholder Oppression?
This Court has never recognized a common-law cause of action for "minority shareholder oppression." Although the courts of appeals' opinions in this case and in Davis both addressed only actions for oppressive actions under the receivership statute, other parties and Texas courts have relied on these opinions to recognize a common-law claim for "shareholder oppression" not based on any statutory authority.
When deciding whether to recognize "a new cause of action and the accompanying expansion of duty," this Court "perform[s] something akin to a cost-benefit analysis to assure that this expansion of liability is justified." Roberts v. Williamson, 111 S.W.3d 113, 118 (Tex. 2003). The analysis is complex, requiring consideration of a number of non-dispositive factors including, but not limited to:
See Nabors Drilling, U.S.A., Inc. v. Escoto, 288 S.W.3d 401, 410 (Tex.2009); Humble Sand & Gravel, Inc. v. Gomez, 146 S.W.3d 170, 193 (Tex.2004); Thapar v. Zezulka, 994 S.W.2d 635, 639-40 (Tex. 1999); Bird v. W.C.W., 868 S.W.2d 767, 769 (Tex.1994); Graff v. Beard, 858 S.W.2d 918, 920-21 (Tex.1993). Carefully considering these factors within the context of this case, we decline to recognize a new common-law cause of action for "minority shareholder oppression" in closely held corporations.
A. Foreseeability, Likelihood, and Magnitude of Potential Injury
By definition, a "closely held" corporation
Those in control of a closely held corporation may use various "squeeze-out" or "freeze-out" tactics to deprive minority shareholders of benefits, to misappropriate those benefits for themselves, or to induce minority shareholders to relinquish their ownership for less than it is otherwise worth. The types of conduct most commonly associated with such tactics include (1) denial of access to corporate books and records, (2) withholding payment of, or declining to declare, dividends, (3) termination of a minority shareholder's employment, (4) misapplication of corporate funds and diversion of corporate opportunities for personal purposes, and (5) manipulation of stock values.
Our review of the case law and other authorities also convinces us that it is both foreseeable and likely that some directors and majority shareholders of closely held corporations will engage in such actions with a meaningful degree of frequency and that minority shareholders typically will suffer some injury as a result. Although the injury is usually merely economic in nature, it can be quite substantial from the minority shareholder's perspective, as it often completely undermines their sole or primary motivation for engaging with the business.
B. Existence and Adequacy of Other Protections
Our conclusion that the risks require a remedy does not end our analysis. See, e.g., Nabors Drilling, 288 S.W.3d at 411 (observing that the mere foreseeability of an injury is not sufficient to justify the creation of a new duty). We must next consider the adequacy of remedies that already exist. This is particularly true when we are addressing corporations and the relationships among those who participate in them, which we have consistently recognized are largely matters governed by statute and contract. See Empire
As we consider existing statutory remedies, we are mindful of the principle that, when the Legislature has enacted a comprehensive statutory scheme, we will refrain from imposing additional claims or procedures that may upset the Legislature's careful balance of policies and interests. See, e.g., Liberty Mut. Ins. Co. v. Adcock, 412 S.W.3d 492, 493 (Tex.2013) (noting that the Texas Workers' Compensation Act "is a comprehensive statutory scheme, and therefore precludes the application of claims and procedures not contained within the Act.").
Even when a closely held corporation does not elect to operate as a "close corporation," the Legislature has enacted special rules to allow its shareholders to more easily bring a derivative suit on behalf of
Of course, shareholders may also prevent and resolve common disputes by entering into a shareholders' agreement to govern their respective rights and obligations. Importantly, the Legislature has granted corporate founders and owners broad freedom to dictate for themselves the rights, duties, and procedures that govern their relationship with each other and with the corporation. See, e.g., id. §§ 21.052-.059, 21.101-.110, 21.210, 21.401-.408. Again, we note that although RIC's owners did not enter into a shareholders' agreement, they certainly could have done so, and by doing so could have avoided the current dispute.
Having noted the extensive statutory, contractual, and common-law protections that already exist under Texas law, we now consider the adequacy of those protections to address the kinds of conduct commonly cited as justifying the creation of liability for "shareholder oppression."
1. Denial of Access to Corporate Books and Records
A common complaint of those alleging shareholder oppression is the denial of access to the corporation's books and records. Our Legislature has expressly protected a corporate shareholder's right to examine corporate records, provided penalties for a violation of those rights, and identified applicable defenses in an action to enforce those rights. See TEX. BUS. ORGS.CODE §§ 21.218 (examination of records), 21.219 (annual and interim statements of corporation), 21.220 (penalty for failure to prepare voting list), 21.222 (penalty for refusal to permit examination), 21.354 (inspection of voting list), 21.372 (shareholder meeting list). These statutory rights and remedies adequately protect a minority shareholder's access to corporate records, and we need not create a new commonlaw cause of action to supplement that protection.
2. Withholding or Refusing to Declare Dividends
A second common complaint by those alleging shareholder oppression relates to the corporation's declaration of dividends, including the failure to declare dividends, the failure to declare higher dividends, and the withholding of dividend payments after a dividend has been declared.
