A frozen-out minority owner in Texas cannot sue for “shareholder oppression” as a standalone claim. The Texas Supreme Court rejected that claim in Ritchie v. Rupe (2014). But you still have real leverage: inspection rights, derivative claims for harm to the company, contract claims under the governing documents, and, in some cases, receivership.
What does a freeze-out look like?
The pattern is familiar. The majority owner stops paying distributions while paying themselves a large salary. You’re removed from management or the board. Financial information dries up. Then comes an offer to buy your stake at a fraction of its value.
Why does Ritchie v. Rupe matter?
Before 2014, Texas courts sometimes ordered majority owners to buy out oppressed minority shareholders. Ritchie ended that. The court held that the receivership statute is the only statutory oppression remedy, and that it is reserved for serious cases. It also declined to create a common-law oppression claim.
The practical result: your remedies depend heavily on what your company agreement, bylaws or shareholder agreement say, and on finding claims that fit the facts.
What can I do right now?
- Demand the records. Texas shareholders who have held shares for six months, or own at least 5%, can inspect books and records on written demand. LLC members have similar rights to company records. A refusal can itself support a lawsuit, and the records often show where the money went.
- Read the governing documents. Look for distribution requirements, information rights, supermajority votes, buy-sell terms and anything limiting the majority’s power.
- Don’t sign anything yet. Releases and low-ball buyouts are common at this stage.
What claims are available?
- Derivative claims for harm to the company itself, such as self-dealing, excessive compensation or diverted opportunities. In a closely held corporation, a Texas court may let the minority owner recover directly, rather than the money going back to the company the majority controls.
- Breach of contract under the company agreement or a shareholder agreement.
- Breach of fiduciary duty, where a formal duty or a relationship of trust and confidence exists. Partners owe these duties; other owners may, depending on the facts.
- Fraud, if the majority misrepresented facts to obtain your shares or your vote.
- Receivership, an extraordinary remedy, where assets are being wasted or the company is deadlocked.
How do I prevent a freeze-out?
Negotiate protections before you invest: mandatory distributions, information rights, a seat on the board, supermajority votes on key decisions, and a buy-sell clause with a fair valuation method. After Ritchie, the contract is your best protection.
From our case files
- $3.5 million jury verdict. We represented a minority owner in a shareholder oppression and breach of fiduciary duty case seeking money and real estate for the company. After a two-week trial the jury found for our client for more than $3.5 million, and the case then settled for a seven-figure value (2011).
- Shareholder buyout plus back pay. For a shareholder of a scientific imaging tech company, we obtained a company buyout of the client’s interest and six figures in unpaid salary (2010).
- An oppressed physician in a group practice. We sued and settled on behalf of a specialist who was being disadvantaged by the other doctors in his multi-doctor practice (2000–2001).
Client names are withheld for confidentiality. Every case turns on its own facts, and past results do not guarantee a similar outcome. See more representative results.
The Burk Law Firm represents minority owners in Texas corporate and LLC disputes. Call (512) 306-9828.
Related: How Do You Split Up With a Business Partner in Texas? · What Should a Texas LLC Company Agreement Include? · Corporation, LLC & Partnership Disputes · What Is a Breach of Fiduciary Duty in Texas?
This article is general information, not legal advice. Reading it does not create an attorney-client relationship.