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Shareholder Oppression

Minority owners of a business are, in many ways, at the mercy of the majority owners. That’s a particularly thorny problem when the case involves a closely held corporation or a partnership. In Texas, as across the rest of the country, claims of minority owner “oppression” have recently increased. These cases necessarily involve the technicalities of two sets of laws: (1) those that governs how the specific type of business involved—corporation, partnership, etc.—operates; (2) those that set out the specific “rights and remedies” of the owners when major disputes arise over that operation.

What does “Oppression” mean in a Texas Court?

Before any remedy will be ordered by a court, of course, the oppressed owner has to factually establish that the actions of the majority owner amounted to oppression. That alone is a complicated undertaking, and that’s where the efforts of an experienced firm like Yaziji Law is most valuable.

The most common definition of “oppression” applied by Texas courts describes several types of majority shareholder conduct that is oppressive:

  • Conduct that “substantially defeats the minority’s expectations” if those expectations were “both reasonable under the circumstances and central to the minority shareholder’s decision to join the venture.”
  • Conduct that is “burdensome, harsh, or wrongful”
  • Conduct amounting to a “lack of probity and fair dealing in the company’s affairs to the prejudice of some members”
  • Conduct that is “a visible departure from the standards of fair dealing and a violation of fair play on which each shareholder is entitled to rely”

Each of these definitions is abstract. The first definition is very factual, requiring a detailed analysis of the minority owner’s expectations, which can only be shown by the owner’s own testimony, any documents that illustrate those expectations and, possibly, by the pattern of conduct early in the relationship which differs from the conduct the majority owner now demonstrates. Establishing the minority owner’s expectations (whether to show that the minority owner is being oppressed or that there is no oppression) is a lot easier for attorneys who have been through these cases before. In fact, experienced attorneys know exactly the kinds of evidence that tends to exist in these situations.

The last definition requires extensive analysis of what the standards of fair dealing are in a given context, a task considerably easier for attorneys who have considerable experience with these cases.

Type of Conduct That May Establish Oppression

The specific actions of a majority owner that amount to oppression are limited only by the imagination of the majority owner. In many cases, of course, it is not a single action which shows oppression, but a series of actions all taken to the detriment of the minority owner. These are some of the things that a minority owner may offer to show oppressive conduct by the majority owner:

  • Declining to pay dividends despite the business’s profitability
  • Effectively paying dividends only to the majority owner by characterizing the payments as compensation or the like
  • Removing the minority owner from positions in the business (terminating employment, removing from the board of directors, etc.)
  • Denying information or access to information to which a minority owner is entitled
  • Reducing the value of the minority owner’s interest, such as by issuing new stock only to the majority owner (reducing the percent owned by the minority)
  • Pressuring the minority owner to sell out, either to the majority owner or a third party, especially if the offered price is inadequate
  • Using the assets of the business for personal or family benefit

Again, in most cases, more than one type of oppressive action will be present.

The Earlier You Get Help, the Better

The best time for minority owners to get help is when they first suspect that the majority owner is abusing that position to their detriment. The best time for majority owners to get help is when they first suspect that the minority owner is planning to claim oppression.

Call the Yaziji Law Firm for a free consultation. The sooner you call, the sooner we can assess the case and get started on getting it under control.

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