February 4, 2016

Ritchie v. Rupe 2016 and the Limits of Fiduciary Duties Owed Between Shareholders in Closely Held Businesses

Holland & Knight Shareholder Rights Blog
Michael A. Grill

A recent Texas court of appeals decision bucks the prevailing view when it comes to fiduciary duties owed between shareholders in closely held companies. In Ritchie v. Rupe,1 the court reversed the jury’s determination that three trustee shareholders breached their fiduciary duties to a minority trustee shareholder. The reversal stems from a long running legal battle between the shareholders of a closely held company in which 72 percent of the company’s voting stock was held by the defendants in their capacity as co-trustees. One of the defendants, Ritchie, also held an additional 10 percent of the shares directly.  The plaintiff owned the remaining 18 percent in her capacity as trustee of a trust in which she and her son were beneficiaries. The plaintiff wished to sell the trust’s shares, but the majority trustees refused to meet with any potential buyers, thus precluding any sale.

The court explained that its analysis was limited by the jury instructions concerning fiduciary duties.  It expressed no opinion as to whether the instructions were correct statements of Texas law. In fact, facially, the instructions seem to have been more favorable to the plaintiff than prior Texas court opinions would suggest.  Although, as explained below, the decision conforms with Texas’ drift away from protections that its courts had previously afforded minority shareholders.

The roots of the prevailing view on shareholder fiduciary duties in closely held entities took hold in Donahue v. Rodd Electrotype Co. of New England.2 The Donahue opinion held that shareholders in closely held corporations owed heightened fiduciary duties to one another, akin to those of partners. The court reasoned, in part, that such shareholders tended to have a greater stake in the business than do shareholders in public corporations, and that there was no ready market for the closely held shares. The majority could therefore substantially reduce (even down to 0%) the minority’s return on its stock while simultaneously doing no harm (and thus breaching no duty) to the entity, leaving the minority “squeezed out” (or “frozen in”).

Following Donahue, most jurisdictions followed suit and held that fiduciary duties existed between owners within closely held corporations, particularly those running from the majority to the minority.3 Though, minority shareholders have been held to owe fiduciary duties to the corporation even after a freeze out.4 

But Texas never quite got on board with Donahue. At least one Texas case, Allen v. Devon Energy Holdings, LLC5 concluded that a controlling shareholder owed a fiduciary duty to the minority in the context of communicating an offer to purchase the minority’s shares. But even the Allen court recognized that most appeals courts in Texas have not recognized fiduciary duties as between majority and minority shareholders in close corporations. The Texas Supreme Court skirted the issue in Willis v. Donnelly,6 specifically refraining from answering whether a majority owes a minority shareholder a general fiduciary duty under Texas law. Its language was somewhat stronger when, in 2014, it decided other issues in the Ritchie matter, stating that it had “never recognized a formal fiduciary duty between majority and minority shareholders in a closely-held corporation” and noting that it had not been asked to do so there.7 In that same opinion, the court also refused to recognize a common-law action for shareholder oppression, raised the standard for determining statutory oppression which had been in place since 1988,8 and restricted a statutorily oppressed minority’s remedy to placing the corporation under rehabilitative receivership.

In light of this 2014 Ritchie opinion, it was not surprising that the appellate court would find that no fiduciary duty existed in 2016 despite jury instructions seemingly favorable to the minority plaintiff. The first and third sentences of the jury instruction stated in part, that:

[1.] A relationship of trust and confidence existed if [the plaintiff]  justifiably placed trust and confidence in [the defendants].

[3] Co-shareholders in a closely held corporation typically do not owe fiduciary duties to fellow shareholders.  While corporate officers owe fiduciary duties to the corporation they serve, they do not generally owe fiduciary duties to individual shareholders unless a contract or confidential relationship exists between them in addition to the corporate relationship.  For a majority shareholder to owe a fiduciary duty to minority shareholders, you must find that the majority shareholder dominates control over the business.

In jurisdictions following Donahue or similar precedent, the dominance and control over the business might be sufficient to establish the existence of a fiduciary duty owed by the co-trustees owning 72 percent. But the Ritchie court interpreted the instructions differently.  Rather than interpret the instructions such that the dominance and control established the necessary confidential relationship, the Ritchie court held that dominance and control was simply an additional requirement necessary for the plaintiff to prove “that a confidential relationship existed between her as trustee and any of [the defendants] in their capacities as trustees.”  The court went on to find that the plaintiff, having had a strained relationship for some time with the defendants, never had “a relationship of trust and confidence” with them. 

Logically, this is a strained reading of the instructions.  Assume that a majority shareholder did have a relationship of trust and confidence with a minority owner. Assume further that the majority owner abused and betrayed that trust and confidence. That majority owner would not be liable for the betrayal of that fiduciary relationship unless he or she also dominated control over the business. In other words, the court’s reading would provide majority owners an added layer of protection against breaches of fiduciary duty that are unavailable to non-majority owners. 

The jury did not read the instruction this way, but the Ritchie court was not inclined to drift towards the prevailing Donahue view of fiduciary duties in closely held corporations. Perhaps the next Texas court to confront this issue will not be constrained by a prevailing jury instruction, and shareholders in closely held corporations will get additional guidance as to the nature of the duties owed between them.

1 No. 05–08–00615–CV, 2016 WL 145581 (Tex. App., Jan. 12, 2016).

2 376 Mass. 578 (1975).

3 See, e.g., 68th Street Apartments, Inc. v. Lauricella, 362 A.2d 78 (N.J. Super. 1976); Alaska Plastics v. Coppock, 621 P.2d 270 (Alaska 1980); Estate of Schroer v. Stamco Supply, Inc., 482 N.E.2d 975 (Ohio Ct. App. 1984); Hagshenas v. Gaylord, 557 N.E.2d 316 (Ill. App. Ct. 1990); Daniels v. Thomas, Dean & Haskins, Inc., 804 P.2d 3S9 (Mont. 1990); Granicz v. Morse, 603 So. 2d 103, 103 (Fla. 2d D.C.A. 1992).

4 Rex Rand Corp. v. Ancel, 58 F.3d 1215 (7th Cir. 1995).

5 367 S.W.3d 355 (Tex. App. 2012).

6 199 S.W.3d 262 (Tex. 2006).

7 Ritchie v. Rupe, 443 S.W.3d 856 (Tex. 2014).

8 Davis v. Sheerin, 754 S.W.2d 375 (Tex. App. 1988).

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