Shareholder oppression lawsuits brought by minority shareholders in Texas corporations are nothing new. In recent years, there have been an increasing number of similar suits filed in a slightly different context: limited liability companies, or “LLCs”. An LLC, like corporation, is a separate legal entity that can own property and conduct business in Texas. However, while the rights of shareholders in corporations are largely governed by statute, the rights of shareholders in a limited liability company (who are typically referred to as “members”) are governed by a company agreement.
The variability and flexibility afforded by company agreements is one of the primary reasons why LLCs have gained such popularity over corporations in the past decades, especially among smaller companies. However, the company agreement is typically written by the person with the largest stake in the new company (or his attorney). And, as you might expect, it often contains more beneficial terms for the majority owners than those that are provided by statute in traditional corporations.
Inevitably, conflicts have arisen between members of LLCs and the question is: What kind of remedies to minority members of LLCs have? In Texas, the answer to that question is still evolving. The standard set forth by the courts so far is that majority members cannot “substantially defeat” a minority member’s “reasonable expectations” so long as those expectations were “central to the minority shareholder’s decision to join the venture.” The case law that exists suggests that the standard is very fact specific, and depends heavily on the individual factual circumstances of the particular investor. However, one thing that is clear: Texas courts will not allow majority owners of LLCs to use company agreements to deprive minority owners of their fundamental rights as investors.
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