With regard to the failure to declare dividends and the failure to declare higher dividends, Texas statutes generally do not dictate when directors must declare dividends or how much the dividends must be.
This Court first addressed this kind of a claim in the context of a closely held corporation nearly sixty years ago in Patton. 279 S.W.2d at 849-53. Although there seems to be some confusion in the courts of appeals, Patton was not a "shareholder oppression" case.
We rejected the minority shareholders' mismanagement claims, but we recognized that the finding that Patton had used "his control of the board for the malicious purpose of ... preventing dividends and otherwise lowering the value ... of the stock of the [minority shareholders], is something else." Id. at 853. We equated this finding with a "breach of trust for which the courts will afford a remedy," id. at 854, and the cases on which we relied indicate that we treated that claim as being brought by the shareholders on behalf of the corporation. See id. (citing Becker v. Dirs. of Gulf City St. Ry. & Real-Estate Co., 80 Tex. 475, 15 S.W. 1094 (1891); Cates v. Sparkman, 73 Tex. 619, 11 S.W. 846 (1889)). We determined that the appropriate remedy in that circumstance was an injunction order compelling payment of the dividends. Id. at 859, 279 S.W.2d 848.
Patton demonstrates that when a corporate director violates the duty to act solely for the benefit of the corporation and refuses to declare dividends for some other, improper purpose, the director breaches fiduciary duties to the corporation, and the minority shareholders are entitled to relief, either directly to the corporation or through a derivative action.
In sum, a remedy exists for dividend decisions made in violation of a director's duties to the corporation and its shareholders collectively, but no remedy exists for decisions that comply with those duties, even if they result in incidental harm to a minority shareholder's individual interests. But even when a corporate
We therefore conclude that the existing duties and remedies applicable to corporate dividend declarations and payments offer adequate protections for minority shareholders under most circumstances.
3. Termination of Employment
A third common complaint of those alleging minority shareholder oppression relates to the termination of the minority shareholder's employment with the corporation. A minority shareholder's loss of employment with a closely held corporation can be particularly harmful because a job and its salary are often the sole means by which shareholders receive a return on their investment in the corporation. We must be particularly careful in considering this complaint, however, because Texas is steadfastly an at-will employment state. "For well over a century, the general rule in this State, as in most American jurisdictions, has been that absent a specific agreement to the
Although at-will employment is the default, employers and employees have the freedom to contract for a different employment relationship. See TEX. BUS. ORGS. CODE § 2.101(5). In fact, the Business Organizations Code expressly permits corporate shareholders to memorialize the terms of employment for a director, officer, or other employee in a shareholders' agreement. Id. §§ 21.101(a)(4), 21.714(b)(9). In the absence of such a contract, however, we may not presume that the company and its shareholders elected to forgo their at-will employment rights, for to do so would violate this State's strong policy in favor of at-will employment. Cf. Tex. Farm Bureau Mut. Ins. Cos. v. Sears, 84 S.W.3d 604, 608 (Tex.2002) ("At-will employment is an important and longstanding doctrine in Texas, and we have been reluctant to impose new common-law duties that would alter or conflict with the at-will relationship." (citations omitted)).
There may be situations in which, despite the absence of an employment agreement, termination of a key employee is improper, for no legitimate business purpose, intended to benefit the directors or individual shareholders at the expense of the minority shareholder, and harmful to the corporation. Though the ultimate determination will depend on the facts of a given case, such a decision could violate the directors' fiduciary duties to exercise their "uncorrupted business judgment for the sole benefit of the corporation" and to refrain from "usurp[ing] corporate opportunities for personal gain." Holloway, 368 S.W.2d at 577; see also Gearhart Indus., 741 F.2d at 723-24. As we have already discussed, a shareholder may enforce these duties through a derivative action, see TEX. BUS. ORGS.CODE §§ 21.551-.563, and the Legislature's special rules would apply if the matter involved a closely held corporation. Id. §§ 21.563(b), 21.751-.763. We also note that such actions could potentially be "oppressive" under section 11.404, and thus justify the appointment of a rehabilitative receiver. See TEX. BUS. ORGS. CODE § 11.404(a)(1)(C); see also former art. 7.05(A)(1)(c). For employment terminations that fall short of these extreme circumstances, however, our commitment to the principles of at-will employment compels us to conclude that the opportunity to contract for any desired employment assurances is sufficient.
4. Misapplication of Corporate Funds and Diversion of Corporate Opportunities
Because the potential harm here is to the corporation and the shareholders collectively, this misconduct does not weigh in favor of recognizing an additional common-law remedy for individual shareholders.
