Rudisill v. Arnold White & Durkee, P.C.
148 S.W.3d 556, 2004 WL 2186957, 2004 Tex. App. LEXIS 8750 (2004)
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Rule of Law:
Under the Texas Business Corporation Act (TBCA), a sale of all or substantially all of a corporation's assets is considered to be "in the usual and regular course of business" if the corporation, directly or indirectly, continues to engage in one or more businesses after the sale, thereby precluding dissenting shareholders from statutory appraisal rights.
Facts:
- In 1999, Arnold White & Durkee, P.C. (AWD) and Howrey & Simon (H & S) began negotiations to combine their operations.
- AWD's board of directors issued a notice for a shareholders' meeting on January 7, 2000, to vote on the proposed combination, specifying a two-thirds majority of Class B and Class C shares for passage.
- Appellants Stephen Rudisill, Ronald Coolley, and Slawomir Szczepanski, who held Class B or Class C shares, submitted written objections to the combination and subsequently voted against it.
- The proposed combination was approved by a two-thirds vote.
- Under the Combination Agreement, all of AWD's assets not specifically excluded (e.g., three vacation condominiums, two insurance policies, several automobile leases) were transferred to H & S.
- In exchange for its assets, AWD became a "Level II Partner" in H & S, which subsequently changed its name to Howrey Simon Arnold & White, L.L.P. (HSAW).
- Rudisill, Coolley, and Szczepanski declined to sign the HSAW Partnership Agreement and ceased working for AWD around late January or early February 2000.
Procedural Posture:
- Stephen Rudisill, Ronald Coolley, and Slawomir Szczepanski (appellants) filed a declaratory judgment action against Arnold White & Durkee, P.C. (AWD) in the trial court.
- Both appellants and AWD filed motions for summary judgment.
- The trial court granted summary judgment in favor of AWD.
- Appellants appealed the trial court's summary judgment ruling to the Court of Appeals of Texas, Houston (14th Dist.).
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Issue:
Does a corporation's sale of all or substantially all of its assets qualify as "in the usual and regular course of business" under TBCA Article 5.09(B), thereby denying dissenting shareholders appraisal rights, if the corporation continues to exist and engage, directly or indirectly, in any business, even if it is not the same business it engaged in before the sale?
Opinions:
Majority - Adele Hedges, Chief Justice
Yes, a corporation's sale of all or substantially all of its assets qualifies as "in the usual and regular course of business" under TBCA Article 5.09(B), thus denying dissenting shareholders appraisal rights, if the corporation continues to exist and engage, directly or indirectly, in any business after the sale. The court affirmed the trial court's grant of summary judgment in favor of AWD, holding that the appellants were not entitled to dissenter's rights. The TBCA provides two procedures for authorizing the sale of substantially all assets: one for sales "in the usual and regular course of business" (Article 5.09) and one for sales not in the usual course, requiring shareholder approval and triggering dissenter's rights (Article 5.10, 5.11). Article 5.09(B), added in 1987, substantially expanded the types of transactions considered "in the usual and regular course of business," stating that such a transaction is in the usual course if the corporation, directly or indirectly, continues to engage in one or more businesses or applies consideration to a business in which it engages following the transaction. Legislative history indicated the amendment's purpose was to require shareholder approval only if the corporation liquidates and ceases to do business. After the combination, AWD continued to exist as a Texas corporation in good standing, maintaining its corporate structure (shareholders, directors, officers, meetings), financial records, and tax returns. As a Level II Partner in HSAW, AWD held voting rights and profits, effectively continuing in the legal services business indirectly through its ownership interest in HSAW. The TBCA does not require a corporation to retain physical assets or engage in the same business to continue in business after transferring assets. Although AWD sought shareholder approval under Article 5.10, it was not legally required to do so because its sale fell under the broader definition of Article 5.09(B); therefore, appellants were not entitled to dissenter's rights. Furthermore, appellants' shareholder status was terminated upon their cessation of employment with AWD, triggering automatic redemption under the AWD Redemption Agreement, regardless of the reason for termination or immediate payment. Finally, no justiciable controversy existed regarding their right to payment under the Redemption Agreement because AWD consistently acknowledged this right and tendered payment, which appellants refused.
Concurring - Kem Thompson Frost, Justice
Yes, a corporation's sale of all or substantially all of its assets qualifies as "in the usual and regular course of business" under TBCA Article 5.09(B), thus denying dissenting shareholders appraisal rights, if the corporation continues to exist and engage, directly or indirectly, in any business after the sale. Justice Frost concurred in the judgment, agreeing that AWD's sale of assets did not trigger dissenter's rights, but offered a refined interpretation of Article 5.09(B). The concurrence noted that Texas's definition of "usual and regular course of business" is unique and broad, effectively eliminating the necessity for shareholder approval and appraisal remedies in many transactions that would otherwise be considered extraordinary. Article 5.09(B) is ambiguous because "continue to engage in one or more businesses" could mean continuing in pre-existing businesses or any business. However, considering the legislative history and the second part of Article 5.09(B) (applying consideration to any business post-transaction), the Legislature intended a broad interpretation. While this construction effectively "eviscerates" shareholder protections and leaves minority shareholders vulnerable to fundamental corporate changes without approval or appraisal remedies, it reflects the Legislature's policy choice. Therefore, the statute should be construed as requiring that the corporation continue in some business after the asset sale, without regard to whether it's the same business conducted before the sale. It was not necessary to determine whether AWD continued specifically in the legal services business, only that it continued in some business as a partner in HSAW. The concurrence also criticized the majority's reliance on post-enactment Bar Committee comments and an article as relevant legislative history.
Analysis:
This case significantly curtails dissenter's rights for Texas corporations by broadly interpreting "usual and regular course of business" under TBCA Article 5.09(B). The decision allows corporations to undergo fundamental changes, such as transferring all operating assets to a new entity and becoming a passive investment holder, without triggering statutory shareholder approval or appraisal rights, so long as any form of business activity continues. This ruling highlights the unique and shareholder-unfriendly nature of Texas corporate law compared to the Model Business Corporation Act, shifting substantial power to corporate boards to restructure without minority shareholder consent. Future corporate transactions in Texas may be structured to explicitly leverage this interpretation, minimizing shareholder input and recourse during major reorganizations.
