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Shareholder Agreements: Litigation Perspectives

by Jeff M. Golub*

I. Introduction .......................................................................................... 163

II. Common Shareholder Disputes and Available Causes of Action .... 164
A. Direct Shareholder Claims ...................................................... 167
1. Accounting and Statutory Access to Corporate Books and
Records ............................................................................. 167
2. Breach of Contract ............................................................ 169
3. Common-Law Fraud, Statutory Fraud, Constructive
Fraud ................................................................................ 170
4. Breach of Fiduciary Duty Based on Informal Fiduciary
Relationship ..................................................................... 177
5. Unjust Enrichment and Quantum Meruit ...................... 178
6. Texas Theft Liability Act / Conversion ............................ 179
7. Receiverships ..................................................................... 180
a. Rehabilitative Receiver ............................................... 181
b. Receivership for Specific Property.............................. 183
B. Shareholder Derivative Claims for Breach of Duty to the
Entity ..................................................................................... 185
1. Direct Recovery by a Derivative Plaintiff ........................ 187
2. Attorney’s Fees and Costs................................................. 188
3. Disgorgement or other Equitable Remedies .................... 188
III. Shareholder Agreement: A Potential Antidote to Future
Disputes ........................................................................................ 189
A. Shareholder Agreement Under the Texas Statute ................ 190
B. Checklist of Provisions that Should be Considered for
Shareholder Agreements. ..................................................... 193
IV. Conclusion .......................................................................................... 200

I. INTRODUCTION

It has been more than five years since the Texas Supreme Court
declined to recognize a common-law cause of action for shareholder
oppression.1 In its holding, the Court narrowed the remedies available to
shareholders harmed or oppressed by the corporation or majority

* Partner, Beck Redden LLP, Houston, TX. The author thanks Beck Redden LLP
attorneys John Noh and Alyssa B. McDaniel for their assistance on this article.
1. Ritchie v. Rupe, 443 S.W.3d 856 (Tex. 2014).
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shareholders.2 The Court relied in part on the statutory, contractual, and

common-law causes of action and remedies already available to
shareholders through litigation. 3 The Court also emphasized the
importance of the use of shareholder agreements to protect the interests
of the corporation and its shareholders and to avoid future disputes.4
Although it restricted shareholder common-law rights, Ritchie did
not put an end to shareholder litigation. 5 As highlighted further below,
recent cases reflect that shareholders continue to seek available judicial
remedies, including through derivative actions and the various statutory
and common-law causes of action and remedies outlined by the Court in
Ritchie.6 These cases provide insight into the types of claims practitioners
should be cognizant of when advising their clients and drafting
organizational documents. Through its repeated emphasis on the use of
shareholder agreements for many situations, the Court in Ritchie left it
to shareholders and corporations to protect their respective rights and
interests and govern themselves by contract.7 Thus, five years after
Ritchie, the importance of well-drafted shareholder agreements cannot
be understated. This article also discusses some of the potential
provisions practitioners should strongly consider including in their
organizational documents.

II. COMMON SHAREHOLDER DISPUTES AND AVAILABLE

CAUSES OF ACTION

In its analysis of shareholder oppression, the Court in Ritchie

outlined some of the most common types of conduct that lead to
shareholder disputes, including:
● Denial of access to corporate books and records;
● Withholding or refusing to declare dividends;
● Termination of employment;
● Misapplication of corporate funds and diversion of corporate
opportunities;

2. See id. at 889–91.

3. See id. at 879–89.
4. Id. at 871.
5. See id. at 879–82 (discussing the statutory and common-law causes of actions a
shareholder may bring).
6. See cases cited infra notes 14–17.
7. See Ritchie, 443 S.W.3d at 871.
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Shareholder Agreements: Litigation Perspectives 165

● Manipulation of stock values in relation to sales or purchases of

minority interests.8
A review of Texas shareholder caselaw reflects those disputes referenced
in Ritchie, and many other common scenarios in which shareholder
disputes may arise, including:
● “Malicious suppression of dividends;”9
● Excessive pay;10
● Misuse of corporate funds and assets / loans to majority
shareholders;11
● Profit distributions;12
● Demands for examination of books and records; 13
● Forced or undervalued stock redemptions; 14
● Disputes over right of first refusal; 15

8. Id. at 882–89.
9. See Patton v. Nicholas, 279 S.W.2d 848, 853–54 (Tex. 1955).
10. See Cardiac Perfusion Servs., Inc. v. Hughes, 436 S.W.3d 790, 791 (Tex. 2014)
(allegations of excessive compensation and improper use of company funds to pay
personal expenses); Boehringer v. Konkel, 404 S.W.3d 18, 22 (Tex. App.—Houston
[1st Dist.] 2013, no pet.) (majority shareholder wrongfully awarded himself an
excessive salary); Gibney v. Culver, No. 13-06-112-CV, 2008 WL 1822767, at *1 (Tex.
App.—Corpus Christi Apr. 24, 2008, pet. denied) (minority shareholder derivative
action alleging excessive compensation paid to an officer).
11. See In re LoneStar Logo & Signs, LLC, 552 S.W.3d 342, 344 (Tex. App.—Austin 2018,
no pet.) (minority LLC member derivative action alleging wrongful use of company’s
assets); Redmon v. Griffith, 202 S.W.3d 225, 231 (Tex. App.—Tyler 2006, pet. denied)
(minority shareholders sued alleging defendants diverted corporate opportunities,
funds, and revenues and illegally disbursed corporate assets for personal use and
benefit).
12. Kohannim v. Katoli, 440 S.W.3d 798, 813 (Tex. App.—El Paso 2013, pet. denied) (LLC
owner filed suit alleging defendant shareholder failed to make profit distributions).
13. Texas Ear Nose & Throat Consultants, PLLC v. Jones, 470 S.W.3d 67, 73 (Tex. App.—
Houston [14th Dist.] 2015, no pet.) (departing member brought suit against other
members for breach of contract “and denial of access to . . . books and records”); White
Point Minerals, Inc., v. Swantner, 464 S.W.3d 884, 886 (Tex. App.—Corpus Christi
2015, no pet.) (former shareholder brought suit alleging company wrongfully deprived
him of access to “books, records of account, minutes, and share transfers”).
14. See Herring Bancorp, Inc. v. Mikkelsen, 529 S.W.3d 216, 218 (Tex. App.—Amarillo
2017, pet. denied) (minority shareholder alleged that involuntary stock redemption
violated the articles of incorporation).
15. Higginson v. Martin, No. 07-15-00343-CV, 2017 WL 603626, at *3 (Tex. App.—
Amarillo Feb. 14, 2017, pet. denied) (minority shareholder sought declaration that
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● Termination of employment;16
● Call rights disputes;17
● Share transfer disputes;18
● Merger disputes.19
The author regularly represents clients involved in shareholder
lawsuits that highlight the importance of well-drafted shareholder (or
partnership) agreements to reduce the potential for, or impact of, such
disputes. In one such case involving a successful closely-held company, a
retiring founder placed his son in charge of the business. In combination
with his appointment of the son as president of the company, he sold
shares of the company to the son. A dispute later ensued regarding the
son’s management of the company, and the board decided to terminate
the son’s employment. Seeking a complete separation, and based on the
language of the shareholder agreement, the company then sought to
repurchase the son’s shares. Litigation ensued relating to the
termination and the company’s demand to repurchase the shares. The
son threatened to market the shares to a third party. The son demanded
access to the books and records and an accounting and accused board
members and other executives of excessive distributions. Disputes over
the value of the shares resulted in multiple appraisals and extensive
discovery in the litigation. Expert witnesses were retained to opine

shareholder agreement, which contained a right of first refusal concerning the

transfer of shares, was unenforceable); McAuley v. Flentge, No. 06-15-00051-CV,
2016 WL 3182667, at *1 (Tex. App.—Texarkana June 8, 2016, pet. denied)
(shareholder dispute concerning whether transfer of stock was restricted by a right
of first refusal).
16. Guajardo v. Hitt, 562 S.W.3d 768, 774 (Tex. App.—Houston [14th Dist.] 2018, pet.
denied) (shareholder alleged claims arising from termination of his employment and
removal of his salary despite certain provisions in the shareholder agreement).
17. Baty v. Bowen, Miclette & Britt, Inc., 423 S.W.3d 427, 430–31 (Tex. App.—Houston
[14th Dist.] 2013, pet. denied) (former employee and shareholder sued other
shareholders alleging misappropriation of shares subject to shareholder agreement
with call rights triggered by employment termination).
18. Fishman v. C.O.D. Capital Corp., No. 05-16-00581-CV, 2017 WL 3033314, at *2 (Tex.
App.—Dallas July 18, 2017, no pet.) (company sued certain shareholders claiming
transfer of shares violated shareholder agreement); GM Oil Props., Inc. v. Wade, No.
01-08-00757-CV, 2012 WL 246041, at *2 (Tex. App.—Houston [1st Dist.] Jan. 26,
2012, no pet.) (shareholder sued corporate officer alleging breach of shareholder
agreement for failing to transfer a certain percentage of his stock to the plaintiff).
19. Hoggett v. Brown, 971 S.W.2d 472, 475 (Tex. App.—Houston [14th Dist.] 1997, pet.
denied) (“shareholder . . . [sued other shareholders] claiming that corporation’s
merger with another company was fraudulent and violated shareholders
agreement”).
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Shareholder Agreements: Litigation Perspectives 167

regarding share valuation. The parties eventually settled their claims,

but only after lengthy and expensive litigation. The shareholder
agreement was reasonably robust but lacked, among others, certain
provisions for valuation of shares in the event of a buy-back upon a
triggering event (employment termination).
The allegations from this lawsuit undoubtedly sound familiar to
Texas attorneys who regularly represent corporations and shareholders.
Although this particular lawsuit likely could not have been avoided
entirely, the litigation could have been substantially streamlined and
more easily resolved by the inclusion of provisions governing the
mechanism of share valuation and buy-back . To address the potential
conflicts that may arise among shareholders, practitioners should
possess a working knowledge of the types of claims available to and
commonly asserted by dissatisfied shareholders in litigation.

A. Direct Shareholder Claims

1. Accounting and Statutory Access to Corporate Books and

Records
Demands for access to corporate information frequently underlie
disputes between shareholders. The Court in Ritchie recognized that
“denial of access to corporate[] books and records” may constitute a form
of shareholder oppression.20
The Texas Business Organizations Code (“TBOC”) provides a
comprehensive framework for shareholders to obtain information from
the corporation.21 The Court in Ritchie focused on the TBOC statutory
framework that protects shareholders’ rights to access a corporation’s
books and records and cited statutory accounting as an available remedy
for minority shareholders claiming oppressive conduct. 22
Cases decided since Ritchie reflect that disputes over access to
information continue to generate shareholder litigation and confirm that
shareholders have been able to obtain relief without a shareholder
oppression claim. For example, in Texas Ear Nose & Throat Consultants,
PLLC v. Jones,23 the departing member of a medical PLLC prevailed at
trial on his claims against other members for breach of contract and
denial of access to the company’s books and records. 24 Interestingly, the

20. Ritchie v. Rupe, 443 S.W.3d 856, 882 (Tex. 2014).

21. TEX. BUS. ORGS. CODE ANN. §§ 3.153, 21.218 (examination of records), 21.354
(inspection of voting list).
22. Ritchie, 443 S.W.3d at 882–83.
23. 470 S.W.3d 67 (Tex. App.—Houston [14th Dist.] 2015, no pet.).
24. Id. at 85.
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court not only focused on the shareholder’s presuit records demands but
also noted that the shareholder served requests for production and filed
motions to compel during the lawsuit that were relevant to the
application of the statute and the jury’s determination of liability. 25
Moreover, the court of appeals sustained the trial court’s award of
additional attorneys’ fees for denial of access to books and records but
determined that the additional fees must be properly segregated and paid
by the LLC and not the individual defendant members.26
In White Point Minerals, Inc., v. Swantner,27 a former shareholder
brought suit “alleging the company had wrongfully deprived him of
access to books, records of account, minutes, and share transfers.” 28 The
court discussed the standing requirements for a former shareholder
bringing such a claim.29 The court granted the former shareholder an
opportunity to cure jurisdictional defects in his petition by pleading facts
to establish his standing under TBOC section 21.218.30
The TBOC permits a shareholder to examine books and records
“[o]n written demand stating a proper purpose.”31 A corporation that
refuses to allow an examination “under Section 21.218 is liable to the
shareholder for . . . costs . . . [and] attorney’s fees,” in addition to any
other damages or remedies afforded the shareholder.32 Shareholder
litigation concerning requests for corporate records and information often
focuses on whether the request was made in good faith and for a proper
purpose, as required by the statute.33 The burden is on the resisting party
to plead and prove that the shareholder lacks a proper purpose in
requesting an examination of records.34 Once the resisting party has

25. Id. at 86.

26. Id. at 89–91.
27. 464 S.W.3d 884 (Tex. App.—Corpus Christi 2015, no pet.).
28. Id. at 885, 886.
29. Id. at 889 (“[W]e hold that the statutory rights addressed in section 21.218 apply
solely to a record or beneficial shareholder of a corporation at the time the demand is
made or action is filed.”).
30. Id. at 890.
31. TEX. BUS. ORGS. CODE ANN. § 21.218(b).
32. Id. § 21.222(a).
33. See id. §§ 21.218(b), 21.222(b)(4); see also Biolustre’ Inc. v. Hair Ventures LLC, No.
04-10-00360-CV, 2011 WL 540574, at *3 (Tex. App.—San Antonio Feb. 16, 2011, no
pet.) (ordering access to books and records and finding proper purpose).
34. See In re Dyer Custom Installation, Inc., 133 S.W.3d 878, 881 (Tex. App.—Dallas
2004, no pet.).
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raised a fact issue regarding good faith or proper purpose, they are
entitled to a jury trial on the issue. 35
Given the frequency with which disputes arise over access,
shareholder agreements can be drafted to include language regarding the
scope of information, format, and mechanisms of providing information
to shareholders. The shareholder agreement should not attempt to
reduce a shareholder’s statutory rights to access corporate information.
However, a shareholder agreement can broaden, clarify, or specify those
rights to reduce future conflicts over the company’s books and records.
For example, the shareholder agreement can specifically outline the
types of reports that will be prepared and provided on a periodic basis,
such as financial statements and other financial information. Inclusion
of details on how the information will be maintained and made available
in the event of a reasonable request can also avoid disputes and provide
a defense to shareholder claims for more information. To avoid disputes
over whether the demand was made for a proper purpose, shareholder
agreements can also list potential bases and mechanisms for requesting
books and records in the future.

2. Breach of Contract
The Court in Ritchie recognized that shareholders facing oppressive
conduct may need to assert direct claims for breach of contract in order
to obtain judicial relief.36 The TBOC specifically authorizes a corporation
that is not publicly traded to be governed by a shareholder agreement
entered into by all “shareholders of a corporation.” 37 The TBOC
enumerates various provisions shareholders may include in a
shareholder agreement concerning matters such as powers of directors,
payment of dividends and distributions, authorizing arbitration,
exercising voting powers, and that “otherwise govern[] . . . the
management of the business and affairs of the corporation.” 38 Additional
sections of the TBOC expressly provide for contractual relationships
among shareholders, including “written voting agreements” 39 and share
transfer restrictions.40 Ancillary to shareholder agreements, employment
contracts are also frequently entered into by shareholders employed by
the corporation.

35. Id. (corporation was entitled to a jury trial on the issue of whether the shareholder
had a proper purpose in requesting books and records).
36. Ritchie, 443 S.W.3d at 881, 888 n.55.
37. TEX. BUS. ORGS. CODE ANN. § 21.101(a).
38. Id.
39. Id. § 6.252.
40. Id. § 21.210.
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Corporate formation, share transfer disputes, and redemptions

are particularly common subjects of shareholder breach of contract
claims.41
As indicated by these recent cases, share transfers made in breach
of a shareholder agreement can cause significant damage. Breaches of
other common shareholder provisions such as procedural or reporting
obligations may be less significant and cause no damage. Whether a
breach merits pursuit of litigation turns on the facts of each dispute. As
for drafting considerations, the shareholder agreement is a contract and
should be the product of principled and informed negotiations. The

41. See, e.g., Texas First Inv. Mgmt. Co., v. Coorsh, No. 01-17-00591-CV, 2018 WL
3352922, at *1–2 (Tex. App.—Houston [1st Dist.] July 10, 2018, no pet.) (affirming
grant of limited partner’s motion for partial summary judgment on his breach of
contract claim against limited partnership for refusal to repurchase partner’s
partnership units pursuant to partnership agreement); APMD Holdings, Inc. v.
Praesidium Med. Prof’l Liab. Ins. Co., 555 S.W.3d 697, 700 (Tex. App.—Houston [1st
Dist.] 2018, no pet.) (affirming judgment for shareholder of proposed medical
malpractice liability insurer on shareholder’s breach of contract claim against the
insurer’s other shareholder for failure to finance the proposed insurer’s capital
surplus as agreed to in memorandum of agreement); Lowry v. Tarbox, 537 S.W.3d
599, 605 (Tex. App.—San Antonio 2017, pet. denied) (affirming judgment on jury
verdict for minority shareholder physician’s claim against medical practice for breach
of compensation contract and failure to comply with stock redemption agreement);
Herring Bancorp, Inc. v. Mikkelsen, 529 S.W.3d 216, 223–26 (Tex. App.—Amarillo
2017, pet. denied) (finding that corporation’s involuntary redemption of minority
shareholder’s preferred stock as part of conversion to Subchapter S corporation did
not breach articles of incorporation); Gonzalez v. UniversalPegasus Int’l, Inc., 531
S.W.3d 276, 278 (Tex. App.—Houston [14th Dist.] 2017, no pet.) (affirming summary
judgment for corporation and its board of directors on minority shareholders’ claim of
breach of contract because shareholders failed to establish that cancellation of their
shares was invalid and failed to present sufficient evidence that they were damaged
by the alleged breach); Fishman v. C.O.D. Capital Corp., No. 05-16-00581-CV, 2017
WL 3033314, at *10–11 (Tex. App.—Dallas July 18, 2017, no pet.) (finding
shareholder breached shareholder agreement transfer restrictions by failing to give
required notice to other shareholders before transfer to a third-party trust in
exchange for consideration); McAuley v. Flentge, No. 06-15-00051-CV, 2016 WL
3182667, at *7–9 (Tex. App.—Texarkana June 8, 2016, pet. denied) (analyzing
whether testamentary transfers were subject to a contractual right of first refusal in
a shareholder agreement); Texas Ear Nose & Throat Consultants, PLLC v. Jones, 470
S.W.3d 67, 95–97 (Tex. App.—Houston [14th Dist.] 2015, no pet.) (upholding breach
of employment agreement finding); Aloysius v. Kislingbury, No. 01-13-00147-CV,
2014 WL 4088145, at *3–4 (Tex. App.—Houston [1st Dist.] Aug. 19, 2014, no pet.)
(holding that majority shareholder had standing to bring breach of contract claim in
his individual capacity against minority shareholder for breach of agreement to form
the corporation); GM Oil Props., Inc. v. Wade, No. 01-08-00757-CV, 2012 WL 246041,
at *2 (Tex. App.—Houston [1st Dist.] Jan. 26, 2012, no pet.) (former shareholder sued
a corporate officer in the officer’s individual capacity for breach of contract, alleging
the defendant breached a shareholder agreement by failing to transfer a certain
percentage of stock to the plaintiff).
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Shareholder Agreements: Litigation Perspectives 171

corporation should try to limit its contractual obligations to shareholders

while meeting the requirements of the governing statutes. On the other
hand, minority shareholders should seek as many protections as they can
reasonably negotiate, recognizing that they often may have less leverage.