5. Manipulation of Stock Values
The final common minority shareholder complaint that we will address involves the directors' manipulation of the value of the corporation's stock. Although not alleged here, there may be circumstances in which the controlling shareholders or directors of a closely held corporation seek to artificially deflate the shares' value, perhaps to allow the company or its shareholders to purchase a minority shareholder's shares for less than their true market value, or to hinder a minority shareholder's sale of shares to third parties. See, e.g., Patton, 279 S.W.2d at 849-53. As a rule, however, claims based on such conduct belong to the corporation, rather than the individual shareholder. See Mass. v. Davis, 140 Tex. 398, 407, 168 S.W.2d 216, 221 (1942). As we explained over 70 years ago:
As with the other conduct we have addressed, the directors' fiduciary duties to the corporation provide protection for minority shareholders affected by such conduct when the conduct harms them in their capacity as shareholders. Though we recognize that the directors may endeavor in such conduct to harm the interests of one or more individual minority shareholders without harming the corporation (i.e., without giving rise to damages recoverable in a derivative suit), for the reasons discussed below, we cannot adopt a common-law rule that requires directors to act in the best interests of each individual shareholder at the expense of the corporation.
6. Summary of Existence and Adequacy of Other Protections
The Legislature has already dictated what rights of access a shareholder has to corporate books and records, and no party alleges that the Legislature's statutory scheme is inadequate to protect shareholders in closely held corporations from improper denial of access to corporate records. See, e.g., D'Unger, 207 S.W.3d at 331; O'Bryant, 18 S.W.3d at 216; Austin, 967 S.W.2d at 401. The four remaining categories of conduct identified as frequent causes of shareholder oppression — withholding or refusing to declare dividends, termination of employment, misapplication of corporate funds or misappropriation of corporate opportunities, and manipulation of corporate share values — all relate to business decisions that fall under the authority of a corporation's offices and directors. As such, they are subject to an officer or director's fiduciary duties to the corporation. We conclude that these legal duties are sufficient to protect the legitimate interests of a minority shareholder by protecting the well-being of the corporation.
We recognize that our conclusion leaves a "gap" in the protection that the law affords to individual minority shareholders, and we acknowledge that we could fill the gap by imposing a common-law duty on directors in closely held corporations not to take oppressive actions against an individual shareholder even if doing so is in the best interest of the corporation. To determine whether imposing such a duty is advisable, however, we must consider the public policies at play, the consequences of imposing the duty, the duty's social utility, and whether the duty would conflict with existing law or upset the Legislature's careful balancing of competing interests in governing business relationships.
C. Consequences of Proposed Duty
"Tort law ... cannot remedy every wrong." Roberts v. Williamson, 111 S.W.3d 113, 118 (Tex.2003). "The fundamental purposes of our tort system are to deter wrongful conduct, shift losses to responsible parties, and fairly compensate deserving victims." Id. We do not believe that the creation of a common-law claim for minority shareholder oppression would fulfill these purposes, nor is the creation of such a claim necessary to do so.
We begin by considering the type of actions that would qualify as "oppressive" under a common-law cause of action. In deciding whether to recognize a new common-law cause of action, we must consider whether the new duty would provide clear standards that would deter the undesirable conduct without deterring desirable conduct or unduly restricting freedoms. See Nabors Drilling, 288 S.W.3d at 410; Gomez, 146 S.W.3d at 193. As our discussion of the Legislature's undefined usage of the term "oppressive" has revealed, the term falls far short of providing any clear standards. Adopting the Legislature's intended meaning of "oppressive" as the same meaning for a common-law claim would merely duplicate the statutory cause of action while permitting remedies that the Legislature has chosen not to permit. Yet adopting a meaning of "oppressive" that differs from the Legislature's would only create more confusion and foster both uncertainty and unnecessary litigation. See Roberts, 111 S.W.3d at 118-19 (observing that proposed duty would "foster uncertainty" as well as disparity in recovery among similarly situated parties).
Even the most developed common-law standards for "oppression" — the "reasonable expectations" and "fair dealing" tests — have been heavily criticized for
Ultimately, because the standard is so vague and subject to so many different meanings in different circumstances, we conclude that creating new and independent legal remedies for "oppressive" actions is simply bad jurisprudence. Although we do not foreclose the possibility that a proper case might justify our recognition of a new common-law cause of action to address a "gap" in protection for minority shareholders, any such theory of liability will need to be based on a standard that is far more concrete than the meaning of "oppressive."
In addition, even if we were to utilize the Legislature's intended meaning of the term "oppressive," our consideration of the competing interests and consequences convinces us to decline to expand a claim for shareholder oppression to provide relief beyond appointment of a rehabilitative receiver. In this context, we must consider not only the interests of the minority shareholder, but also the potential consequences to the corporation itself, the officers and directors on whom the duty is imposed, the other shareholders of the corporation, and business relationships in general. See, e.g., Strickland v. Medlen, 397 S.W.3d 184, 185 (Tex.2013) (listing a myriad of unintentional consequences that might attend liability for compensating emotional damages arising from the loss of a pet). Imposing on directors and officers a common-law duty not to act "oppressively" against individual shareholders is the equivalent of, or at least closely akin to, imposing on directors and officers a fiduciary duty to individual shareholders. We have not previously recognized a formal fiduciary duty to individual shareholders, and we believe that better judgment counsels against doing so.
