Texas Supreme Court Underscores the Necessity of Written Buy-Sell Agreements 
and Other Contractual Protections When Forming Companies

Texas’ highest court recently ruled that minority shareholders do not have a claim for oppression when majority shareholders do things that hurt them financially. The case, Ritchie v. Rupe, involved a long running dispute in a closely-held company in which the founding shareholders had passed on, and the relationship among their descendants had deteriorated into acrimony.

Although it ruled out an oppression claim, the Texas Supreme Court recognized the existence of a severe problem:

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.

In discussing remedies, the Court’s opinion points out that parties forming a corporate entity can contractually protect themselves:

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. Again, we note that although [the corporation’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. (Citations omitted.)

No one could say it better. Starry-eyed optimism when forming a company is no solution if or when things don’t pan out as expected. A lawyer with experience in these matters can alert you of potential problems and help you work out these matters.

A full copy of the opinion is available here.