April 22, 2022

When Do Minority Shareholders Owe Fiduciary Duties?

Most corporate lawyers have a Delaware-centric view of the world and expect that most other U.S. jurisdictions will fall in line with Delaware when it comes to major corporate law doctrines. That’s often a safe bet, but as this Arendt Fox Schiff memo points out, it isn’t when it comes to whether minority shareholders owe fiduciary duties.

Delaware says that minority shareholders generally don’t owe fiduciary duties, unless they can be squeezed into the controlling shareholder box.  But most states don’t agree with Delaware – at least in the case of close corporations. This excerpt from the memo discusses how the positions adopted by several of those states would apply in the case of hypothetical involving a minority shareholder of a shipping company who learns of an opportunity to contract with a trucking company for its own business at a discount to what the shipping company currently pays for its trucking contract:

In jurisdictions like Illinois that follow the majority approach, shareholders of closely held corporations typically owe each other fiduciary duties by virtue of their status as shareholders. But there are variations across jurisdictions.

Indiana: Indiana courts closely follow Illinois’s approach, where shareholders of closely held corporations owe fiduciary duties even if they are not directors or officers of the corporation. If Corporation is an Indiana closely held corporation, then Shareholder likely cannot pursue the discounted trucking contract for personal use without first disclosing the opportunity to Corporation and giving Corporation an opportunity to pursue it.

New York, Massachusetts, and D.C.: Minority shareholders of New York closely held corporations owe each other the duty of good faith and a high degree of fidelity. Similarly, shareholders of Massachusetts closely held corporations owe each other and their corporations the duty of utmost good faith and loyalty, and shareholders in D.C. closely held corporations owe each other the highest degree of good faith and must deal fairly, honestly, and openly with each other. These are heightened standards that closely resemble the duties that partners owe each other. If Corporation is a New York, Massachusetts, or D.C. closely held corporation, then it is unlikely that Shareholder can pursue the discounted trucking contract absent disclosure of the opportunity to and approval by Corporation.

Michigan: Under Michigan law, minority shareholders of close corporations owe fiduciary duties only in certain circumstances, such as when those shareholders also participate in company management. Whether minority shareholders of close corporations in Michigan owe fiduciary duties is a context-dependent analysis and will vary depending on the relationship of the shareholders to the company. It is possible that, under Michigan law, Shareholder could safely pursue the discounted trucking contract without disclosure to and approval from Corporation, because Shareholder may not owe fiduciary duties to Corporation.

Many states have “close corporation statutes,” and while states typically impose fiduciary duties only on minority holders in close corporations, the memo says that most states adopt a functional approach to deciding whether to classify an entity as a close corporation, and don’t require the entity to have been established in conformity with a close corporation statute.

John Jenkins