3. Common-Law Fraud, Statutory Fraud, Constructive

Fraud
Direct fraud claims typically arise from disputes over
representations made relating to transactions such as share purchases
or redemptions. Nondisclosure of facts may also be the basis of a claim if
a duty to disclose is recognized by the law. Ritchie also noted the potential
for common-law and statutory fraud claims to arise from manipulation
of share values.42
Fraud under Texas law requires proof of the following, among other
elements: (1) the defendant made a material false representation; (2) the
representation was made knowingly or recklessly without knowledge of
its truth; (3) the defendant made the representation with the intent that
plaintiff act on it; (4) the plaintiff justifiably relied on the representation
causing injury.43 To be actionable under Texas law, a misrepresentation
must be a statement “concerning a material fact.” 44 Shareholder
complaints based on statements regarding future events or promises of
future company performance may not support a fraud claim. 45
Shareholders may assert that they were fraudulently induced to
enter into a shareholder agreement or a transaction related to the
shareholder agreement, such as a redemption agreement. The case Allen
v. Devon Energy Holdings, L.L.C. 46 is instructive and outlines in detail
the types of common law and statutory fraud claims that might be
asserted by a shareholder in the context of share redemption. 47 In Allen,
a minority shareholder claimed he was fraudulently induced to redeem
his shares at a value that was twenty times less than the value at which
a third party purchased the entity’s shares one and a half years later. 48
The court in Allen found that the majority shareholder’s statement in a
letter to the minority shareholder that certain wells would be “non-

42. See Ritchie v. Rupe, 443 S.W.3d 856, 888 n.56 (Tex. 2014).
43. Zorrilla v. Aypco Constr. II, LLC, 469 S.W.3d 143, 153 (Tex. 2015).
44. Transp. Ins. Co. v. Faircloth, 898 S.W.2d 269, 276 (Tex. 1995).
45. See Allen v. Devon Energy Holdings, L.L.C., 367 S.W.3d 355, 370 (Tex. App.—
Houston [1st Dist.] 2012, pet. granted, judgm’t vacated w.r.m.).
46. Id.
47. Id. at 369–76.
48. Id. at 367.
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economic” was a material statement of fact and actionable for purposes

of a fraudulent inducement claim. 49
Fraud can take many forms, and the factual circumstances in
reported cases vary widely. Here are some fairly recently reported
shareholder-related fraud cases:
● Abdu v. Hailu,50 affirming the trial court’s dismissal of a
fraudulent lien claim by a shareholder in a closely-held
corporation against another shareholder and third party
because plaintiff shareholder asserted the claim individually,
though it belonged to the corporation, and sought damages
personally for the alleged wrong.
● Lowry v. Tarbox,51 affirming the judgment on jury verdict for a
minority shareholder physician’s claims against the co-owner of
a neurology medical practice who was also the practice’s
majority shareholder, for fraud against the physician.
● Siddiqui v. Fancy Bites, LLC,52 affirming the district court’s
judgment for two members of a four-member LLC on a claim
that other LLC members fraudulently induced them to
purchase their interests in the LLC.
● Davis v. White,53 affirming judgment on a jury verdict for a
former law partner on a claim against another partner for fraud
in the failure to disclose the true nature of the partnership’s
finances.
● White v. Zhou Pei,54 affirming judgment for two shareholders of
a closely-held corporation on a claim against the remaining
shareholders for fraud by failure to disclose requested
information regarding the corporation’s status and finances,
but reversing judgment for shareholder’s claim that remaining
shareholders violated fiduciary duties owed to him as a creditor
of the corporation because there was insufficient evidence that
the shareholder was in fact a creditor.

49. Id. at 372, 376.

50. No. 05-17-01261-CV, 2018 WL 6716547 (Tex. App.—Dallas Dec. 21, 2018, no pet. h.).
51. 537 S.W.3d 599 (Tex. App.—San Antonio 2017, pet. denied).
52. 504 S.W.3d 349 (Tex. App.—Houston [14th Dist.] 2016, pet. denied).
53. No. 02-13-00191-CV, 2014 WL 7387045 (Tex. App.—Fort Worth Dec. 29, 2014, pet.
granted), judgment vacated on other grounds, 475 S.W.3d 783 (Tex. 2015).
54. 452 S.W.3d 527 (Tex. App.—Houston [14th Dist.] 2014, no pet.).
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In addition to supporting a common-law fraud claim, false

representations may also be actionable as statutory fraud under the
Texas Securities Act.55
The Texas Securities Act (“TSA”) provides,

A person who offers to buy or buys a security . . . by means of

an untrue statement of a material fact or an omission to state
a material fact necessary in order to make the statements
made, in light of the circumstances under which they are made,
not misleading, is liable to the person selling the security to
him, who may sue either at law or in equity for rescission or for
damages if the buyer no longer owns the security. 56

The TSA provides for recovery of damages, rescission, and recovery of

costs and “attorney’s fees if the court finds that the recovery would be
equitable in the circumstances.”57
Fraudulent conduct relating to shareholder agreements may also
give rise to statutory fraud claims under the Texas Business and
Commerce Code provisions governing stock transactions. 58 Actual

55. See Allen v. Devon Energy Holdings, L.L.C., 367 S.W.3d 355, 399–405 (Tex. App.—
Houston [1st Dist.] 2012, pet. granted, judgm’t vacated w.r.m.) (trial court erred in
granting summary judgment against the minority shareholder on his Texas
Securities Act claims that he was misled by statements in redemption letter).
56. TEX. REV. CIV. STAT. ANN. art. 581-33B.
57. Id. art. 581-33D (outlining formulas for rescission and damages); see also Allen, 367
S.W.3d at 410 (finding that “any income the buyer received” recoverable as damages
under the TSA does not include defrauding buyer’s proceeds from subsequent sale of
the stock shares).
58. See TEX. BUS. & COM. CODE ANN. § 27.01 (“Fraud in Real Estate and Stock
Transactions.”). Specifically,
Fraud in a transaction involving real estate or stock in a corporation or
joint stock company consists of a
(1) false representation of a past or existing material fact, when
the false representation is
(A) made to a person for the purpose of inducing that person
to enter into a contract; and
(B) relied on by that person in entering into that contract; or
(2) false promise to do an act, when the false promise is
(A) material;
(B) made with the intention of not fulfilling it;
(C) made to a person for the purpose of inducing that person
to enter into a contract; and
(D) relied on by that person in entering into that contract.
Id. § 27.01(a).
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damages, attorney’s fees, and costs (including expert witness fees) are
recoverable if a shareholder prevails. 59 Exemplary damages may also be
recoverable depending on proof of actual awareness of the false
representation.60
Texas also recognizes a claim for constructive fraud, which requires
a showing of a breach of trust or of a preexisting confidential
relationship.61 Actual fraud focuses on the wrongdoer’s “intent to deceive,
whereas constructive fraud is . . . [based on] breach of some legal or
equitable duty which . . . the law declares fraudulent because of its
tendency to deceiver others, to violate confidence, or to injure public
interests.”62 Where constructive fraud is found, a constructive trust over
wrongfully obtained proceeds may be ordered.63
Fraud claims are often quite fact-dependent, and it may be difficult
to anticipate them when drafting a shareholder agreement. Some
provisions may prove helpful in reducing the likelihood of such claims or
providing defenses to such claims. For example, because fraud claims
require proof of reliance, a contractual disclaimer of reliance may be
helpful in defending against a fraud claim. 64 Note that the contractual
disclaimer must be “clear and unequivocal.”65
A merger clause should be included in a shareholder agreement to
establish there are no other understandings or agreements between the
parties other than those specifically enumerated in the shareholder
agreement (or other ancillary written agreements between the parties).
A typical merger clause provides,

The agreement modifies and supersedes all other preceding

agreements, oral or written, between the parties and
constitutes the entire agreement of the parties regarding the
subject matter of the contract.

59. Id. § 27.01(b), (e).

60. Id. § 27.01(c), (d).
61. Archer v. Griffith, 390 S.W.2d 735, 740 (Tex. 1964).
62. Id.
63. Meadows v. Bierschwale, 516 S.W.2d 125, 128 (Tex. 1974).
64. See Italian Cowboy Partners Ltd. v. Prudential Ins. Co., 341 S.W.3d 323, 332 (Tex.
2011) (clarifying existing case law relative to contractual waivers of fraudulent
inducement claims).
65. Id. at 331, 336; Schlumberger Tech. Corp. v. Swanson, 959 S.W.2d 171, 179 (Tex.
1997) (Disclaimer of reliance clause had “requisite clear and unequivocal expression
of intent necessary to disclaim reliance.”).
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A merger clause demonstrates that the parties to a contract intended the

agreement to be a final integrated expression of their agreement. 66 If a
dispute arises, the parol evidence rule bars attempts to introduce
extrinsic evidence to vary, contradict, or add to the terms of the
shareholder agreement.67
Note that a standard merger clause, without an expressed clear and
unequivocal intent to disclaim reliance, is insufficient to foreclose a
fraudulent inducement claim. 68 Thus, a drafter should not make the
error of including a merger clause without also including a clear and
unequivocal disclaimer of reliance. A comparison between the disclaimer
clauses in Schlumberger69 and Forest Oil,70 which the Court found
effective to disclaim reliance, and the clause in Italian Cowboy,71 which
the Court found insufficient to disclaim reliance, is instructive for
drafting purposes:

66. See Italian Cowboy, 341 S.W.3d at 334.

67. See, e.g., RESTATEMENT (SECOND) OF CONTRACTS § 216 cmt. e (1981) (Merger clauses
are “likely to conclude the issue [of] whether the agreement is completely
integrated.”).
68. Italian Cowboy, 341 S.W.3d at 334.
69. Schlumberger Tech. Corp. v. Swanson, 959 S.W.2d 171, 180 (Tex. 1997).
70. Forest Oil Corp. v. McAllen, 268 S.W.3d 51, 54 n.4 (Tex. 2008).
71. Italian Cowboy Partners Ltd. v. Prudential Ins. Co., 341 S.W.3d 323, 332 (Tex. 2011).
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176 Corporate Counsel Review

Italian Cowboy Schlumberger Forest Oil

“Tenant “[N]one of us is “[I]n executing the
acknowledges that relying upon any releases contained in
neither Landlord nor statement or this Agreement, . . .
Landlord's agents, representation of any [the parties are not]
employees or agent of the parties relying upon any
contractors have being released statement or
made any hereby. Each of us is representation of any
representations or relying on his or her agent of the parties
promises with own judgment . . . .”73 being released
respect to the Site, hereby. [We are] . . .
the Shopping Center relying on . . . [our]
or this Lease except own judgment . . . .”74
as expressly set forth
herein. . . . This lease
constitutes the
entire agreement
between the parties
hereto with respect
to the subject matter
hereof, and no
subsequent
amendment or
agreement shall be
binding upon either
party unless it is
signed by each party
. . . .”72

Shareholder fraud claims often involve disputes over share

valuation.75 As outlined in the checklist below, shareholder agreements
can include provisions regarding agreed-upon valuation methods that
apply when a buy-sell provision is triggered or shares are redeemed.
Among many options, valuation provisions may require fair market value

72. Italian Cowboy, 3341 S.W.3d at 328.

73. Schlumberger, 959 S.W.2d at 180 (emphasis omitted).
74. Forest Oil, 268 S.W.3d at 54 n.4.
75. See, e.g., Allen v. Devon Energy Holdings, L.L.C., 367 S.W.3d 355 (Tex. App.—
Houston [1st Dist.] 2012, pet. granted, judgm’t vacated w.r.m.); N. Tex. Opportunity
Fund, L.P. v. Hammerman & Gainer Int’l, Inc., 107 F. Supp. 3d 620, 627 (N.D. Tex.
2015) (shareholder fraud claims arising out of director’s effort to hide company’s true
value so that shareholder would redeem its shares for less than they were worth).
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as determined by qualified appraisers, a formula price specified in the

shareholder agreement, book value, or a set price adjusted by specified
indexes to account for the passage of time. Requiring an independent
valuation by a valuation specialist may help assuage a shareholder’s
concerns about receiving fair market value for redeemed shares.

4. Breach of Fiduciary Duty Based on Informal Fiduciary

Relationship
The Court in Ritchie confirmed that shareholders do not generally
owe each other fiduciary duties.76 But the Court acknowledged that in
some circumstances, a preexisting confidential relationship between
shareholders may result in an “informal” fiduciary relationship that
could be the basis for a shareholder’s claim for breach of fiduciary duty.77
The determination of whether an informal fiduciary duty exists is
fact intensive and could arise from “a moral, social, domestic, or purely
personal relationship of trust and confidence.” 78 No such relationship
exists in a business transaction unless it “existed prior to, and . . .
[separate] from[] the transaction[] at issue.” 79
In Cardiac Perfusion Services, Inc. v. Hughes,80 the claims included
allegations that the majority shareholder engaged in oppressive conduct
by suppressing payment of profit distributions, paying himself excessive
compensation, and refusing to allow examination of the corporation’s
books and records.81 Although the Court reversed the buyout remedy
ordered by the trial court (based on the holding in Ritchie), the parties
did not challenge, and the court affirmed, the findings for breach of
“informal” fiduciary duty.82 Typically, the business judgment rule would
apply to corporate decision-making such as payment of dividends. But
where informal fiduciary duties are found separate and apart from the
shareholders’ business relationship, the Court in Ritchie saw “no reason
to assume that the [business judgment] rule would apply.” 83 Moreover,

76. Ritchie v. Rupe, 443 S.W.3d 856, 874 n.27 (Tex. 2004) (citing Willis v. Donnelly, 199
S.W.3d 262, 276–77 (Tex. 2006)).
77. Id. at 874 n.27, 892 n.63.
78. Id.
79. Id. at 874 n.27 (citing Meyer v. Cathey, 167 S.W.3d 327, 331 (Tex. 2005)); see also
Cardiac Perfusion Servs., Inc. v. Hughes, 436 S.W.3d 790, 791 n.1 (Tex. 2014)
(discussing availability of direct claim by shareholder against majority shareholder
for breach of informal fiduciary duty).
80. 436 S.W.3d 790 (Tex. 2014).
81. Id. at 791.
82. Id. at 792.
83. Ritchie v. Rupe, 443 S.W.3d 856, 874 n.27 (Tex. 2014).
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178 Corporate Counsel Review

the Ritchie Court indicated a court-ordered buyout remedy could be

viable in the event the court of appeals on remand found a breach of an
informal fiduciary relationship.84 Notably, on remand, the court of
appeals found no evidence of an informal fiduciary duty. 85
In summary, a direct claim by shareholders based on an informal
fiduciary relationship is unavailable to most plaintiff shareholders
because it is narrowly limited to preexisting fiduciary or confidential
relationships. Nevertheless, to reduce further the possibility of
shareholder claims based on an informal fiduciary-like relationship,
drafters and their clients can include prophylactic provisions in the
shareholder agreement, such as reciprocal statements that the
shareholders agree they are not fiduciaries and have no preexisting
personal relationship of trust or confidence.

5. Unjust Enrichment and Quantum Meruit

Recovery for unjust enrichment is available “when one person has
obtained a benefit from another by fraud, duress, or the taking of an
undue advantage.”86 It is often alleged in tandem with a direct fraud
claim. However, depending on the circumstances of the claim, including
from whom the benefit was obtained, the claim may belong to the
corporation.87
Quantum meruit may be a viable claim in the context of disputes
over services provided by a shareholder to a company. Quantum meruit
requires a plaintiff to prove (1) “valuable services were rendered;” (2) “for
the person sought to be charged;” (3) “which services were accepted . . .;”
and (4) under such circumstances as reasonable notice to the person that
the plaintiff performing the services expected compensation from the
person sought to be charged.88
Some shareholders provide sweat equity to benefit a company but
later feel underappreciated or shortchanged. For example, this may be
particularly true in a family business where family members are
expected to contribute their efforts to the greater good of the enterprise.

84. Id. at 892.

85. Ritchie v. Rupe, No. 05-08-00615-CV, 2016 WL 145581, at *4–6 (Tex. App.—Dallas
Jan. 12, 2016, pet. denied).
86. Heldenfels Bros., Inc. v. Corpus Christi, 832 S.W.2d 39, 41 (Tex. 1992).
87. See Hudgeons v. Hallmark, No. 02-14-00194-CV, 2015 WL 5634395, at *5 (Tex.
App.—Fort Worth Sept. 24, 2015, no pet.) (affirming summary judgment for
company’s senior vice president on claims by former stockholders for unjust
enrichment and money had and received because representative lacked standing in
his individual capacity to assert such claims; representative did not identify any duty
owed directly to him contractually or otherwise by the vice president).
88. Vortt Expl. Co. v. Chevron U.S.A., Inc., 787 S.W.2d 942, 944 (Tex. 1990).
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Such organizations frequently lack formal planning or employment

agreements documenting their shareholders’ contributions. A quantum
meruit claim may provide relief in such circumstances. This claim may
also arise in the context of a start-up company that does not initially
generate earnings or distribute dividends to its shareholders to
compensate them for their efforts. A compensation dispute later
invariably arises over the value of the shareholders’ respective
contributions to the company. These types of disputes may be avoided by
shareholder employment agreements specifically delineating the parties’
rights and obligations and the compensation shareholders will receive for
their services.

6. Texas Theft Liability Act / Conversion

Depending on the facts and circumstances (and the criminality, if
any) surrounding purported oppressive conduct, shareholders may assert
additional common-law tort claims such as conversion and statutory
claims under the Texas Theft Liability Act (“TLA”). 89
Conversion requires a showing of unauthorized and wrongful
assumption and exercise of control over the personal property of another,
to the exclusion of the owner’s rights. 90 An action for conversion of money
will lie when identification of money is possible and there is a breach of
an obligation to deliver the specific money in question or to otherwise
treat specific money.91
A Texas Theft Liability Act (“TLA”) claim hinges on a showing of
theft under applicable Texas criminal statutes.92 “‘Theft’ means
unlawfully appropriating property or unlawfully obtaining services as
described by [Texas penal statutes].” 93
In North Texas Opportunity Fund L.P. v. Hammerman & Gainer
International, Inc.,94 the plaintiff shareholder alleged claims arising out
of a director’s efforts setting up a shell company to hide the company’s
profits and true value so the shareholder would redeem its shares for less
than their true value.95 He alleged that he was entitled to possess, and

89. See Ritchie, 443 S.W.3d at 883; TEX. CIV. PRAC. & REM. CODE ANN. §§ 134.001–.005
(“Texas Theft Liability Act”).
90. Green Int’l, Inc. v. Solis, 951 S.W.2d 384, 391 (Tex. 1997).
91. N. Tex. Opportunity Fund, L.P. v. Hammerman & Gainer Int’l, Inc., 107 F. Supp. 3d
620, 637 (N.D. Tex. 2015) (citing Sw. Indus. Inv. Co. v. Berkley House Investors, 695
S.W.2d 615, 617 (Tex. App.—Dallas 1983, writ ref’d n.r.e.)).
92. TEX. CIV. PRAC. & REM. CODE ANN. § 134.003.
93. Id. § 134.002.
94. 107 F. Supp. 3d 620 (N.D. Tex. 2015).
95. Id. at 626–27, 637.
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180 Corporate Counsel Review

the corporation had stolen, a portion of the true profits of the corporation
that he otherwise would have received absent the wrongful conduct. 96 He
alleged that the specific profits were specifically identifiable and had
been fraudulently taken, and the court found those allegations sufficient
to state claims for conversion and under the TLA. 97 The shareholder’s
primary claims were for fraud, but the addition of a TLA claim opened
the door to recovery of attorney’s fees.

