Texas Minority Shareholder Rights: What You Can Sue For

Owning a small share of a corporation can make it hard to have a say in how the business is run. A Texas business litigation lawyer can help you understand whether the people in control have violated your rights.

You might suspect that someone is taking company money for personal use or hiding financial records. Whether you can sue depends on what happened and which rights the law or your shareholder agreement gives you.

Can you sue for shareholder oppression?

In Ritchie v. Rupe, the Texas Supreme Court rejected a standalone common-law claim for shareholder oppression. You cannot automatically recover damages or get a court-ordered buyout because you were treated unfairly.

In certain situations, a court can appoint a receiver to oversee and protect the corporation. If the request is based on shareholder oppression, the conduct must create a substantial risk of harm to the corporation and the court must find other available remedies to be inadequate.

What if someone breaks a shareholder agreement?

Shareholder agreements can contain provisions regarding the voting and sale of shares. If you suffer a loss because a party has broken a term of that agreement that is enforceable, you may have a claim for breach of contract.

For example, a contract could require that another owner must first offer you their shares before they can sell them to anyone else. It also may restrict when the corporation can issue new shares. If the corporation chooses to go beyond this limit, your percentage of ownership could be diluted and you may have a cause of action. If what happened doesn’t match the wording of the agreement you may be able to apply for an order enforcing the agreement or compensation for your losses.

Can misuse of company money support a lawsuit?

Generally, directors and corporate officers owe fiduciary duties to the corporation. These duties include not improperly taking personal advantage of the company’s interests. Not every business decision that loses money constitutes a breach. Courts typically allow directors to make honest business decisions.

Taking company money for personal use or diverting company business opportunities may be the basis for a breach-of-fiduciary-duty claim. But a majority interest doesn’t necessarily mean that a personal fiduciary duty is automatically created to you. A claim that is based on a duty owed directly to you requires a different legal basis.

Can you sue if you were misled about your shares?

If someone deliberately misrepresents the company’s finances to get you to buy or sell shares, you may have a claim for fraud. You usually need to show that the false information was material to your decision and that you reasonably relied on it to your detriment.

Emails can be useful to document what you were told about the company finances. If you can match those statements against the financial records at the time, it may help show that the person knowingly gave you false information.

What if the corporation refuses to show you its records?

Texas Business Organizations Code Section 21.218 allows a shareholder who has owned stock for at least six months or owns at least 5% of outstanding stock to request inspection of certain corporate records. The demand must be in writing and must state a proper purpose.

The requested records must be reasonably related to that purpose, e.g., investigating suspected misuse of funds. If the corporation wrongfully denies access, you may apply to the court to enforce your rights and to recover costs, including reasonable attorney’s fees.

Do you sue personally or for the corporation?

Where someone has violated a right you have, you may have a direct claim. If the injury is to the corporation, e.g., theft of corporate funds, the claim normally belongs to the corporation.

A shareholder can bring that claim in a derivative lawsuit, which seeks recovery for the company. In some derivative cases, special rules for qualifying closely held corporations permit a court to treat them as direct actions when justice requires.

For these rules, a closely held corporation has fewer than 35 shareholders, with no shares listed on a national exchange or regularly quoted in an over-the-counter market. A Texas business litigation lawyer can explain which approach fits your case.

How can you protect your investment?

Retain copies of your ownership documents and any correspondence regarding contested decisions. You can get advice before you sign a buyout agreement so you understand what rights you might be giving up. It is also wise to have counsel review filing deadlines as negotiations continue. If you believe your shareholder rights have been violated, contact The Law Office of Sandy McCorquodale, P.C. on (833) 712-4472.