Firm News – June 2014

Attorney Clayton Bailey and the Director of Litigation and Policy for the USDA’s Grain Inspection, Packers and Stockyards Administration, Brett Offutt, co-authored a paper and discussed current legal issues impacting the agribusiness industry at the State Bar of Texas’ 8th Annual John Hufaker Agricultural Law Seminar.

Attorneys Alex Brauer and Ben Stewart’s representation of a Texas investment fund in a lawsuit filed against Hammerman & Gainer International, Inc. and various related entities and individuals was profiled by the Texas Lawbook on April 24, 2014.

The legal representation provided by Bailey Brauer attorneys has resulted in over a dozen published opinions by federal and state courts in Texas and other jurisdictions.

What are Your Rights as a Minority Owner of a Company?

Claims for minority shareholder oppression no longer exist under Texas law. Are minority owners now left out in the cold when company insiders engage in bad acts? Not necessarily.

When a minority owner of a Texas corporation, limited liability company or partnership disagrees with the actions taken by a majority owner, officer or director, he is generally left with two choices: (1) sell his interest in the company; or (2) go to court in an effort to change the behavior.

Regarding the first option, the owner of a Texas partnership has a legal right to transfer or redeem his ownership interest. Unfortunately, owners of Texas corporations and limited liability companies do not. Assuming the company’s shares are not publicly traded and there is no contractual right to sell, the owner may have a very difficult, if not impossible, time selling his interest in the company.

This is why it is extremely important to enter into an agreement governing the rights of owners (i.e., shareholders agreement, partnership agreement, limited liability company agreement) when purchasing an interest in a private company. The terms of the agreement govern the owners’ contractual rights and should, and often do, contain provisions that provide a method for a minority owner to sell his interests back to the company or to other owners.

Many owners of private companies unfortunately do not have the time, money or ability to hire an attorney on the front end to ensure that the owner has an exit strategy. This leads us to the second option – asking a court to stop the improper behavior.

In a blow to minority owners, the Texas Supreme Court recently held that the claim of minority shareholder oppression does not exist under Texas law. All is not lost however. Should company insiders engage in improper behavior, they may still be liable to a minority owner.

The most common examples of inappropriate actions by insiders are (1) denying access to company books and records, (2) withholding payment of, or refusing to declare, dividends, (3) terminating a minority owner’s employment, (4) misusing corporate funds and taking corporate opportunities for personal purposes, and (5) manipulating stock values. This type of behavior may give rise to several claims, including, but not limited to, breach of fiduciary duty and fraud.

Beware that officers and directors generally do not owe a fiduciary duty to any particular owner of the company but rather to the company itself. The exceptions to this rule are if an informal fiduciary relationship exists between an insider and the owner based on a personal relationship of trust that existed prior to the relationship relating to the company – think dad who convinces son to invest in dad’s company – or corporate documents create a duty.

The bottom line is that, like many things, an ounce of prevention on the front end is worth a pound of cure on the back. However, even if the minority owner did not enter into a shareholders agreement when purchasing his interest, he still has rights available to him to address improper conduct by insiders of the company. And for those readers in jurisdictions outside of Texas, the Texas Supreme Court’s ruling may foreshadow a legal precedent coming your way.