D. Conclusion on Common-law Action for Oppression
The Legislature has crafted a statutory scheme governing domestic corporations. The statutes are detailed and extensive, reflecting legislative policy judgments about when the government should step in to impose rights and obligations on the parties and when the parties should be free to dictate their own rights and obligations vis-à-vis each other and the business. This Court has the prerogative to superimpose a common-law cause of action upon this statutory framework — though not to alter or contravene the statutory framework — but we exercise that power sparingly, careful not to upset the Legislative balance of policies, and only when warranted by a genuine need. See, e.g., D'Unger, 207 S.W.3d at 331; O'Bryant, 18 S.W.3d at 216; Austin, 967 S.W.2d at 401; see also Twyman, 855 S.W.2d at 630 (Hecht, J., joined by Enoch, J., concurring in part and dissenting in part) ("This Court, as steward of the common law, possesses the power to recognize new causes of action, but the mere existence of that power cannot justify its exercise. There must be well-considered, even compelling grounds for changing the law so significantly. Where, as here, no such grounds are given, the decision is more an exercise of will than of reason."). We find no such necessity here, and therefore decline to recognize a common-law cause of action for "shareholder oppression."
Breach of Informal Fiduciary Duties
Finally, we address Rupe's contention that we may affirm the trial court's buy-out order based on the jury's finding in her favor on her breach-of-fiduciary-duty claim. Rupe's fiduciary duty claim is not based on the formal fiduciary duties that officers and directors owe to the corporation by virtue of their management position.
For the reasons expressed, we reverse the court of appeals' judgment and remand the case to that court for further proceedings consistent with this opinion.
Justice GUZMAN filed a dissenting opinion, in which Justice WILLETT and Justice BROWN joined.
Justice GUZMAN, joined by joined by Justice WILLETT and Justice BROWN, dissenting.
Thirty-seven states, including Texas, have statutes allowing a court to appoint some form of receiver over a closely held corporation for shareholder oppression. Today, Texas becomes the first of these jurisdictions with a statute that unequivocally prefers lesser remedies to effectively preclude those remedies — despite overwhelming authority observing that, to the contrary, many if not all jurisdictions allow these lesser remedies.
Historically, legislatures have recognized that minority shareholders are particularly vulnerable to abuse by majority shareholders and are thus entitled to significant protections. Without protection, shareholder oppression can significantly devalue or destroy the minority shareholder's investment.
Here, the minority shareholder prevailed on her oppression and fiduciary duty claims at trial by presenting legally sufficient evidence that the majority shareholders and corporation made bargain offers to buyout her stock, warned her that it would be the only purchaser of her stock, withheld corporate information from her, refused to meet with prospective purchasers of her shares, and paid personal expenses of a majority shareholder with corporate funds. Indeed, the chairman of the corporation's board of directors admitted at trial that refusing to meet with prospective purchasers was oppressive. Because the Court extinguishes meaningful protections for minority shareholders and renders a take nothing judgment on a valid shareholder oppression claim, I respectfully dissent.
The structure of closely held corporations situates minority shareholders in positions uniquely vulnerable to abuse. Hollis v. Hill, 232 F.3d 460, 467 (5th Cir.2000). Typically, a board of directors elected by a majority of the voting interest of the shareholders oversees the corporation, which operates through officers that report to the board. TEX. BUS. ORGS. CODE §§ 3.103(b), 21.401(a). Generally, these minority shareholders have no right to participate in the management of the corporation, and the directors often elect themselves as officers of the corporation. As an amicus brief submitted by several professors and faculty of Texas law
Unlike minority shareholders in partnerships or public corporations, minority shareholders in closely held corporations are uniquely subject to this oppressive conduct because of their inability to freely exit the venture. In a partnership, a minority shareholder has a statutory right to withdraw from the partnership and receive either her share of the proceeds if the remaining partners terminate the partnership or a fair value buyout of her shares if the remaining partners continue the partnership. TEX. BUS. ORGS. CODE §§ 152.501(b)(1), 152.601(1). Likewise, dissatisfied minority shareholders in a publicly held corporation may sell their shares on the open market. But there is no statutory right for a minority shareholder to exit the corporation and receive a return of her investment. And frequently, the only buyers for minority shares of a closely held corporation are the remaining shareholders — who might be engaging in the oppressive conduct from which they could ultimately profit.
Ideally, minority shareholders would reach buy-sell or shareholder agreements with the majority shareholders before purchasing minority shares. When disputes arise, shareholders could readily turn to their agreements as the basis for their rights without needing to resort to the law to determine the duties owed. But as one commentator has observed, "[f]rom a relational standpoint, people enter closely-held businesses in the same manner as they enter marriage: optimistically and ill-prepared."
Giving due consideration to the plight of minority shareholders, thirty-one states have statutes that permit even the harsh remedy of allowing courts to appoint a receiver to liquidate a corporation based on shareholder oppression.
Here, Ann married into the Rupe family. Her husband's sister, Paula Dennard, informed Rupe that she would "never get any money in this family." Rupe and her husband, Buddy, wanted to add their son as a beneficiary to the family trust that owned 47% of Rupe Investment Corporation (RIC),
Lutes later offered to redeem Rupe's shares for $1 million. Rupe replied that the $1 million buyout offer was "absurd" and was designed to take advantage of her. Dennard, Ritchie, and Lutes then elected Dennard's daughter Gretchen to take Buddy's seat on the board.
