David A. Skeels v. Jonathan T. Suder, Michael T. Cooke; and Friedman, Suder & Cooke, P.C. (No. 21-1014; delivered June 23, 2023) arose from a dispute between shareholders in a law firm over the redemption of plaintiff’s shares upon his involuntary termination of employment by the firm. Unable to work out an agreement on the terms of the redemption, plaintiff (Skeels) hired legal counsel to help determine the value of his shares and requested to inspect the firm’s books. The firm refused and demanded that plaintiff voluntarily surrender his shares at a value of zero, allegedly in accordance with the firm’s governing documents. Plaintiff sued for a declaratory judgment that the firm’s governing documents did not contain a redemption provision and that the parties did not agree on a redemption price. The firm counterclaimed for a declaration that the governing documents authorized the firm’s actions and moved for sanctions. The trial court granted the firm’s counterclaim and rendered a take-nothing judgment. A divided Forth Worth Court of Appeals affirmed. SCOTX granted review.
In an opinion by Justice Devine, SCOTX reversed. The Court’s analysis began with applicable provisions of the Business Organizations Code governing professional corporations, specifically the provisions authorizing the corporation to redeem a shareholder’s shares in the event the shareholder continues to provide legal services elsewhere. The statute speaks to shareholder agreements with redemption provisions, which may be inconsistent with the provisions of the BOC. The question thus became whether any of the corporate documents, which included the certificate of formation and a 2014 resolution that authorized the firm’s founders to demand the return of plaintiff’s shares without paying for them. The firm asserted that the language of the resolution, which authorized the founders “to take afTfirmative action on behalf of the firm,” either allowed it set the redemption terms in any manner it chose or constituted a shareholder’s agreement under Chapter 21, BOC.
Applying basic rules of document construction, the Court determined that the broad language of the resolution “[did] not authorize any action without limitation because, textually, ‘affirmative action’ is modified by ‘on behalf of the firm’” (emphasis added). According to Justice Devine, “[a] general, nonspecific authorization to act as an entity’s agent or representative does not independently authorize action the entity would not otherwise be permitted to take. The Firm has not established that [it] has ever been authorized to set the redemption price and other redemption terms without the departing shareholder’s agreement, and the adoption of the 2014 Resolution did not change that.” Absent any provision in the governing documents addressing redemption, therefore, the only thing the resolution did was to appoint the “founders” to act on the firm’s behalf. The firm then argued that its historical practice demonstrated that it never paid money to redeem the shares of departing shareholders and that those shareholders had always executed separation agreements in which they surrendered their shares. But, the Court responded, nothing in the resolution or governing documents gave the founders the authority to “determine the redemption price and terms on both [the firm’s] and [plaintiff’s] behalf.” In fact, plaintiff did not agree on the price and, even if the resolution constituted a Chapter 21 agreement (which the Court declined to decide), “its terms did not independently authorize the Founders to unilaterally determine the redemption terms.” Consequently, the Court reversed the court of appeals and remanded to the trial court.
Chief Justice Hecht filed a brief dissenting opinion on the basis that the resolution, which plaintiff signed, authorized the founders to “unilaterally amend the firm’s governing documents to set the terms of redemption. To hold that [plaintiff] agreed to the one but not the other makes no sense.” In any event, the case is curious because of the miniscule amount in controversy (how much value could plaintiff’s shares really have?) and the protracted litigation over it (seven years—and now it goes back to the trial court for a do-over). What were the real stakes? The only thing we can figure is that someone wanted to make a point, a very expensive point.
