Ritchie v. Rupe 2016 And The Limits Of Fiduciary Duties Owed Between Shareholders In Closely Held Businesses

Michael Grill is an Associate in Holland & Knight's Chicago office

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...