Monthly Archives: August 2014

FAA Legal Interpretation Presents Problems for Ride Sharing Websites and the Pilots Who Use Them

In an August 13, 2014 legal interpretation letter, the FAA challenges the legality of general aviation “ride sharing” websites such as Airpooler.com, and it raises important issues for pilots relating to potential FAA enforcement actions and problems with insurance coverage.

Airpooler.com is a website designed to facilitate “ride sharing” between private pilots and passengers, essentially pairing pilots and passengers who share a common destination.  The idea is that the pilot and the passenger will split the costs of the flight, resulting in savings for both parties.  Airpooler requested that the FAA provide a legal interpretation stating that private pilots who participate in the website are not violating FAA regulations by carrying passengers or property for compensation or hire.

The FAA interpretation stated that the term “compensation” includes pilots and passengers sharing expenses.  But the FAA also recognized that 14 C.F.R. § 61.113 provides an exception for expense sharing.  (Indeed, this exception is the foundation upon which ride-sharing websites are built.)  The FAA stated that it is not enough for a private pilot to rely on the exception to avoid being deemed to have operated for compensation or hire.  The FAA stated that a “bona fide” “common purpose” with the passengers is required, and the pilot must have his own reason for travelling to the destination.  Thus, the FAA concluded that pilots using ride-sharing websites are acting as common carriers for compensation or hire.

The FAA’s legal interpretation is certainly not beyond question. For example, it is not clear that pilots and passengers using ride-sharing websites lack a bona fide common purpose to travel to the specific, common destination.  (However, courts give significant deference to such agency interpretations.)  Regardless, the FAA’s interpretation presents a clear indication that pilots who utilize ride-sharing websites could face enforcement action for violating the regulations.  Furthermore, the interpretation raises potential insurance issues.  General aviation insurance policies often exclude coverage for flights made for compensation or hire.  Thus, a pilot could face a denial of coverage.  All such issues should be considered by a pilot who chooses to utilize ride-sharing websites in the future.

For a copy of the FAA’s legal interpretation letter, click here.

The Death of Minority Shareholder Oppression Claims in Texas?

Bad news for minority shareholders in Texas.  On June 20, 2014, the Texas Supreme Court delivered the opinion in the case of Ritchie v. Rupe, which is available here.  In one of the most important business law cases decided by the Texas Supreme Court in recent memory, the Court ruled (in a 6-3 decision) that:

(1)   There is no common law cause of action for “minority shareholder oppression” in Texas;

(2)   While shareholder oppression can be asserted under Texas’s court-appointed rehabilitative receivership statute (Section 11.404 of the Texas Business Organizations Code), receivership is the sole remedy for such shareholder oppression (not a buy-out of the minority shareholder being oppressed); and

(3)   The definition of shareholder oppression under the receivership statute is very narrow – it requires that the directors “abuse their authority over the corporation with the intent to harm the interests of one or more shareholders, in a manner that does not comport with the honest exercise of their business judgment, and by doing so create a serious risk of harm to the corporation.”

 

The facts of the Ritchie v. Rupe case involved alleged oppression of an 18% shareholder of a privately held Texas corporation because the majority shareholders who controlled the corporation, among other things, (i) offered to buy out the minority shareholder at a price representing a significant discount to the shares’ fair market value, and (ii) refused to meet and exchange information about the corporation with other potential buyers of the minority shareholder’s shares, thereby making the shares virtually impossible to sell as a practical matter.  The lower courts determined that the facts supported a claim for minority shareholder oppression and required the corporation’s majority shareholder to purchase the minority shareholder’s shares for a redemption price of $7.3 million.  The Texas Supreme Court reversed that ruling on the basis described above, but it left open the possibility that the minority shareholder might still pursue a potential claim against the controlling shareholder for breach of fiduciary duty.

The Ritchie v. Rupe case overturned several lower court opinions and opinions in other states which generally allowed claims for shareholder oppression merely if the majority shareholder’s conduct either (1) substantially defeats the minority shareholder’s reasonable expectations in joining the company (the “reasonable expectations” test), or (2) (i) is “burdensome, harsh and wrongful,” (ii) involves “a lack of probity and fair dealing in the affairs of a company to the prejudice of some of its members,” or (iii) involves “a visible departure from the standards of fair dealing and [fair play]” (the “fair dealing” test).

 

The bottom line is that it is now much more difficult for a Texas minority shareholder to successfully bring shareholder oppression claims in Texas.

 

The take-away is that now it is even more important than ever for shareholders of privately held companies (especially minority shareholders) to enter into shareholder agreements to protect their rights and to provide for a contractual mechanism for a shareholder to exit the company.