Minority Shareholder Right

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Rights of Limited Partners in the Face of a General Partner’s Self-Dealing

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Limited partnerships have in large measure been replaced by limited liability companies as the passive investment vehicles of choice.  But, they are still relevant because they are still sometimes used and there are many legacy limited partnerships that are still in existence.

On the surface, it appears limited partners have very few rights and protections.  They are not allowed to participate in management or to second guess the general partner’s actions.  However, while the law requires that they stay passive insofar as management is concerned, it does afford them a number of protections to assure that their financial interests are not abused.

"A limited partner is not in the hopeless position where he must only suffer in silence when an alleged wrong occurs. He has a right of full and free access to information contained in the partnership books, and of all things affecting the partnership, as well as a right to formal accounting." Millard v Newmark & Co., 24 AD2d 333, 336 (lst Dep' t, 1966).

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Fiduciary Duties of Majority Shareholders in New York -- What the Courts Say

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Duty of Good Faith

Fender v. Prescott, 101 A.D.2d 418,422 (1st Dept. 1984):

[T]he relationship between shareholders in a close corporation, vis-à-vis each other, is akin to that between partners and imposes a high degree of fidelity and good faith.

As was observed by Chief Judge Cardozo in Meinhard v. Salmon, 249 N.Y. 458, 164 N.E. 545, 546 (1928) : "A trustee is held to something stricter than the morals of the market place. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior."

The strict standard of good faith imposed upon a fiduciary may not be so easily circumvented.

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Protection of Minority Shareholder Rights and Shareholder Oppression Doctrine in Texas

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What can minority shareholders do in under Texas law to protect themselves against unfair treatment, including “squeeze-outs”, “freeze-outs” and the taking of disproportionate benefits by the majority? 

Texas recognizes both the shareholder oppression doctrine and “breach of fiduciary duty” theories in close corporations to protect the rights of minority shareholders.

The Dissolution Statute:

The Texas corporate dissolution statute, Article 7.05 of the Texas Business Corporation Act, provides for the appointment of a receiver and the possibility of dissolution when an aggrieved shareholder establishes “illegal, oppressive, or fraudulent” conduct by directors or those in control. 

Of significance, Texas Courts have used this statute as a basis to fashion a broad range of remedies less harsh than dissolution, where they find that minority shareholder rights have been abused.

What is Oppressive Conduct?

Though illegal and fraudulent conduct is fairly easy to identify, oppressive conduct is less readily definable.  One of the leading cases in Texas, Davis v. Sheerin, adopts the language of New York’s Matter of Kemp for oppression, and defines “oppressive conduct” as follows: