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Classic Shareholder Oppression

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Being a shareholder in a corporation, a partner in a limited partnership, or a member in a limited liability company, opens up opportunities for the shareholder, partner, or member to be oppressed.  The minority owners can be subject to what Texas courts refer to as shareholder oppression.

Shareholder oppression is not particularly well defined, though, by Texas courts. Some examples of squeeze out could be maliciously suppressing the payment of dividends owed, making improper personal loans, paying personal expenses from corporate funds, and diverting corporate opportunities. Ultimately, these tactics are designed to deprive the minority shareholder, partner, or member of the value of their ownership.

In closely held entities, a majority shareholder, partner, or member owe fiduciary duties to the minority owners. The facts giving rise to the shareholder oppression can also give rise to a breach of fiduciary duty claim. The existence of such a duty depends on the circumstances. For example, a fiduciary duty exists if a confidential relationship exists. A fiduciary relationship is an extraordinary one and will not be lightly created. The mere fact that one subjectively trusts another does not alone indicate that confidence is placed in another in the sense demanded by fiduciary relationships because something apart from the transaction between the parties is required.

A fiduciary relationship may be created by contract, through the repurchase of a shareholder’s stock in a closely held corporation, in certain circumstances in which a majority shareholder in a closely held corporation dominates control over the business, and in closely held corporations in which the shareholders operate more as partners than in strict compliance with the corporate form.

Knowing one’s obligations in a corporation, partnership, or limited liability company are important considerations in a smooth operation of the business, making sure there is harmony and not dissension in the ranks.

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