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Volume XI, Number 338

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Shareholder Agreements Are Very Powerful In Texas: Parties Should Carefully Review Those Agreements Before Obtaining Stock In A Corporation

The owners of a corporation may enter into shareholder agreements. In Richie, the Texas Supreme Court stated: “Shareholders of closely-held corporations may address and resolve such difficulties by entering into shareholder agreements that contain buy-sell, first refusal, or redemption provisions that reflect their mutual expectations and agreements.” Ritchie v. Rupe, 443 S.W.3d 856, 871 (Tex. 2014).

Regarding shareholder agreements, the Texas Business Organizations Code provides:

(a) The shareholders of a corporation may enter into an agreement that: (1) restricts the discretion or powers of the board of directors; (2) eliminates the board of directors and authorizes the business and affairs of the corporation to be managed, wholly or partly, by one or more of its shareholders or other persons; (3) establishes the individuals who shall serve as directors or officers of the corporation; (4) determines the term of office, manner of selection or removal, or terms or conditions of employment of a director, officer, or other employee of the corporation, regardless of the length of employment; (5) governs the authorization or making of distributions whether in proportion to ownership of shares, subject to Section 21.303; (6) determines the manner in which profits and losses will be apportioned; (7) governs, in general or with regard to specific matters, the exercise or division of voting power by and between the shareholders, directors, or other persons, including use of disproportionate voting rights or director proxies; (8) establishes the terms of an agreement for the transfer or use of property or for the provision of services between the corporation and another person, including a shareholder, director, officer, or employee of the corporation; (9) authorizes arbitration or grants authority to a shareholder or other person to resolve any issue about which there is a deadlock among the directors, shareholders, or other persons authorized to manage the corporation; (10) requires winding up and termination of the corporation at the request of one or more shareholders or on the occurrence of a specified event or contingency, in which case the winding up and termination of the corporation will proceed as if all of the shareholders had consented in writing to the winding up and termination as provided by Subchapter K; (11) with regard to one or more social purposes specified in the corporation’s certificate of formation, governs the exercise of corporate powers, the management of the operations and affairs of the corporation, the approval by shareholders or other persons of corporate actions, or the relationship among the shareholders, the directors, and the corporation; or (12) otherwise governs the exercise of corporate powers, the management of the business and affairs of the corporation, or the relationship among the shareholders, the directors, and the corporation as if the corporation were a partnership or in a manner that would otherwise be appropriate only among partners and not contrary to public policy.

(b) A shareholders’ agreement authorized by this section must be: (1) contained in: (A) the certificate of formation or bylaws if approved by all of the shareholders at the time of the agreement; or (B) a written agreement that is: (i) signed by all of the shareholders at the time of the agreement; and (ii) made known to the corporation; and (2) amended only by all of the shareholders at the time of the amendment, unless the agreement provides otherwise.

Tex. Bus. Orgs. Code § 21.101. See Batey v. Droluk, No. 01-12-01058-CV, 2014 Tex. App. LEXIS 3979 (Tex. App.—Houston [1st Dist.] Apr. 10, 2014, no pet.) (limitations in shareholder agreement was effective).

If properly executed, such an agreement is enforceable: “A shareholders’ agreement that complies with this subchapter is effective among the shareholders and between the shareholders and the corporation even if the terms of the agreement are inconsistent with this code.” Tex. Bus. Orgs. Code § 21.104; Skeels v. Suder, No. 02-18-00112-CV, 2021 Tex. App. LEXIS 4810 (Tex. App.—Fort Worth June 17, 2021, no pet. history). The term of the agreement must be in the agreement. Id. at § 21.012.

There are notice requirements. Tex. Bus. Orgs. Code § 21.103. If a purchaser of shares does not have knowledge of the existence of a shareholder agreement, it is entitled to rescind the purchase. Id. at § 21.105(a). An action to enforce the right of rescission must be commenced not later than the earlier of: (1) the 90th day after the date the existence of the shareholder agreement is discovered; or (2) the second anniversary of the purchase date of the shares. Id. at § 21.105(c). A shareholders’ agreement ceases to be effective when shares of the corporation are: (1) listed on a national securities exchange; or (2) regularly traded in a market maintained by one or more members of a national or affiliated securities association. Id. at § 21.109(a). The Code does not limit other shareholder agreements: “This subchapter does not prohibit or impair any agreement between two or more shareholders, or between the corporation and one or more of the corporation’s shareholders, permitted by Title 1, this chapter, or other law.” Id. at § 21.110.

The court in Skeels v. Suder, stated: “a shareholder agreement, signed by all shareholders and ‘made known’ to the corporation, governs corporate action notwithstanding a contrary provision in the BOC. And shareholders are, therefore, free to agree to stricter or more lenient rights than those provided in the BOC. Accordingly, the terms of any share redemption may be provided in a governing document or an applicable agreement among the members, even if the document or agreement is broader or narrower than the dictates of the BOC.” No. 02-18-00112-CV, 2021 Tex. App. LEXIS 4810 (Tex. App.—Fort Worth June 17, 2021, no pet. history) (internal citations omitted). The court held that a shareholder agreement regarding redemptions rights was enforceable even if it was inconsistent with the Business Organizations Code. Id. “[T]he terms of any share redemption may be provided in a governing document or an applicable agreement among the members, even if the document or agreement is broader or narrower than the dictates of the BOC.” Id. at *21. Partners of a law firm entered into a shareholder agreement that allowed certain individuals to take action. Under that power, they forcibly redeemed one shareholder’s shares for zero dollars. Id. The court of appeals affirmed that under the various documents, it had the right to do so: “The plain language of the Resolution—a shareholder agreement—broadly allowed Friedman, Suder, and Cooke as the Firm’s governing authority to take affirmative action on behalf of the Firm; thus, the trial court did not err by finding that the Resolution governed the redemption of Skeels’s shares on the terms dictated by the Firm’s governing authority.” Id. Accordingly, shareholder agreements are very powerful tools in Texas, and parties should be very careful to review same when entering into a corporation.

© 2021 Winstead PC.National Law Review, Volume XI, Number 232
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About this Author

David Johnson Financial Institution lLtigation Winstead Law Firm Fort Worth Texas
Managing Shareholder - Fort Worth

David maintains an active trial and appellate practice and has consistently worked on financial institution litigation matters throughout his career. David is the primary author of the Texas Fiduciary Litigator blog, which reports on legal cases and issues impacting the fiduciary field in Texas. 

David's financial institution experience includes (but is not limited to): breach of contract, foreclosure litigation, lender liability, receivership and injunction remedies upon default, non-recourse and other real estate lending, class...

817.420.8223
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