7. Receiverships
Shareholders frequently seek the juridical appointment of a receiver
as part of shareholder litigation. Often this remedy is sought in the
context of a claim for shareholder oppression. Ritchie adopted a three-
part test for determining “oppression” under the TBOC:

[A] corporation’s directors or managers engage in “oppressive”

actions . . . when they abuse their authority over the corporation
with the intent to harm the interests of one or more of the
shareholders, in a manner that does not comport with the
honest exercise of their business judgment, and by doing so
create a serious risk of harm to the corporation. 98

When this test for oppression is met, a minority shareholder may be

entitled to a rehabilitative receivership, but not a buyout remedy.99
The TBOC has several provisions relating to the appointment of
receivers. Depending on the circumstances and proof shown, the TBOC
provides for (1) a rehabilitative receiver and (2) a receiver for specific
property.100 Receivers are often sought in circumstances such as
deadlocks in management, but they are difficult to obtain. 101
“Receivership is an extraordinarily harsh remedy and one that courts are
particularly loathe to utilize.”102 Thus, courts strictly construe the
requirements for receivership and the burden is “on the party seeking

96. Id. at 637.

97. Id. at 638.
98. Ritchie v. Rupe, 443 S.W.3d 856, 871 (Tex. 2014).
99. Id. at 872–73, 877; Cardiac Perfusion Servs., Inc v. Hughes, 436 S.W.3d 790, 791–92
(Tex. 2014).
100. TEX. BUS. ORGS. CODE ANN. §§ 11.403, 11.404.
101. See Spiritas v. Davidoff, 459 S.W.3d 224, 232 (Tex. App.—Dallas 2015, no pet.) (no
irreparable harm shown for the appointment of a receiver even where proof showed
that business entities were deadlocked and that the deadlock prevented the entity
from responding to letters of intent regarding real property).
102. See, e.g., id. at 232 (internal citation omitted).
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Shareholder Agreements: Litigation Perspectives 181

the appointment” to demonstrate that the circumstances meet the

requirements.103

a. Rehabilitative Receiver
The TBOC lists specific grounds to appoint a rehabilitative receiver,
and details several additional requirements that apply to each ground:

(a) Subject to Subsection (b), a court that has jurisdiction over

the property and business of a domestic entity under Section
11.402(b) may appoint a receiver for the entity's property and
business if:

(1) in an action by an owner or member of the domestic

entity, it is established that:

(A) the entity is insolvent or in imminent danger of

insolvency;

(B) the governing persons of the entity are

deadlocked in the management of the entity's affairs,
the owners or members of the entity are unable to
break the deadlock, and irreparable injury to the
entity is being suffered or is threatened because of the
deadlock;

(C) the actions of the governing persons of the entity

are illegal, oppressive, or fraudulent;

(D) the property of the entity is being misapplied or

wasted; or

(E) with respect to a for-profit corporation, the

shareholders of the entity are deadlocked in voting
power and have failed, for a period of at least two
years, to elect successors to the governing persons of
the entity whose terms have expired or would have
expired on the election and qualification of their
successors;

103. Id.
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182 Corporate Counsel Review

(2) in an action by a creditor of the domestic entity, it is

established that:

(A) the entity is insolvent, the claim of the creditor

has been reduced to judgment, and an execution on
the judgment was returned unsatisfied; or

(B) the entity is insolvent and has admitted in

writing that the claim of the creditor is due and
owing; or

(3) in an action other than an action described by

Subdivision (1) or (2), courts of equity have traditionally
appointed a receiver.104

Even if one of the grounds listed in Section 11.404(a) is met, subsection

(b) authorizes a receiver only if (1) appointment is necessary “to conserve
the property and business of the . . . entity and avoid damage to the
interested parties;” and (2) “all other available legal and equitable
remedies . . . are inadequate.”105
In narrowly construing these requirements, the Texas Supreme
Court explained the type of oppression that might warrant a
rehabilitative receiver.106 The Court cited to fraudulent and illegal
conduct that must “create a serious risk of harm to the corporation.”107 A
rehabilitative receiver is the only remedy available under the statute for
shareholder oppression.108
A rehabilitative receiver may not be the preferred remedy for a
shareholder, who may in many cases prefer a buyout. However, the
appointment of a rehabilitative receiver can apply significant pressure
and may still advance litigation strategy to achieve a favorable outcome.
The Court in Ritchie left undecided the question of “whether a trial court
could properly appoint a rehabilitative receiver and authorize or order
the receiver to implement a buyout of a shareholder’s interests.” 109 But
it left the door slightly ajar provided the order complies with the statute’s

104. TEX. BUS. ORGS. CODE ANN. § 11.404(a) (emphasis added).

105. Id. § 11.404(b).
106. See Ritchie v. Rupe, 443 S.W.3d 856, 866–71 (Tex. 2014).
107. Id. at 871; see also Spiritas, 459 S.W.3d at 236 (overturning receiver appointment for
lack of evidence of “irreparable injury” from management deadlock).
108. Ritchie, 443 S.W.3d at 872–73, 877; Cardiac Perfusion Servs. Inc. v. Hughes, 436
S.W.3d 790, 791 (Tex. 2014) (holding buyout remedy not available under common-law
claim for oppression or under statute).
109. Ritchie, 443 S.W.3d at 877 n.32
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requirement that any appointment “conserve the property and business

of the domestic entity and avoid damage to interested parties.” 110 The
Court further noted without deciding the issue: “If the buyout would help
the shareholder but hurt the corporation, an order authorizing the
receiver to effectuate the buyout would likely not comply with the statute
authorizing the appointment.”111 Thus, Ritchie provides at least some
basis for a shareholder to seek a rehabilitative receiver with the follow-
on goal of seeking court authorization of the receiver to implement a
buyout.
Moreover, while a rehabilitative receivership may not be fully
satisfying, it can lead to a liquidating receivership if an acceptable
rehabilitation plan is not presented within one year of the appointment
of the receiver.112
Note that a party is entitled to an interlocutory appeal of an order
“appoint[ing] a receiver or trustee.”113 Thus, even if other claims remain
to be litigated, an interlocutory appeal of the receivership appointment
may proceed.114 The prospect of an immediate interlocutory review is
likely another reason that trial courts exercise caution before granting
this extraordinary remedy.

b. Receivership for Specific Property

TBOC section 11.403 provides for a receivership over specific
assets or property of the corporation:

(a) Subject to Subsection (b), and on the application of a person

whose right to or interest in any property or fund or the
proceeds from the property or fund is probable, a court that has
jurisdiction over specific property of a domestic or foreign entity
may appoint a receiver in an action:

(1) by a vendor to vacate a fraudulent purchase of the

property;

(2) by a creditor to subject the property or fund to the

creditor's claim;

110. Id. (citing TEX. BUS. ORGS. CODE ANN. § 11.404(b)(1)).

111. Id.
112. See TEX. BUS. ORGS. CODE ANN. § 11.405(a)(3).
113. TEX. CIV. PRAC. & REM. CODE ANN. § 51.014(a)(1).
114. Spiritas v. Davidoff, 459 S.W.3d 224, 234–37 (Tex. App.—Dallas 2015, no pet.) (on
interlocutory appeal, reversing appointment of receiver).
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184 Corporate Counsel Review

(3) between partners or others jointly owning or

interested in the property or fund;

(4) by a mortgagee of the property for the foreclosure of

the mortgage and sale of the property, when:

(A) it appears that the mortgaged property is in

danger of being lost, removed, or materially
injured; or

(B) it appears that the mortgage is in default and

that the property is probably insufficient to discharge
the mortgage debt; or

(5) in which receivers for specific property have been

previously appointed by courts of equity.

(b) A court may appoint a receiver for the property or fund

under Subsection (a) only if:

(1) with respect to an action brought under Subsection

(a)(1), (2), or (3), it is shown that the property or fund is in
danger of being lost, removed, or materially injured;

(2) circumstances exist that are considered by the court to

necessitate the appointment of a receiver to conserve the
property or fund and avoid damage to interested parties;

(3) all other requirements of law are complied with; and

(4) the court determines that other available legal and

equitable remedies are inadequate.

(c) The court appointing a receiver under this section has and
shall retain exclusive jurisdiction over the specific property
placed in receivership. The court shall determine the rights of
the parties in the property or its proceeds.

