Shareholder Disputes in a Closely Held Texas Corporation: Your Options

What makes a corporation closely held, and why it matters

Section 21.563 of the Business Organizations Code defines a closely held corporation as one with fewer than 35 shareholders and no shares listed on a national securities exchange or regularly quoted in an over-the-counter market. The definition matters because it unlocks a simpler route to court for shareholder claims, discussed below. It also describes the economic reality that drives these disputes: there is no market for your shares, so the only buyer is the other owners, and control of the board means control of salaries, dividends, hiring and information. A minority shareholder in a public company sells; a minority shareholder in a Dallas family or founder corporation negotiates or litigates.

The toolkit, in rough order of escalation

1. Inspect the records

A shareholder who has held shares for at least six months or holds at least five percent of the outstanding shares may, on written demand stating a proper purpose, examine and copy the corporation's books, records of account, minutes and share transfer records (section 21.218). The company owes the shareholder's costs and attorney's fees if it wrongly refuses (section 21.222). This is the first move in almost every dispute, and its procedure is set out in a shareholder's right to inspect corporate records in Texas.

2. Enforce the shareholders' agreement

Section 21.101 allows the shareholders of a corporation to agree, in the certificate, the bylaws or a separate written agreement signed by all shareholders, to things an ordinary corporation cannot do: restrict or eliminate the board, name the directors and officers and set how they are removed, fix distributions other than pro rata, allocate voting power, set terms for dealings between the corporation and a shareholder, provide for arbitration or a tie-breaker in deadlocks, and require the corporation to wind up at a shareholder's request or on a stated event. If your corporation has such an agreement, most of your rights are in it, and they are enforced as a contract.

3. Vote

Directors are elected by the shareholders and, under section 21.409, may be removed with or without cause by a majority of the shares entitled to vote at a meeting called for that purpose, unless the certificate or bylaws provide otherwise. A shareholder or group with a majority can replace the board and therefore the officers. A minority cannot, which is why the remaining tools exist.

4. Challenge interested transactions

Directors and officers who pay themselves, lease to the corporation or contract with their own entities must satisfy section 21.418: disclosure and approval by disinterested directors or shareholders in good faith, or fairness to the corporation. A transaction that satisfies neither is voidable and supports a claim for breach of the duty of loyalty.

5. Sue for breach of duty, directly

Officers and directors owe the corporation duties of loyalty and care. Ordinarily a shareholder enforces those duties derivatively, on the corporation's behalf, after a written demand and a 90-day wait. Section 21.563 lifts that procedure for closely held corporations: the derivative-proceeding rules in sections 21.552 through 21.560 do not apply to a shareholder's claims against a director, officer or shareholder, and if justice requires the court may treat the claim as the shareholder's direct action and order any recovery paid to the shareholder rather than the corporation. That changes everything about who controls the case and who gets the money. The mechanics are in suing on behalf of the company.

6. Receivership and liquidation

Section 11.404 lets a shareholder ask the district court to appoint a receiver to rehabilitate the corporation where it is insolvent, where the directors are deadlocked and the shareholders cannot break it and irreparable injury is threatened, where the directors' acts are illegal, oppressive or fraudulent, where corporate property is being wasted, or where the shareholders have been deadlocked for two years over electing directors. The court must find lesser remedies inadequate. Liquidation under section 11.405 is a further step. Both are explained in asking a court to appoint a receiver or dissolve a Texas company.

The recurring disputes

Example

Suppose a Dallas printing corporation has four shareholders: two brothers at 35 percent each who run it, and two investors at 15 percent each. The brothers, as the board, double their own salaries, hire their spouses, lease the plant from an entity they own at above-market rent, and declare no dividends for five years. One investor sends a records demand under section 21.218, obtains the payroll and the lease, and sues the brothers for breach of the duty of loyalty and violation of section 21.418. Because the corporation is closely held, section 21.563 lets him sue without the derivative demand procedure, and the court may treat the claim as his own and award his share of the excess compensation and rent directly to him. The brothers' exposure, plus the fee award on the records claim, usually produces a buyout negotiation at a price informed by the corrected financials rather than by the brothers' first offer.

How these cases end

With a buyout, in most instances. Texas courts cannot order one as an oppression remedy, but the claims above create exposure that makes one rational, and a shareholders' agreement often provides the mechanism and the valuation standard. The pricing fights are described in how a partner buyout is priced and enforced in Texas. Where no buyout can be reached, the alternatives are a receiver, a sale of the whole company, or a judgment that reallocates money without changing who owns what.

Which court

District court in the county of the corporation's registered office or principal place of business for receivership, and for most claims. Where more than $5 million is in controversy and the dispute concerns the corporation's governance or internal affairs, a derivative claim, or a director's or officer's breach of duty, the Texas Business Court has concurrent jurisdiction (Government Code section 25A.004(b)); a publicly traded party removes the threshold. Arbitration clauses in shareholders' agreements are enforced and move the whole dispute out of court.

Deadline

Four years for breach of fiduciary duty and for breach of a written shareholders' agreement under Civil Practice and Remedies Code section 16.004. A records claim accrues on refusal of a proper demand. Each year's excess compensation is a separate accrual, so acting sooner preserves more years.

When to involve a litigator

When the records demand is refused, or when the response confirms what you suspected. From that point the choice of claims and the framing under section 21.563 determine both your control of the case and where the money goes. Tina Wysk represents majority and minority shareholders of closely held corporations in Dallas state and federal courts and in arbitration.