THE BLOG
01/12/2015 12:19 pm ET Updated Mar 14, 2015

A Different Type of Attack on Minority Rights in Texas

When it comes to the issue of "minority rights," thoughts immediately wander to race, gender, age, or sexual preference. In the state of Texas, there is a different type of minority rights battle at stake and the war over it went all the way to the Texas Supreme Court.

Recently I interviewed Lee Kaplan on the Price of Business show. Kaplan is a prominent business litigator with the law firm of Smyser, Kaplan, and Velselka and he was on to discuss this issue. In the interview, he said that in 2014 the Texas Supreme Court, "with a decision of 6 to 3, overturned 25 years of precedent when it came to minority shareholder rights". He called this a "surprising decision" and that the court has essentially curtailed many shareholder rights.

Because of this decision, on a very practical level, minority shareholders will need to have explicit rights and authorities in their contracts with the businesses they invest with or the presumption will be that the company itself has little responsibility to comply with the interest of those owners. He pointed out, for example, that if the management of a firm has majority ownership of that company, and they are interested in dramatically increasing their salaries, there is very little minority shareholders can do about it, no matter how unhappy they are with that situation.

I asked Kaplan if lawyers were the beneficiary of the decision and he said, "certainly not", because many minority shareholders won't even bother trying to fight a case because they know they cannot win. Furthermore, this decision seems to have retroactively taken the rights away of minority shareholders. It is a very far-reaching case and has the potential of having a chilling effect on the way investors look at getting involved in a company. After all, since it happened retroactively in Texas, it could possibly happen anywhere.

This court decision is certainly going to force minority shareholders to fight far more aggressively on the front end to assure their rights going forward. There are, however, certain protections still assured under the statute according to Kaplan. These include having access to company records and reports. But as a rule, rights for minority shareholders are dramatically curtailed under this court decision.

So I asked who the winners were in this decision and wondered if such a case might attract more businesses to Texas. Kaplan believes that it is too early to say if there are any winners, but it is certainly not those who have invested in a minority position. He argues that it is inaccurate to think this case will reduce the number of court cases that will come up. In fact, he says, there were very few before because majority interest owners easily had addressed the issues of the minority on the front end in order to avoid such cases in the future.

The Texas Supreme Court is noted for being one of the most conservative in the country, so this decision seems odd for a group that is often critical of those who "legislate from the bench". Kaplan argues that is exactly what has taken place, in his opinion, because the court has largely -- and arbitrarily -- changed the rules for minority shareholders.

It may take some time, but this court decision could, in fact, have a negative impact on an otherwise economically red hot state. When start-ups are in the process of seeking funding for their great entrepreneurial endeavor, potential shareholders with only a minority stake could think twice before taking action.