(d) If the condition necessitating the appointment of a receiver

under this section is remedied, the receivership shall be
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Shareholder Agreements: Litigation Perspectives 185

terminated immediately, and the receiver shall redeliver to the

domestic entity all of the property remaining in receivership. 115

This type of statutory receivership is less onerous and, in theory,

easier to obtain than a rehabilitative or liquidating receiver.116 However,
it still requires a judicial determination that damage to the property will
occur and “other available legal and equitable remedies are
inadequate.”117 As a result, courts will strictly construe these statutory
requirements.118

B. Shareholder Derivative Claims for Breach of Duty to the

Entity

In addition to various direct shareholder causes of action, the Court

in Ritchie identified derivative actions for breach of fiduciary duty as
another potential remedy for oppressed shareholders. 119 The TBOC
contains provisions that make it easier for shareholders to assert
derivative actions in the context of closely held corporations and LLCs. 120
Specifically, for closely held corporations and LLCs, the TBOC
relieves shareholder plaintiffs of the burden of making a pre-suit demand
and meeting other typical standing requirements.121 It specifically states
that the typical derivative action presuit demand requirements “do not
apply to . . . a closely held corporation.”122 In Sneed v. Webre,123 the Texas
Supreme Court reaffirmed that shareholders of a closely held corporation
have derivative standing without making presuit demand, and do not
need to overcome the business judgment rule to bring a derivative suit. 124

115. TEX. BUS. ORGS. CODE ANN. § 11.403.

116. See Finger Contract Supply Co. v. Republic Nat. Bank of Dall., 412 S.W.2d 79, 84
(Tex. App.—Forth Worth 1967, writ ref’d n.r.e.) (“The instant receivership is the least
harsh of those for which provision has been made by law as applied to corporations.
It is one wherein the corporation has been left intact, but where only specific assets
belonging to it are made the subject matter of the receivership.”).
117. TEX. BUS. ORGS. CODE ANN. § 11.403(b)(2), (3).
118. See, e.g., Spiritas, 459 S.W.3d at 234 (trial court’s receivership order failed to identify
“specific property,” rendering Section 11.403 inapplicable); Alert Synteks, Inc. v.
Jerry Spencer, L.P., 151 S.W.3d 246, 251 (Tex. App.—Tyler 2004, no pet.) (trial court
abused discretion in appointing receiver over corporation’s assets).
119. Ritchie v. Rupe, 443 S.W.3d 856, 880–81 (Tex. 2014).
120. See id. (“[T]he Legislature has enacted special rules to allow its shareholders to more
easily bring a derivative suit on behalf of the corporation.”).
121. See TEX. BUS. ORGS. CODE ANN. § 21.563(b).
122. Id.
123. 465 S.W.3d 169 (Tex. 2015).
124. Id. at 181, 189–93.
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186 Corporate Counsel Review

The TBOC also provides that “if justice requires,” the court may treat a
derivative action “as a direct action brought by the shareholder for the
shareholder’s own benefit, . . . and . . . [award relief] directly to the
[shareholder] . . . .”125
Officers and directors owe fiduciary duties to the corporation. 126 As
a result, breach of fiduciary duty is a common shareholder derivative
claim.127 Depending on the factual circumstances, derivative claims for
fraud or other intentional torts may also be asserted on behalf of the
corporation.
Although the business judgment rule does not apply to a closely held
corporation shareholder’s standing to initiate a derivative claim, it does
apply to the merits of a derivative proceeding when officers’ or directors’
actions are being challenged.128 Thus, in any derivative action, the
business judgment rule applies as a defense to the merits of the claims
that the officers or directors breached their duties to the corporation. 129
“The business judgment rule . . . generally protects corporate officers and
directors, who owe fiduciary duties to the corporation, from liability for
acts that are within the honest exercise of their business judgment and
discretion.”130 Citing from its opinion in Cates v. Sparkman,131 the Court
in Sneed stated “that courts will not interfere with the officers or
directors in control of the corporation’s affairs based on allegations of
mere mismanagement, neglect, or abuse of discretion.” 132 To overcome
the business judgment rule, a claim for breach of fiduciary duty against
an officer or director must be “‘characterized by ultra vires, fraudulent,
and injurious practices, abuse of power, and oppression on the part of the
company or its controlling agency clearly subversive of the rights of the
minority, or of a shareholder, and which, without such interference,
would leave the latter remediless.’”133
A derivative claimant must show that the board or management
failed to comply with their fiduciary duties owed the company. 134 A
shareholder may bring a derivative fiduciary claim for “failure to declare
dividends” when a director violates the duty to act solely for the benefit

125. TEX. BUS. ORGS. CODE ANN. § 21.563(c).

126. Ritchie v. Rupe, 443 S.W.3d 856, 883 (Tex. 2014).
127. See id.
128. Id. at 869; Sneed v. Webre, 465 S.W.3d 169, 179 (Tex. 2015).
129. Sneed, 465 S.W.3d at 178–79.
130. Id. at 173 (citing Cates v. Sparkman, 11 S.W. 846, 848–49 (Tex. 1889)).
131. 11. S.W. 846 (Tex. 1889).
132. Sneed, 465 S.W.3d at 186 (citing Cates, 11 S.W. at 849).
133. Sneed, 465 S.W.3d at 180 (quoting Cates, 11 S.W. at 849).
134. See Ritchie v. Rupe, 443 S.W.3d 856, 868–69, 884 (Tex. 2014).
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Shareholder Agreements: Litigation Perspectives 187

of the company and refuses to declare dividends for some other, improper
purpose.135 Derivative claims often include allegations that a majority
shareholder awarded himself excessive pay or unwarranted bonuses
while withholding dividends or failing to fund company initiatives.136
Such conduct may amount to a “misapplication of corporate funds [or]
diversion of corporate opportunities” which may be redressed through a
derivative action for breach of fiduciary duty.137
The reasonableness of compensation is generally a fact question,
and the burden is on the plaintiff to prove it was excessive. 138 Moreover,
if the challenged conduct was undertaken “for the benefit of the
corporation [and] in compliance with the duties of care and loyalty,” there
is no derivative liability even if the conduct causes harm to the derivative
shareholder’s interests.139

1. Direct Recovery by a Derivative Plaintiff

As noted above, the TBOC provides for direct recovery to a
derivative claimant from a closely-held corporation or LLC “if justice
requires.”140 Thus, even if the damage is to the corporation, a derivative
plaintiff may be able to show that he is entitled to a share of monetary
damages based on his pro-rata ownership, financial or other contribution,
or another financial metric that makes direct recovery just under the
circumstances.
In Saden v. Smith,141 a 50% shareholder brought a derivative claim
based on another corporate officer’s diversion of company revenues into
a personal bank account.142 The court treated the derivative claim as a
direct claim, found a breach of fiduciary duty to the corporation, and
awarded damages directly to the plaintiff shareholder. 143 Conversely,
direct recovery was denied by the court in Guajardo v. Hitt.144 There, the

135. Id. at 885.

136. Id. at 884; Landon v. S&H Mktg. Grp., Inc., 82 S.W.3d 666, 677 (Tex. App.—Eastland
2002, no pet.).
137. See Ritchie, 443 S.W.3d at 887; Boehringer v. Konkel, 404 S.W.3d 18, 28–30 (Tex.
App.—Houston [1st Dist.] 2013, no pet.) (majority shareholder wrongfully awarded
himself an excessive salary).
138. Boehringer, 404 S.W.3d at 29; Gibney v. Culver, No. 13-06-112-CV, 2008 WL 1822767,
at *13 (Tex. App.—Corpus Christi Apr. 24, 2008, pet. denied) (minority shareholder
derivative action alleging excessive compensation paid to an officer).
139. Ritchie, 443 S.W.3d at 884.
140. TEX. BUS. ORGS. CODE ANN. §§ 21.563(c), 101.463(c); see supra Part II B.
141. 413 S.W.3d 450 (Tex. App.—Houston [1st Dist.] 2013, pet. denied).
142. Id. at 462.
143. Id.
144. 562 S.W.3d 768 (Tex. App.—Houston [14th Dist.] 2018, pet. denied).
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court affirmed the district court’s denial of direct recovery to the

derivative plaintiff shareholder based on disbursement of unauthorized
bonuses and commissions.145 The court found that the shareholder did
not demonstrate his entitlement to recover the corporation’s damages
directly.146
Depending on the circumstances and the nature of the injury to the
derivative plaintiff shareholder, other equitable remedies may be
available.147 The statutory receivership remedies discussed above may
also be appropriate in the context of a derivative lawsuit. 148

2. Attorney’s Fees and Costs

A prevailing derivative plaintiff “may” be entitled to recover
attorney’s fees expended on claims asserted on behalf of the corporation
if the court determines that “the proceeding . . . resulted in a substantial
benefit to the corporation.”149 In DeNucci v. Matthews,150 the court
awarded fees to the derivative plaintiff who prevailed on fiduciary duty
claims that management awarded wrongful excessive distributions. 151
The statute also places risk on a derivative plaintiff by providing that a
derivative plaintiff must pay the fees and costs of the corporation or other
defendant if a court finds that the derivative “proceeding [was] instituted
or maintained without reasonable cause or for an improper purpose.” 152

3. Disgorgement or other Equitable Remedies

Where a breach of fiduciary duty has occurred but there are no
direct damages to the company, disgorgement may be a potential
equitable remedy.153 In the shareholder litigation context, this remedy

145. Id. at 771.

146. Id. at 779–81.
147. See DeNucci v. Matthews, 463 S.W.3d 200, 206 (Tex. App.—Austin 2015, no pet.)
(affirming equitable remedies of reinstatement to board of directors and ordering
access to records).
148. See supra Part II A(7).
149. TEX. BUS. ORGS. CODE ANN. § 21.561(b)(1).
150. 463 S.W.3d 200 (Tex. App.—Austin 2015, no pet.).
151. Id. at 209–10.
152. TEX. BUS. ORGS. CODE ANN. § 21.561(b)(2).
153. Burrow v. Arce, 997 S.W.2d 229, 243, 245 (Tex. 1999) (fee forfeiture as equitable
remedy for breach of fiduciary duty).
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Shareholder Agreements: Litigation Perspectives 189

would require the offending officer or director to disgorge the improper

benefit received through their breach of duty. 154

III. SHAREHOLDER AGREEMENT: A POTENTIAL ANTIDOTE

TO FUTURE DISPUTES

In Ritchie, the parties had failed to enter into a shareholder

agreement.155 The Court repeatedly suggested that shareholders enter
into shareholder agreements to protect their respective interests and
avoid common shareholder disputes:

