Texas law can cause problems for minority shareholders
This year has been momentous for a variety of reasons, many of which stem from the global Covid-19 pandemic. The fallout has touched all of us — and our businesses. With the economy in recession, unemployment at record levels, and too many businesses shutting their doors, 2020 is going down as a banner year for upending the status quo.
Another casualty of the pandemic that I’ve seen is an increase in business divorce, which happens when one partner wants out, or wants another partner out. It’s happening for a variety of reasons, but a common denominator is that someone involved wants more money.
Back in the mid-20th century, Reno earned the moniker of the nation’s marital divorce capital. The reason was that the city only required a six-week residency and assigned no fault in divorce cases. This was during a time when most states viewed property acquired during the marriage as under the control of the husband, and fault had to be assigned and proven. So wives wanting a guaranteed outcome, and husbands with limited patience, set out for the Nevada city to free themselves from marriage.
This concept of strategic jurisdiction choice comes into play in a business divorce as well – albeit at the front end rather than the back end as with Reno’s marital divorces. The laws of the state in which the business was established can have a meaningful impact on the dissolution of that business as well.
Our state has long been championed as a great state for business. It is, and it is especially great if you’re the majority owner in a business. In 2014, the Texas Supreme Court issued its opinion in Ritchie v. Rupe, which essentially did away with the cause of action for minority shareholder oppression, rejecting a string of rulings made through the state’s appellate courts over a decades-long period. Minority owners can still bring claims for things like breach of fiduciary duty and fraud, but the hurdles to succeed with those claims are fairly high in our business-friendly state.
This ruling now has a big impact on business owners with a minority stake in an enterprise, as they have fewer protections. However, with careful planning, imagining the worst-case scenarios, and clearly defining titles and roles within the company, minority owners can be proactive about protecting their interests. Oh, and make sure to get all of those protections written into the contract. (Owners could also try up-front to form the business in another state with more robust minority shareholder protections.)
My colleague Natalie Brandt is a litigator and wrote earlier this year on our blog about how she is increasingly getting called in during the contract negotiation process to think through what can “muck up” a business relationship and make sure it’s covered in the contract. Her wisdom certainly applies in a business divorce situation.
While all relationships, whether for love or profit, have their challenges, not having your interests protected legally shouldn’t be one of them. Businesspeople with a minority stake in a business formed in Texas should know the law and how it affects them. Then do what they can to protect their interests.
Adam Connatser can be reached at Adam@wrightconnatser.com.