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Under Texas law, minority shareholders in private Texas companies have no right to sue for shareholder oppression, even when facing hostile exit pressure from majority shareholders who dilute shares or otherwise reduce the value of the minority shareholder’s investment. This aspect of Texas law is staunchly pro-business, and helps protect the boardroom from undue interference from the courts in Texas. And it greatly separates Texas from all other states in some substantial ways.
Most states either overtly allow suits for minority shareholders oppression or don’t prohibit them. But before you cancel your Directors and Officers (D&O) liability insurance, read on for a brief explanation of the practical considerations that flow from this uniquely-Texas law. In a landmark case decided by the Texas Supreme Court last year, the Court announced that the Texas Business Organizations Code (TBOC) does not prohibit oppression of minority shareholders, and there is no cause of action at common law for minority shareholder oppression in Texas. The Supreme Court held that shareholder oppression claims could only be brought against a private company in Texas when a rehabilitative receiver has been appointed.
From a practical perspective, this sole exception is not an attractive alternative for an oppressed minority shareholder because it would probably not create any benefit in terms of greater investment value for minority shares. As mentioned, all of this is great news for private companies because it will reduce the amount of shareholder litigation and associated dispute costs. But this does not mean that disgruntled shareholders cannot sue private companies; other causes of action may still be brought. And sophisticated investors may demand contractual minority shareholder protections in their investor agreements before investing in any Texas corporation.
As a final consideration, private company D&O insurance policies are typically far more broad than their public company counterparts, covering an array of non-investor claims from vendors, lenders, or business partners. So instead of cancelling your D&O policy, you might instead use this reduced sphere of litigation threats to bargain for lower pricing or for otherwise improved terms.
R. D. Adair, PLLC offers experienced business counsel and can assist you with your business insurance issues. To learn more about the planning for insurance needs, or how we can assist you in a related matter, contact us today to schedule a consultation.