Shareholders of closely held corporations may address and

resolve such difficulties by entering into shareholder
agreements that contain buy-sell, first refusal, or redemption
provisions that reflect their mutual expectations and
agreements.156

Sometimes, [shareholders in a closely held corporation] enter

into shareholder agreements to define things like their
respective management and voting powers, the apportionment
of losses and profits, the payment of dividends, and their rights
to buy or sell their shares from or to each other, the corporation,
or an outside party. . . . When, as in this case, there is no
shareholders’ agreement, minority shareholders who lack both
contractual rights and voting power may have no control over
how those disputes are resolved.157

[S]hareholders may also prevent and resolve common disputes

by entering into a shareholders’ agreement to govern their
respective rights and obligations. Importantly, the Legislature
has granted corporate founders and owners broad freedom to
dictate for themselves the rights, duties, and procedures that
govern their relationship with each other and with the
corporation. . . . [W]e note that although [the corporation]’s
owners did not enter into a shareholders’ agreement, they

154. See In re Life Partners Holdings, Inc. Derivative Litig., Consol. Case No. DR-11-CV-
AM, 2015 WL 8523103, at *17–18 (W.D. Tex. Nov. 9, 2015) (discussing various
equitable remedies in shareholder lawsuit).
155. Ritchie v. Rupe, 443 S.W.3d 856, 861 (Tex. 2014).
156. Id. at 871.
157. Id. at 878–79.
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certainly could have done so, and by doing so could have

avoided the current dispute.158

A shareholder agreement may have little impact on the merits of,

or defenses to, certain claims. If a corporate officer or director wrongfully
diverts corporate funds to a personal account, a breach of loyalty and
abuse of power is clear, and the provisions of a shareholder agreement
would likely be immaterial to the claim. However, other claims may be
significantly impacted by a shareholder agreement. For example, a
derivative claim alleging suppression of dividends may be defeated by
language in a shareholder agreement governing payment of dividends. If
management complies (or attempts to do so in good faith) with provisions
in a shareholder agreement regarding calculation or timing of dividends,
a claim for breach of fiduciary duty by a disgruntled shareholder is more
likely to fail under the business judgment rule. Thus, a well-drafted
shareholder agreement can establish that allegedly wrongful conduct
falls within the honest exercise of business judgment and discretion.
At least one leading commentator has suggested that a
shareholder agreement can be drafted to limit fiduciary duties in the
corporate context.159 Based on the catchall provision of TBOC Section
21.101(a) regarding the permissible contents of a shareholder agreement,
she posits that the “fiduciary duties of . . . management . . . may be
modified or waived [in a shareholder agreement] . . . so long as such
provisions would be permissible in the context of a partnership.” 160
However, a drafter must be careful to ensure that the shareholder
agreement does not run afoul of the TBOC provisions that expressly
prohibit the elimination or restriction of certain duties, such as the duty
of loyalty.161

A. Shareholder Agreement Under the Texas Statute

Section 21.101 of the TBOC, entitled “Shareholders’ Agreement,”

outlines the basic functions and contents of a shareholder agreement:

158. Id. at 881 (citations omitted).

159. Elizabeth S. Miller, M. Stephen Beard & Alyce A. Beard, Fiduciary Duties,
Exculpation and Indemnification in Texas Business Organizations, State Bar of
Texas, 17th Annual Choice, Governance, & Acquisition of Entities, 9 (May 24, 2019),
https://www.baylor.edu/law/facultystaff/doc.php/117971.pdf.
160. Id.
161. See id. at 8; see also TEX. BUS. ORGS. CODE ANN. §7.001 (“Limitation of Liability of
Governing Person”).
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(a) The shareholders of a corporation may enter into an

agreement that:

(1) restricts the discretion or powers of the board of

directors;

(2) eliminates the board of directors and authorizes the

business and affairs of the corporation to be managed,
wholly or partly, by one or more of its shareholders or other
persons;

(3) establishes the individuals who shall serve as directors

or officers of the corporation;

(4) determines the term of office, manner of selection or

removal, or terms or conditions of employment of a
director, officer, or other employee of the corporation,
regardless of the length of employment;

(5) governs the authorization or making of distributions

whether in proportion to ownership of shares, subject
to Section 21.303;

(6) determines the manner in which profits and losses will

be apportioned;

(7) governs, in general or with regard to specific matters,

the exercise or division of voting power by and between the
shareholders, directors, or other persons, including use of
disproportionate voting rights or director proxies;

(8) establishes the terms of an agreement for the transfer

or use of property or for the provision of services between
the corporation and another person, including a
shareholder, director, officer, or employee of the
corporation;

(9) authorizes arbitration or grants authority to a

shareholder or other person to resolve any issue about
which there is a deadlock among the directors,
shareholders, or other persons authorized to manage the
corporation;
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192 Corporate Counsel Review

(10) requires winding up and termination of the

corporation at the request of one or more shareholders or
on the occurrence of a specified event or contingency, in
which case the winding up and termination of the
corporation will proceed as if all of the shareholders had
consented in writing to the winding up and termination as
provided by Subchapter K;

(11) with regard to one or more social purposes specified

in the corporation's certificate of formation, governs the
exercise of corporate powers, the management of the
operations and affairs of the corporation, the approval by
shareholders or other persons of corporate actions, or the
relationship among the shareholders, the directors, and
the corporation; or

(12) otherwise governs the exercise of corporate powers,

the management of the business and affairs of the
corporation, or the relationship among the shareholders,
the directors, and the corporation as if the corporation
were a partnership or in a manner that would otherwise
be appropriate only among partners and not contrary to
public policy.

(b) A shareholders’ agreement authorized by this section must

be:

(1) contained in:

(A) the certificate of formation or bylaws if approved

by all of the shareholders at the time of the
agreement; or

(B) a written agreement that is:

(i) signed by all of the shareholders at the time

of the agreement; and

(ii) made known to the corporation; and

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Shareholder Agreements: Litigation Perspectives 193

(2) amended only by all of the shareholders at the

time of the amendment, unless the agreement
provides otherwise.162

Notably, provisions in a shareholder agreement are effective and

enforceable “among the shareholders and between the shareholders and
the corporation” even when inconsistent with the Texas Business
Organizations Code.163
Section 21.101 provides guidance regarding provisions that can be
included in a shareholder agreement.164 But it is principally a starting
point. Drafters should consider a detailed shareholder agreement that
outlines the rights and obligations of a company, its shareholders, and
management. There is no universally suitable form shareholder
agreement, and practitioners face a difficult task in attempting to
anticipate and prophylactically address all the potential disputes that
may arise among the relevant parties. Two commentators described the
difficult balance of rights that drafters must undertake:
Drafters of the organizing documents of a closely held corporation
cannot avoid a tradeoff. On the one hand, they must provide some
protection to minority investors to ensure that they receive an adequate
return on the minority shareholder’s investment if the venture succeeds.
On the other hand, they cannot give the minority too many rights, for the
minority might exercise their rights in an opportunistic fashion to claim
returns at the majority’s expense.165

B. Checklist of Provisions that Should be Considered for

Shareholder Agreements.

The following are potential provisions that may be included in

shareholder agreements to help avoid many common shareholder
disputes.
● Stock transfer restrictions. Shareholders in privately held
companies desire certainty and control over who may become a
shareholder in the future. Transfer restrictions preclude
shareholders from transferring (including selling, assigning,
encumbering, pledging, or gifting) company stock without
permission from some or all the other shareholders. The TBOC

162. TEX. BUS. ORGS. CODE ANN. § 21.101.

163. Id. § 21.104.
164. See id. § 21.101.
165. Frank H. Easterbrook & Daniel R. Fischel, Close Corporations and Agency Costs, 38
STAN. L. REV. 271, 285 (1986).
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contains various provisions relating to transferability and

outlines the circumstances under which the transfer of a
security is valid.166 Section 21.213 provides that a transfer
restriction is enforceable if “the restriction is reasonable and
noted conspicuously on the certificate.” 167 A shareholder
agreement often specifies those persons or categories of persons
or entities (such as family partnerships or related entities) to
whom shares may be transferred in the future and the
mechanisms for such transfers. The transfer restrictions should
require notice to all shareholders to ensure compliance.
● Pledges. Shareholders may wish to pledge their shares to
secure the repayment of a corporation’s debt, or to secure
personal indebtedness.
● Buy-Sell Provisions. These important provisions provide a
mechanism for the purchase and sale of a shareholder’s interest
upon the occurrence of specified trigger events. Trigger events
commonly include death of a shareholder, divorce, termination
of a shareholder’s employment, bankruptcy, and disability.
Buy-sell provisions can be mandatory or voluntary.
○ Put right (voluntary). This provision allows a shareholder
to sell their shares upon a trigger event. For example, a
shareholder may wish to sell their shares in the event of a
change in control of the company.
○ Call right (involuntary). This provision requires a
shareholder to sell their shares upon a trigger event. For
example, the company may wish to force a shareholder to
sell their shares upon termination of employment or upon
a finding of specified misconduct by a shareholder. Given
the potential disputes that could arise from the exercise of
such a provision, the shareholder agreement should
outline in detail the mechanisms for exercise of the call
right and for an agreed upon method for valuing the
shares.
○ Drag along and tag along rights. A drag along right allows
a majority shareholder to force a minority shareholder to
sell their shares in the event the majority shareholder is
selling shares. Drag along rights help prevent a minority
shareholder from blocking a sale of the company. They can

