Chapter 2-9 Dissenting Shareholders Suits

• Jurisdiction: United States

2-9 Dissenting Shareholders Suits

2-9:1 Overview

During the course of its life, a business entity may undertake one or more fundamental transactions or changes. Owner approval is generally required for these fundamental actions. Because these fundamental actions do not normally require unanimous consent from the entity's owners, several owners might be compelled to acquiesce to a fundamental action which they don't want the entity to participate in. The Texas Legislature has enacted a remedy for these dissenting owners. A dissenting shareholder suit is a cause of action which seeks to provide a dissenting owner the fair value of his ownership interest. In order to receive fair value, the owner must strictly comply with the procedural rules outlined by the Texas Legislature.

2-9:1.1 Related Causes of Action

Shareholder Oppression, Breach of Fiduciary Duty, Breach of Partnership Duty, Derivative Shareholder Suits

MUST READ CASES & STATUTES

Farnsworth v. Massey, 365 S.W.2d 1 (Tex. 1963)

Gannon v. Baker, 807 S.W.2d 793 (Tex. App.—Houston [1st Dist.] 1991), writ granted (Nov. 6, 1991), rev'd in part on other grounds, 818 S.W.2d 754 (Tex. 1991)

Texas Business Organizations Code Annotated Sections 10.351-10.368

2-9:2 Elements

(1) An owner

• The owner can be:

• A shareholder in a

• Domestic for-profit corporation;
• Professional corporation;
• Professional association; or
• Real estate investment trust;²³²
• Partnership or LLC owners provided rights of dissent and appraisal within the organization's governing documents.²³³

(2) Of a qualifying entity

• To qualify, the entity must be one of the following:

• A domestic for-profit corporation;
• A professional corporation;
• A professional association;
• A real estate investment trust;²³⁴ or
• A partnership or limited liability company that expressly provides its owners a right of dissent and appraisal.²³⁵

(3) Which proposes to make a qualifying entity action

• An owner has dissent and appraisal rights from the following actions:

• A plan of merger to which the domestic entity is a party if owner approval is required by this code and the owner owns in the domestic entity an ownership interest that was entitled to vote on the plan of merger;
• A sale of all or substantially all of the assets of the domestic entity if owner approval is required by this code and the owner owns in the domestic entity an ownership interest that was entitled to vote on the sale;
• A plan of exchange in which the ownership interest of the owner is to be acquired;
• A plan of conversion in which the domestic entity is the converting entity if owner approval is required by this code and the owner owns in the domestic entity an ownership interest that was entitled to vote on the plan of conversion; or
• A merger effected under Texas Business Organizations Code Section 10.006 (Short Form Merger) in which:

• The owner is entitled to vote on the merger; or
• The ownership interest of the owner is converted or exchanged;²³⁶

• An owner does not have dissent and appraisal rights from a merger or conversion where there is only one surviving entity, or from any plan of exchange in which:

• The owner's ownership interest is:

• Traded on a national stock exchange; or
• Held of record by at least 2,000 owners;

• The owner is not required to accept consideration that is different from consideration offered to other owners of the same class or series; and
• The owner is not required by the terms of the plan of merger, conversion or exchange, as appropriate, to accept for the owner's ownership interest any consideration other than:

• (A) ownership interests, or depository receipts in respect of ownership interests, of a domestic entity or non-code organization of the same general organizational type that, immediately after the effective date of the merger, conversion or exchange, as appropriate, will be part of a class or series of ownership interests, or depository receipts in respect of ownership interests, that are:

• Listed on a national securities exchange or authorized for listing on the exchange on official notice of issuance; or
• Held of record by at least 2,000 owners;

• (B) cash instead of fractional ownership interests or fractional depository receipts the owner would otherwise be entitled to receive; or
• (C) any combination of the ownership interests or fractional depository receipts and cash described by Paragraphs (A) and (B).²³⁷

(4) Owner sends written notice objecting to that action

• If the proposed action is to be submitted to a vote of the owners at a meeting, the owner must give to the domestic entity a written notice of objection to the action that:

• Is addressed to the entity's president and secretary;
• States that the owner's right to dissent will be exercised if the action takes effect;
• Provides an address to which notice of effectiveness of the action should be delivered or mailed; and
• Is delivered to the entity's principal executive offices before the meeting;²³⁸

(5) Owner dissents from the action

• The owner must dissent from the action:

• The owner must vote against the action if the owner is entitled to vote on the action and the action is approved at a meeting of the owners; and
• The owner may not consent to the action if the action is approved by written consent;²³⁹

(6) Owner makes a timely written demand on the responsible organization

• The owner must give to the responsible organization a demand in writing that:

• Is addressed to the president and secretary of the responsible organization;
• Demands payment of the fair value of the ownership interests for which the rights of dissent and appraisal are sought;
• Provides to the responsible organization an address to which a notice relating to the dissent and appraisal procedures may be sent;
• States the number and class of the ownership interests of the domestic entity owned by the owner and the fair value of the ownership interests as estimated by the owner; and
• Is delivered to the responsible organization at its principal executive offices at the following time:

• Not later than the 20th day after the date the responsible

...