Continuous Ownership Rule

By LaCrecia Perkins and Ladd Hirsch

A look back at Business Divorce developments during Texas 2018 reflects a continuing negative trend for private company shareholders[1] who have claims for misconduct against the company’s control group (e.g., majority owners, officers, managers, and/or directors).  The rocky road for Texas shareholders began in 2014 with the Supreme Court’s Ritchie v. Rupe decision,[2] which eliminated the remedy previously available to minority shareholders of securing a court-ordered buyout of their ownership interest upon proof that majority owners had engaged in oppressive conduct.  The slope became even steeper in late 2018 with an appellate court decision requiring dismissal of shareholder derivative lawsuits if the shareholder cannot meet the “Continuous Ownership Rule.”  See In re LoneStar Logo & Signs, LLC.[3]

What are shareholder derivative lawsuits, how does the Continuous Ownership Rule apply to claims in these cases, and do private company shareholders continue to have the right to pursue valid claims for wrongdoing against the company’s majority owners, officers, managers, and directors?  This post answers those questions, and the upshot is that the best advice for shareholders is to file their derivative lawsuit as soon as possible.  While winning the race to the courthouse provides no guaranty that the lawsuit will be permitted to continue through trial, under the current Texas law, having a derivative lawsuit on file gives the shareholder the best possible legal and equitable arguments for maintaining the lawsuit to judgment.
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