Ritchie later offered for RIC to purchase Rupe's shares for approximately $1.7 million (or $5,987 per share) to be paid over a seven-year period. In making the offer, Ritchie warned that RIC would be the only purchaser of her stock. Ritchie admitted at trial this value was calculated using the book value of RIC's shareholder equity, and Ritchie and Lutes both conceded that book value was not necessarily representative of market value.
Unsatisfied with the offer, Rupe retained investment banker George Stasen to market her stock to third parties. When they met, Dennard, several of her children, and Ritchie greeted Stasen in "a very hostile fashion," and Ritchie refused Stasen's request to meet with any potential third-party buyers. They required Rupe and any potential buyer to execute confidentiality agreements that were not subject to negotiation and that granted RIC sole discretion to approve or disapprove disclosure of requested information.
According to Stasen, potential buyers laughed at him because they could not be expected to "make a decision on an investment from this limited information without meeting the executives" of a closely held corporation like RIC. Stasen explained that "[t]here was no way I could ever sell anything ... [b]ecause there wasn't enough information in the package and everybody wanted to be able to meet Lee Ritchie and talk to the executives of the companies." Importantly Dennard admitted at trial that she disagreed with Ritchie's refusal to meet with potential third-party buyers, she would want to meet with the president of a closely held corporation before investing, Stasen's request of Ritchie was reasonable, and refusing such a request would be "oppressive to a minority shareholder."
Rupe sued Dennard, Ritchie, Lutes, and RIC, claiming shareholder oppression and breach of fiduciary duty. Rupe sought a court-ordered buyout of her shares or, alternatively, the appointment of a receiver
The Court today holds that because the shareholder oppression statute only expressly addresses the remedy of receivership, no other remedy for oppression is available. And because the remedy of receivership is comparably harsh, the Court imposes a stringent definition of oppression by incorporating the business judgment rule. The Court's logic in applying the business judgment rule in this context would presumably also apply to minority shareholder claims for breach of fiduciary duty. But the Court's initial holding that receivership is the only remedy for oppression is flawed — which necessarily affects the soundness of the Court's remaining holdings.
The shareholder oppression statute not only addresses but also prefers lesser legal and equitable remedies than receivership — it does not extinguish them. Because courts may impose lesser remedies, the long-standing definition of oppression that has existed at common law in Texas and a host of other jurisdictions (to which the Legislature has acquiesced) should apply. Further, the business judgment rule is fundamentally incongruent with the concept of minority shareholder oppression because that oppression (such as buying minority shares for a bargain price) typically benefits the corporation. And the oppression statute contemplates use of lesser remedies in situations where oppression exists but does not harm the corporation — further indicating the business judgment rule should not apply. Neither does the business judgment rule have a place in minority shareholder claims for breach of fiduciary duty. I address each point in turn.
At the heart of this case is the pre-codified version of the Texas oppression statute, former article 7.05. That provision requires a shareholder seeking a rehabilitative receivership to establish that the directors' acts are "illegal, oppressive, or fraudulent." Act of Mar. 30, 1955, 54th Leg., R.S., ch. 64, art. 7.05(A)(1), 1955 Tex. Gen. Laws 239, 290-91, amended by Act of May 3, 1961, 57th Leg., R.S., ch. 169, 1, 1961 Tex. Gen. Laws 319, 319 (hereinafter "former art. 7.05"). Additionally, a court may only appoint a receiver: (1) when the
But the plain language of the oppression statute prefers other remedies — it does not extinguish them. Former article 7.05 provides for receivership only if "all other remedies available either at law or in equity... are determined by the court to be inadequate." Former art. 7.05. If no other remedies are available under the statute or common law, as the Court holds, the oppression statute would have no need to express a preference for their use. Such a holding violates our fundamental canon of construction to not render any statutory language meaningless. 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."). And in doing so, the Court defeats the very purpose of the Legislature's carefully chosen words.
Other jurisdictions with similar oppression statutes have uniformly interpreted them as allowing other lesser remedies. The Texas oppression statute has its roots in the Illinois Business Corporation Act of 1933,
Several courts with statutes similar to ours have specifically addressed the propriety of a buyout as a remedy for oppression.
Importantly, I am aware of no state that has interpreted their shareholder oppression statute as foreclosing all remedies except receivership, as the Court does today. Indeed, other state supreme courts have cited this Court's precedent for the proposition that "[m]ost states have adopted the view that a dissolution statute does not provide the exclusive remedy for injured shareholders and that the courts have equitable powers to fashion appropriate remedies where the majority shareholders have breached their fiduciary duty to the minority by engaging in oppressive conduct."
Commentators are in accord with the host of jurisdictions that recognize courts retain the authority to implement lesser legal and equitable remedies for shareholder oppression. As one commentator has observed, because most oppression statutes are based on the Model Business Corporation Act, "alternative relief, particularly buy-outs of minority shareholders, is available in most, if not all, jurisdictions."
