The legal front remains forbidding for private company minority investors who seek to secure a buyout of their ownership stake based on claims for oppression against the company’s majority owners. It has been six years since the Texas Supreme Court eliminated a court-ordered buyout as an available remedy for minority shareholders claiming oppression, and no other legal avenue exists that provides minority owners with a buyout of their interest based on claims for mistreatment by business owners who manage the company. See Ritchie v. Rupe. The best advice for minority investors therefore is simply this—before investing in a private business, minority owners need to insist on securing a buy-sell agreement.
We have written extensively about the terms of buy-sell agreements in previous posts (Read Here). A buy-sell contract provides investors with the right to obtain a buyout of their minority ownership interest in the company at a future time.
No Buy—Out For Breach of Fiduciary Duty
When minority owners have claims for misconduct by majority owners, these claims most commonly include: (1) breach of contract, (2) fraud, and (3) breach of fiduciary duty. None of these claims permit the trial court, however, to award the minority owner with the remedy of a buyout of his/her or its minority interest. Instead, the remedy for these claims is typically the recovery of actual damages. In the case of fraud, if the minority owner can prove that he/she was fraudulently induced to make the investment in the company, the court could rescind the transaction and require the majority owner to return the investor’s purchase price. Instances of outright fraudulent inducement are relatively rare, however, and this will not be a claim or remedy available to most investors. The fiduciary duty claim against the majority owner in control of the company does give rise to a potential shareholder derivative action, however, which is discussed below.
Continue Reading The Plight of Oppressed Private Company Minority Investors: No Legal Escape Available Without a Buy-Sell Agreement in Place