The Texas Supreme Court just issued a landmark decision that limits the rights of minority shareholders in privately owned Texas companies.  The Court ruled that minority shareholders in closely held Texas companies – meaning those with a small group of investors who manage the company – can no longer file a lawsuit to assert a claim for “fair market value” of their shares when the management takes a position designed to dilute their interests.

The Court also declared that the majority shareholders are not required to meet with prospective purchasers of the minority’s stock to discuss future business strategies – even if the refusal means the minority will be unable to sell their interests or will be forced to sell them at a drastically reduced price.

This ruling stuns many in the corporate law community, as it overturns 25 years of legal precedent and is a huge blow to legal protections that have long been afforded to minority shareholders.

I am worried that the decision could significantly affect future business decisions by majority and minority shareholders at numerous privately held companies.  I think the Court has decided to go in a very different direction from courts in several states. In fact, Nevada and Delaware, which are known as “business-friendly” states, have recognized the importance of minority shareholders in closely held companies in cases of abuse by majority shareholders.  Now, minority shareholders in Texas have much less protection than in other states.  For years, Texas courts have stepped in to help prevent a majority shareholder from taking advantage of the minority, and at times requiring the majority to buy out the minority’s shares at a fair price.  No more.

The majority’s opinion reasoned that the Texas Business Organizations Code does not authorize a court to order a corporation to buy out a minority shareholder’s stock and that there is no common law cause of action for minority shareholder oppression.  The Court is correct.  Now it is up to the legislature to address this situation.  After all, courts are [constitutionally] prohibited from engaging in “judicial legislation.”

Clearly, closely held corporations appear to be the biggest beneficiaries of this decision, which will free the management and the controlling shareholders to make decisions based on their business judgment and the best interest of the corporation without concern about litigation from a dissenting minority shareholder.  This ruling may cause venture capitalists to re-think prospective investments in Texas-based business startups in the health care, technology, and energy sectors.

I encourage the Texas legislature to promptly deal with this important issue.