B. Definition of Oppression
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.
443 S.W.3d at 871. The business judgment rule shields directors and managers from liability for rational decisions made for the benefit of the corporation.
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 definition of oppression is unwarranted. Like many other states, Texas's statute was similar to
New York has primarily shaped the definitions of oppression in the United States.
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).
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.
C. The Business Judgment Rule
In addition to crafting a restrictive definition of oppression, the Court embeds in its definition the business judgment rule, shielding majority shareholders and directors from liability for decisions that do not harm the corporation or that were made in the honest exercise of business judgment. But the business judgment rule is fundamentally at odds with the lesser shareholder oppression remedies the oppression statute expressly prefers. The Court's inclusion of the rule in the definition of oppression negates the very protection the oppression statute afforded until today.
When crafting the reasonable expectations test for shareholder oppression, the New York court observed that "[w]hether the controlling shareholders discharged petitioner for cause or in their good business judgment is irrelevant." Topper, 433 N.Y.S.2d at 362. A number of other courts have likewise rejected the business judgment rule in minority shareholder oppression cases.
Commentators have agreed that the business judgment rule should not apply in shareholder oppression cases. As one leading commentator has explained:
Douglas K. Moll, Shareholder Oppression in Texas Close Corporations: Majority Rule Isn't What It Used To Be, 1 HOUS. BUS. & TAX. L.J. 12, 20 (2001) (citations omitted); see also F. Hodge O'Neal, Close Corporations: Existing Legislation and Recommended Reform, 33 BUS. LAW. 873, 884 (1978) (criticizing the business judgment rule as a conceptual barrier to judicial relief for aggrieved minority shareholders).
The typical example of minority shareholder oppression culminates when directors offer to buy a minority shareholder's shares at a fraction of their true value. Such an offer will seemingly always be in the corporation's best interest. For example, the directors here offered at most $1.7 million for shares the jury valued at trial at $7.3 million. If this value were the fair
D. Common-Law Cause of Action
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." 443 S.W.3d at 879. But the Court concludes that the common-law standard for minority shareholder oppression is too vague
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.
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.
E. Breach of Fiduciary Duty
Shareholder oppression was not the only cause of action in this proceeding. Rupe also sued for breach of fiduciary duty.
Douglas K. Moll, Shareholder Oppression & Dividend Policy in the Close Corporation, 60 WASH. & LEE L.REV. 841, 852 (2003) (quotation marks and citations omitted). The fiduciary concept for close corporations arose in the 1970s, when the Massachusetts high court recognized that "stockholders in the close corporation owe one another substantially the same fiduciary duty in the operation of the enterprise that partners owe to one another." Donahue v. Rodd Electrotype Co., 367 Mass. 578, 328 N.E.2d 505, 515 (1975).
As the Fifth Circuit has observed, this "recognition of special rules of fiduciary duty applicable to close corporations has gained widespread acceptance." Hollis, 232 F.3d at 468. High courts in Indiana, Maryland, Minnesota, New York, Ohio, Utah, and West Virginia have recognized that majority shareholders can owe fiduciary duties to minority shareholders.
We expressly avoided the issue in Willis v. Donnelly because the record there could not support the existence of a fiduciary duty. 199 S.W.3d 262, 276-77 (Tex.2006). But we did recognize the existence of a fiduciary duty in Patton, where we held that "[u]ndoubtedly the malicious suppression of dividends is a wrong akin to breach of trust, for which the courts will afford a remedy." 279 S.W.2d at 854. In light of Patton and the mainstream approach in American jurisprudence, Texas courts of appeals have determined on a case-by-case basis whether majority shareholders owe an informal fiduciary duty to minority shareholders of closely held corporations.
Finally, the business judgment rule should not apply to these fiduciary duty claims. When we recognized a claim for breach of fiduciary duty in Patton, the majority shareholder was harming the minority
Rupe prevailed at trial on her shareholder oppression and fiduciary duty claims, and the trial court compelled a $7.3 million buyout. The court of appeals held there was sufficient evidence of shareholder oppression (and therefore did not reach the fiduciary duty issues), but the $7.3 million buyout failed to account for the minority shares' lack of marketability and control. 339 S.W.3d at 302. The jury charge defined oppression as:
As previously addressed, this definition is more appropriate here than the reasonable expectations definition because Rupe inherited her shares and thus had no expectations when making a decision to invest.
The jury found that Dennard, Ritchie, Lutes, and RIC all engaged in oppressive conduct. The jury also affirmatively answered special submissions that: (1) Dennard paid personal expenses from RIC corporate funds; (2) Dennard, Ritchie, and Lutes offered Rupe a position on the board in exchange for her agreement not to sue a shareholder of RIC; (3) Dennard, Ritchie, and Lutes's buyout offers were oppressive; (4) Dennard, Ritchie, and Lutes's failure to permit Rupe to examine and copy corporate information was oppressive; (5) Dennard, Ritchie, and Lutes owed Rupe a fiduciary duty; (6) Dennard, Ritchie, and Lutes breached their fiduciary duty; and (7) the fair value of Rupe's shares was $7.3 million, not discounted for lack of marketability or control. The trial court entered judgment that compelled a buyout of Rupe's shares for $7.3 million.
