Davis v. Sheerin
1988 WL 67280, 1988 Tex. App. LEXIS 1693, 754 S.W.2d 375 (1988)
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Rule of Law:
Under their general equity powers, Texas courts may order a majority shareholder to buy out a minority shareholder's interest as a remedy for oppressive conduct, particularly in a closely-held corporation, when lesser remedies are inadequate to protect the minority shareholder's rights.
Facts:
- In 1955, William H. Davis and James L. Sheerin incorporated a business, with Davis owning 55% of the stock and Sheerin owning 45%. Sheerin was a director but not an employee.
- In 1960, Davis and Sheerin formed a partnership with the same 55/45 ownership split for the purpose of acquiring real estate.
- The partnership acquired six tracts of land, but the deeds for all properties were held in William Davis's name alone.
- In the late 1960s, Davis began asserting that Sheerin had gifted his 45% stock interest in the corporation to him.
- In 1985, Davis denied Sheerin the right to inspect the corporate books, demanding that Sheerin first produce his stock certificate to prove ownership.
- Contemporaneously, Davis denied that Sheerin owned a 45% interest in the six tracts of land, claiming they were not partnership assets.
Procedural Posture:
- James L. Sheerin sued William H. Davis and Catherine L. Davis in a Texas district court (trial court) for oppressive conduct and breach of fiduciary duties.
- Following a six-week jury trial, the jury found, among other things, that the Davises conspired to deprive Sheerin of his stock and willfully breached fiduciary duties.
- The trial court entered a judgment based on the verdict and its own legal conclusions, ordering the Davises to buy out Sheerin's stock for $550,000, appointing a receiver, and making several other awards and injunctions.
- William H. Davis and Catherine L. Davis, as appellants, appealed portions of the trial court's judgment to the Texas Court of Appeals.
- James L. Sheerin is the appellee in the appeal.
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Issue:
Does a Texas court, under its general equity powers, have the authority to order a majority shareholder to buy out a minority shareholder's stock as a remedy for oppressive conduct, even in the absence of a statute expressly authorizing such a remedy?
Opinions:
Majority - Dunn, Justice.
Yes. Texas courts, under their general equity powers, may decree a 'buy-out' in an appropriate case where less harsh remedies are inadequate to protect the rights of the parties. The court reasoned that if its equity powers are broad enough to permit the extreme remedy of liquidating a corporation, as established in Patton v. Nicholas, then those powers must also include the authority to order a less drastic remedy like a buy-out. The determination of whether conduct is 'oppressive' is a question of law for the court, based on the jury's findings of fact. Here, the jury's finding that Davis conspired to deprive Sheerin of his stock, coupled with breaches of fiduciary duty, was sufficient to support the trial court's legal conclusion of oppressive conduct. A buy-out is particularly appropriate in a closely-held corporation where a minority shareholder has no ready market for their shares and is being 'squeezed out' by the majority, and where lesser remedies like damages or injunctions cannot adequately protect the minority shareholder's interest and voice in the company.
Concurring-in-part-and-dissenting-in-part - Evans, Chief Justice
This opinion does not directly answer the primary issue regarding the buy-out, but concurs with the majority's holding on that matter. The dissent disagrees with the majority's decision to reverse the trial court's mandatory injunction for the payment of future dividends. The justice argued that the jury's findings supported the conclusion that the appellants would not pay future dividends unless ordered to do so, and therefore the injunction was a necessary protection for the appellee pending the completion of the buy-out.
Analysis:
This case is significant for judicially establishing the shareholder 'buy-out' as an available equitable remedy for minority shareholder oppression in Texas, even without explicit statutory authority. It broadened the power of trial courts beyond the often-drastic statutory options of receivership or liquidation, allowing for a more tailored and flexible remedy. By affirming that courts can fashion non-statutory remedies under their general equity powers, the decision provides a crucial tool for protecting minority shareholders in closely-held corporations from 'squeeze-out' tactics. This precedent strengthens the position of minority owners by giving them a viable path to exit a corporation at a fair value when faced with oppressive conduct.
