We looked at the fiduciary duties that shareholders owe each other in Minnesota. How do those differ from the other states we are licensed to practice in, namely Iowa, Wisconsin and Arizona? There are some key differences.
The Iowa Supreme Court adopted a reasonableness standard in the Baur v. Baur Farms, Inc., 832 N.W.2d 663 (Iowa 2013) case related to fiduciary duties. In Iowa:
Management-controlling directors and majority shareholders of such corporations have long owed a fiduciary duty to the company and its shareholders. This fiduciary duty encompasses a duty of care and a duty of loyalty. The fiduciary duty also mandates that controlling directors and majority shareholders conduct themselves in a manner that is not oppressive to minority shareholders.
Id. at 673-74 (internal cites omitted).
The Iowa Supreme Court in May of 2022 also just recently reviewed the standard of conduct for Iowa directors, holding:
Corporate directors in Iowa must adhere to “standards of conduct” that require directors to discharge their duties (1) in good faith, and (2) in a manner that the director reasonably believes to be in the best interests of the corporation. Iowa Code § 490.830(1)(a)–(b). Directors also, “when becoming informed in connection with their decision-making function or devoting attention to their oversight function, shall discharge their duties with the care that a person in a like position would reasonably believe appropriate under similar circumstances.” Id. § 490.830(2). These statutory duties generally fall within one of two broad categories of fiduciary duties—a duty of care and a duty of loyalty—that we’ve applied to corporate directors under earlier versions of the Iowa Business Corporation Act.
Meade v. Christie, 2022 WL 1695586 (Iowa Supreme Court May 27, 2022) (internal citations omitted).
If you are a majority shareholder, you owe a fiduciary duty to a minority shareholder. Estate of Sheppard ex rel. McMorrow v. Specht, 824 N.W.2d 907, 911 (Wis. Ct. App. 2012). But that duty has not been extended to nonmajority shareholders. Id.
Wisconsin also set important parameters as to when an individual shareholder can bring a claim directly against a director, holding:
It is true the fiduciary duty of a director is owed to the individual stockholders as well as to the corporation. Directors in this state may not use their position of trust to further their private interests. Thus, where some individual right of a stockholder is being impaired by the improper acts of a director, the stockholder can bring a direct suit on his own behalf because it is his individual right that is being violated.
Notz v. Everett Smith Group, Ltd., 764 N.W.2d 904, 910 (Wis. 2009) (quotation omitted). Such claims also implicate Wisconsin’s business judgment rule which will be the topic of a different blog.
Similar to Iowa and Wisconsin, whether a fiduciary duty is owed in Arizona is an issue of control. “Generally, shareholders do not assume fiduciary duties when they acquire shares in a corporation.” Powers Steel & Wire Products, Inc. v. Vinton Steel, LLC, 2021 WL 5495289 (Ariz. Ct. App. 2021). But a majority shareholder is more akin to an officer or director and “occupies a fiduciary relation to the holders of the minority stock and the corporation, who can only act through him.” Id. (internal quotation omitted). Thus, a majority shareholder with the ability to manage and control a corporation owes the same fiduciary duty as an officer or director. Mims v. Valley Nat’l Bank, 14 Ariz. App. 190 (Ariz. Ct. App. 1971).
Distinguishable from Minnesota, Arizona recently declined to recognize that shareholders in closely held corporations always owe each other fiduciary duties in the Powers Steel & Wire Products, Inc. matter – instead, reaffirming that the issue on whether fiduciary duties are owed is about who can exercise control over the corporation.