Before assessing whether sufficient evidence supports the verdict, one must assess whether the submission was proper. In addition to submitting abroad-form question on oppression,
Having determined the trial court's submission was proper, I also believe there is legally sufficient evidence supporting the findings of oppression. Because Rupe inherited her shares, oppression is defined as burdensome, harsh, or wrongful conduct.
Having concluded there is legally sufficient evidence of oppression, the question becomes what remedy is appropriate. Rupe primarily requested a buyout and alternatively requested dissolution if the buyout was inadequate. Dissolution is undoubtedly harsher than a buyout. See Robert A. Ragazzo, Toward a Delaware Common Law of Closely Held Corporations, 77 WASH. U.L.Q. 1099, 1119 (1999) ("[The buyout] is less harsh than dissolution and often gives both parties what they want most."). But the statute does not allow for dissolution based on oppression. Former art. 7.05. Thus, there is no need to compare the harshness of a buyout to a remedy Rupe never requested.
Because I agree with the court of appeals that it was error for the trial court to instruct the jury to not discount the value of Rupe's stock for its lack of marketability or minority status, I would affirm its judgment remanding for a redetermination of the amount of the buyout. 339 S.W.3d at 302. Under Rule of Appellate Procedure 44.1(b), a new trial may be ordered on a separable part of a proceeding, but a separate trial on unliquidated damages is improper if liability is contested. TEX.R.APP. P. 44.1(b). Here, the amount of the buyout is an equitable remedy rather than a measure of unliquidated damages, and a retrial on the amount of the buyout alone is separable without unfairness to the parties.
In sum, I cannot agree that a proper construction of the shareholder oppression statute is that the statute extinguishes the very remedies it expressly prefers. Uniformly, courts in Texas and beyond have held that less harsh remedies at law and equity are available, such as a court-ordered buyout. Under the time-honored definitions of oppression, there is some evidence that the majority shareholders here engaged in burdensome, harsh, and wrongful conduct by (1) making inferior buyout offers; (2) warning Rupe that RIC would be the only purchaser of her stock; (3) withholding corporate information; (4) refusing to meet with prospective purchasers of Rupe's shares; and (5) paying Dennard's personal expenses with corporate funds. RIC's chairman even admitted that refusing to meet with prospective purchasers was oppressive. But because the valuation of Rupe's shares failed to account for their lack of marketability or control, I would affirm the judgment of the court of appeals, which remanded to the trial court for a redetermination of the amount of the buyout. Because the Court renders judgment that Rupe take nothing on her valid shareholder oppression claim, I respectfully dissent.
The model act, for example, does not allow for appointment of a rehabilitative receiver based on oppressive actions. See Model Business Corporation Act § 7.48. In fact, it does not provide for any consideration of an individual shareholder's interests in determining whether to appoint a receiver. Id. § 7.48(a) (authorizing appointment of a custodian or receiver only when a shareholder establishes that the corporation's "directors are deadlocked" and "irreparable injury to the corporation is threatened or being suffered" or that "the directors or those in control of the corporation are acting fraudulently and irreparable injury to the corporation is threatened or being suffered"). Instead, under the model act, oppressive actions will only support a claim for dissolution of the corporation, and only if it is a closely held corporation. See id. § 14.30(a)(2)(ii), (b). Compare TEX. BUS. & COM.CODE § 11.404, with Model Business Corporation Act § 14.30(a)(2)(ii), (b); post at 895 (stating that "36 states in all appear to allow liquidation for oppressive or similar conduct"). We thus construe the Texas statute in a manner that is consistent with the less severe but more generally available remedy it authorizes for oppressive actions.
More importantly, the model act, unlike the Texas statute, expressly authorizes a buy-out option as an alternative to dissolution based on oppressive actions, but only if the corporation or one or more of its shareholders elects that option. Model Business Corporation Act § 14.34(a). Because the model act expressly authorizes a buyout, we cannot rely on it to find such a remedy in the Texas statute, which does not. And even if we could, it would provide no basis to hold that courts may order a buyout against the wishes of the corporation and its remaining shareholders.
Like the model act, but unlike the Texas statute, the Illinois statute creating a remedy for oppressive actions is limited to shareholders in corporations that are not publicly traded. Compare 805 ILL. COMP. STAT. 5/12.55 (shareholder remedies in public corporations), with 805 ILL. COMP. STAT. 5/12.56 (shareholder remedies in non-public corporations). And unlike the Texas statute, the Illinois statute expressly authorizes a broad array of remedies, including the removal of an officer or director, the appointment of a custodian, the payment of dividends, the award of damages, and "[t]he purchase by the corporation or one or more other shareholders of all, but not less than all, of the shares of the petitioning shareholder." Id. § 5/12.56(b). Thus, the Illinois legislature did exactly what the Texas legislature chose not to do: it expressly authorized, by statute, additional remedies beyond appointment of a receiver, including judicially mandated buyouts. See 805 ILL. COMP. STAT. 5/12.55(b)(11). We cannot rely on another state's statute, which expressly authorizes certain remedies, as a basis for construing our statute, which does not expressly authorize those remedies, as if it does. To the contrary, the Illinois statute demonstrates how the Texas legislature could have statutorily authorized alternative remedies, but it did not.