166. TEX. BUS. ORGS. CODE ANN. §§ 21.209, 21.211.

167. Id. § 21.213(a).
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be complex provisions that include, for example, a

minimum target sale price before the minority shareholder
is forced to sell his shares. Tag along rights give a
shareholder the right (but not the obligation) to sell shares
at the same time and price as another shareholder.
Typically, the minority shareholder possesses the tag
along rights, but the provision can be drafted to go both
ways and also permit a majority shareholder to tag along
on a minority shareholder sale.
○ Right of first refusal and first offer. These important
provisions are a breed of transfer restriction in that they
prevent a shareholder from selling shares to a third party
without first offering them to the existing shareholders. A
ROFR applies when a shareholder desires to accept an
offer made by a third party to purchase their shares. A
ROFO applies when a shareholder wishes to transfer his
shares to a third party before an offer is made. In both
cases, the shareholder must first offer the shares to the
company and/or its shareholders on the same terms before
the sale can occur. ROFRs can be linked to trigger events
such as death or divorce of a shareholder.
○ Preemptive rights. Contractual preemptive rights provide
shareholders the right to purchase company stock which
may be offered in the future, so as to maintain their
percentage of ownership in the company. These can be
complex provisions that should account for factors such as
different classes of shares, shares issued as options or
other compensation, and convertible securities. Note that
TBOC Sections 21.203-21.208 provide additional statutory
preemptive rights and restrictions in certain
circumstances.
○ Timing provisions. The shareholder agreements should
specify the time for exercising rights generated by buy-sell
provisions and transfer restrictions. For example, the
shareholder agreement should impose a time deadline on
a shareholder to exercise an option to purchase shares.
● Purchase Price / Share Valuation. As discussed further below,
disputes over share valuation frequently arise in shareholder
litigation. The shareholder’s agreement should include
provisions regarding the determination of purchase price in the
event of a sale or transfer of shares. There are multiple options
that can be tailored to account for the specific situation, nature
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of the business and its assets (such as real estate assets), and
the relationships of the shareholders. Some valuation options
include (1) a fixed price; (2) fair market value determined by
appraisal by a third party; (3) capitalization of historical
earnings method; (4) book value; and (5) a formula price based
on the company’s financial metrics and performance.
Adjustments for minority discount and lack of marketability
may be appropriate. Book value may underestimate the true
value of a business because assets are carried on the balance
sheet at cost and without taking goodwill or going concern value
of the business into account. A contract price may seem
reasonable at the time a shareholder agreement occurs but may
fall below fair value over time. However, courts typically uphold
buy-sell provisions based on a stated price or book value even
where fair value at the time of the triggering event exceeds the
contract price or book value.168 A capitalization of earnings
method takes the average of historical earnings for some
specified period and multiplies those earnings by a multiplier
to arrive at a value. In theory this method may arrive at a value
that better matches the true value of the company at the time
of the trigger event. However, it involves far more complex
drafting than the other methods.
● Dividends. A shareholder agreement may provide for payment
of dividends in certain circumstances. For example, the
agreement can provide for mandated dividends triggered by
certain company financial metrics.
● Board representation. The shareholder agreement should
address various governance matters, including board size,
shareholder representation, voting power of the majority and
minority shareholders, director designation rights, restrictions
on removal of board members, and filling of board vacancies.
● Board committees. The shareholder agreement can provide for
committees, possibly comprising independent directors, to
make decisions on issues that, by their nature, may lead to
disputes (such as management compensation).
● Board observer rights. The shareholder agreement can provide
minority shareholders with board observer rights without
giving them voting and decisionmaking power. Such a provision

168. See Dixie Pipe Sales, Inc. v. Perry, 834 S.W.2d 491, 494 (Tex. App.—Houston [14th
Dist.] 1992, writ denied) (enforcing a corporation’s right to purchase shares at book
value).
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can help increase decisionmaking transparency and reduce the

potential for conflict.
● Special voting rights. This provision may give minority
shareholders veto power over certain significant events or
decisions, which can be specified in the provision. Some
examples of such events include committing the company to
incur debt over a certain amount, loaning money over a certain
amount, or entering into related-party transactions.
● Access to books, records, and information. As discussed above,
shareholders have statutory rights to certain corporate
information. The shareholder agreement can broaden or clarify
those rights.
● Confidentiality. A business of any substance regularly produces
confidential information. It may be confidential for multiple
reasons, such as trade secret protection, business
competitiveness, shareholder wealth management, or family or
personal business privacy. A confidentiality provision can be
used to protect such information as a matter of practice, and to
prevent disgruntled minority shareholders from releasing
sensitive information.
● Business / corporate opportunity clause. These provisions can
either require shareholders to submit specific corporate
opportunities to the company or explicitly provide that
shareholders have no such obligation. 169
● Arbitration. Shareholders can agree to arbitrate their disputes,
and the specific language of an arbitration provision can be
important in determining the procedures for deciding disputes.
○ Scope. Whether a claim falls within the scope of a
shareholder agreement’s arbitration provision turns on its
language. In Baty v. Bowen, Miclette & Britt, Inc.,170 the
court construed the scope of an arbitration provision in a
shareholder agreement to include a shareholder’s claims
for breach of fiduciary duty, oppression, and conversion
arising out of an alleged forced sale of shares to the other
shareholders.171 The court focused on the specific language
of the arbitration provision that “any controversy or claim

169. See TEX. BUS. ORGS. CODE ANN. §§ 2.101(21), 21.101(a)(12), 152.002; Miller, Beard, &
Beard, supra note 159.
170. 423 S.W.3d 427, 438–41 (Tex. App.—Houston [14th Dist.] 2013, pet. denied).
171. Id. at 440–41.
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arising pursuant to this Agreement shall be submitted to

and resolved by a single arbitrator.”172 The court found
that “‘pursuant to’ means ‘in carrying out’” the terms of the
Shareholder Agreement.173 The court concluded that the
shareholder’s claims for breach of fiduciary duty,
oppression, and conversion were “claims arising in
‘carrying out’ or ‘pursuant to’ the Shareholders’
Agreement” and must be arbitrated.174
○ Arbitration procedures. Consideration should be given to
how shareholder arbitration will be conducted. For
example, arbitration clauses can specify the number of and
method for selecting arbitrators, location of the
arbitration, the amount of permitted discovery, arbitration
timeline including time for issuing a decision, and other
mechanics of an arbitration. Outlining these details in the
shareholder agreement can ensure that the arbitration is
streamlined and advances the goal of efficiently resolving
shareholder disputes.
● Forum / venue selection. For various reasons, parties may
prefer to preserve their rights to seek relief in the courts rather
than arbitrate.175 In such circumstances, the parties should
consider agreeing to resolve any disputes in a specific judicial
forum and thereby head off potential litigation forum shopping.
Forum selection provisions can be particularly helpful where
shareholders reside in different locations or the corporation has
multiple offices and disparately located operations. A
particularly business-friendly forum (such as Delaware) may
also be a preferred forum for resolving disputes arising out of
the shareholder agreement.
○ Subject to public policy constraints, forum selection
clauses are generally enforceable in Texas. In In re Lyon

172. Id. at 439 (emphasis supplied).

173. Id. at 440 (citing Syntax, Inc. v. Hall, 899 S.W.2d 189, 191–92 (Tex. 1995) (construing
“pursuant to” language in an arbitration agreement as “carrying out” the terms of the
agreement)).
174. Id. at 441.
175. The expense of arbitrator and arbitration filing fees, lack of dispositive motion
practice, and the lack of appellate rights are some of the potential factors one may
consider in avoiding arbitration. See David F. Johnson, The Enforcement of
Contractual Jury Waiver Clauses in Texas, 62 BAYLOR L. REV. 649, 650–51 (2010)
(discussing the potential downsides of arbitration clauses).
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Financial Services, Inc.,176 the Texas Supreme Court

analyzed the scope of an arbitration provision in a
shareholder agreement in the context of a minority
shareholder dispute.177 Specifically, in Pinto Technology
Ventures, L.P. v. Sheldon,178 the Court held that a minority
shareholder’s statutory, common-law tort, and fiduciary
claims evidenced a “dispute arising out of” the shareholder
agreement and therefore fell within the scope of the
agreement’s Delaware forum selection clause. 179 The
subject forum selection clause contained commonly used
“arising out of” language.180 The Court noted that, in
finding the subject claims within the scope of the forum
selection provision, it refused to allow “artful pleading” to
avoid the forum selection clause, and it “focus[ed] on the
substance of the claims, not the labels, and avoid[ed]
‘slavish adherence to a contract/tort distinction.’”181
○ Shareholders can contractually agree that any litigation
between them will be filed only in a particular forum
(sovereign or state) and venue (location within that state).
For example, a forum selection provision could require a
lawsuit to be filed “in the courts of the State of Texas.” A
venue selection provision, in contrast, refers to the place
within a forum where the case must be tried (“in the state
courts of Harris County, Texas,” for example). Some
transactions may be subject to statutory venue provisions,
including “Major Transactions” as defined by statute.182
● Jury Waiver. This provision may be included to require any
disputes to be decided by a judge and not a jury. Jury waivers
are enforceable if they are conspicuous and were entered into
knowingly and voluntarily.183

176. 257 S.W.3d 228 (Tex. 2008).

177. Id. at 231–32.
178. 526 S.W.3d 428 (Tex. 2017).
179. Id. at 439.
180. Id. at 434.
181. Id. at 441 (internal citations omitted).
182. See TEX. CIV. PRAC. & REM. CODE ANN. § 15.020(c).
183. In re Gen. Elec. Capital Corp., 203 S.W.3d 314, 316 (Tex. 2006); In re Prudential Ins.
Co., 148 S.W.3d 124, 132–33 (Tex. 2004).
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IV. CONCLUSION

The Court in Ritchie significantly narrowed the litigation

remedies available for oppressed minority shareholders. However,
reported cases since Ritchie confirm that shareholder litigation continues
to be pursued through several available statutory and common-law
causes of action and remedies. The onus remains on practitioners to
listen carefully to their clients and draft robust shareholder agreements
tailored to their clients’ current and—to the extent possible—future
needs. Through a well-drafted shareholder agreement, many shareholder
disputes may be more efficiently resolved, or avoided entirely.