Commentators also have recognized that court-ordered buyouts can threaten the financial security of closely held entities, even pushing them into bankruptcy or dissolution. See, e.g., Lydia Rogers, The Bankruptcy Implications of A Court-Ordered Buyout for Shareholder Oppression: Is It A Remedy at All?, 64 BAYLOR L. REV. 594, 604 (2012) ("The reality is that a court-ordered buyout judgment could force closely held corporations to declare bankruptcy. Buyout judgments, even after discounts, can easily exceed one million dollars. Such an amount is not likely to be readily available to a closely held corporation, and after a judgment, it would be unlikely that the corporation would be able to obtain outside financing to pay the debt."); Edward B. Rock & Michael L. Wachter, Waiting for the Omelet to Set: Match-Specific Assets and Minority Oppression in Close Corporations, 24 J. CORP. L. 913, 920 (1999) (noting that, particularly in the context of close corporations, readily available "dissolution or buyout increase the risk of bankruptcy, thereby reducing the creditworthiness of the company"); 1 F. Hodge O'Neal & Robert B. Thompson, O'NEAL & THOMPSON'S OPPRESSION OF MINORITY SHAREHOLDERS & LLC MEMBERS § 1:4, at 1-7 n. 2 (rev.2d ed. 2005) ("In discussing a minority shareholder suit which eventually led to the bankruptcy of the corporation, a Pennsylvania attorney noted: `No responsible bank would extend credit to a close corporation embroiled in a shareholder controversy. Without credit, most such corporations simply die.'" (quoting Letter to author, June 15, 1981)).
With regard to formal fiduciary duties, this Court has never recognized a formal fiduciary duty between majority and minority shareholders in a closely-held corporation, see Willis v. Donnelly, 199 S.W.3d 262, 276-77 (Tex. 2006), and no party has asked us to do so here. This Court has recognized a fiduciary duty owed by corporate officers and directors to the corporation, which prohibits officer and directors from usurping corporate opportunities for personal gain and requires them to exercise their "uncorrupted business judgment for the sole benefit of the corporation." Int'l Bankers Life Ins. v. Holloway, 368 S.W.2d 567, 576-77 (Tex.1963); see also Redmon, 202 S.W.3d at 233 (noting that officers' and directors' formal fiduciary duty is owed to the corporation and its shareholders collectively, not to individual shareholder interests); Somers ex rel. EGL, Inc. v. Crane, 295 S.W.3d 5, 11 (Tex.App.-Houston [1st Dist.] 2009, no pet.) (same); Lindley v. McKnight, 349 S.W.3d 113, 124 (Tex.App.-Fort Worth 2011, no pet.) (same); Hoggett v. Brown, 971 S.W.2d 472, 488 (Tex.App.-Houston [14th Dist.] 1997, pet. denied) (same). No party in this case has asked us to alter the nature of that duty.
Importantly, the dissent's attacks underscore the flaws in its own proposed construction of the statute. It asks this Court to ignore the words of the statute, which authorize courts to "appoint a receiver ... only if... all other available legal and equitable remedies ... are inadequate," id. § 11.404(b)(3), and instead rewrite the statute to authorize courts to "appoint a receiver or grant any other legal or equitable remedy of any kind, whether otherwise available or not."
Nor can we assume that the absence of applicable contractual provisions indicates ill-preparedness on the part of business owners. Owners may reasonably choose flexibility over predictability. Minority shareholders may reasonably choose to create mechanisms that would allow them to impede the will of the majority or demand a buyout because they do not want other minority owners to have the same ability to interfere with the operation of the business or to threaten the financial health of the business with an ill-timed demand for buyout.
Finally, even if we accepted the dissent's premise, the buy-out remedy the dissent favors (whether granted under an expansive reading of the receivership statute or the creation of a new common-law cause of action) has not been limited to circumstances where there is no shareholder or buy-sell agreement. In Cardiac Perfusion Services, for example, the court of appeals affirmed a buyout of minority shares in direct contravention of the terms of the parties' buy-out agreement. 380 S.W.3d at 204-05. In Illinois, where the statute on which the dissent relies expressly authorizes a buyout in non-public corporations based on oppressive actions, the courts likewise have applied the statute to force buyouts at prices calculated under the statute rather than the parties express agreement and to force buyouts with terms that are contrary to the parties' express terms for exiting the business. See, e.g., Gingrich v. Midkiff, 2014 IL App (5th) 120332-U, 2014 WL 316547 (affirming judgment in case where court calculated buyout price under statute rather than valuation formula in shareholder agreement and where court declined to impose shareholder agreement's non-compete limitation on withdrawing or expelled shareholders).