Minority shareholder fiduciary obligations – are there any?

Long ago, the United States Supreme Court held that majority shareholders “have the right to control; but when it does so, it occupies a fiduciary relation toward the minority, as much so as the corporation itself or its officers and directors.”  S. Pac. Co. v. Bogert, 250 U.S. 483, 487-88 (1919).  And we covered such a fiduciary duty in our posts on June 25, 2022 and June 27, 2022.  (Check them out if you have not already).

But what about minority shareholders?  Do they owe any fiduciary duties to the corporation?  How about their co-shareholders?  The answer comes down to one of control.

In Minnesota, generally only a majority or controlling shareholder owes a fiduciary duty to the corporation or its other shareholders.  Advanced Communication Design, Inc. v. Follett, 615 N.W.2d 285, 293-94 (Minn. 2000).  But if it is a closely held corporation AND the minority shareholder participates “equally in the management of the corporation similar to partners, they may have fiduciary duties to each other requiring them to exercise the highest degree of integrity and good faith in their dealings.”  Id. at 94.

Iowa law provides that “minority shareholders not in control of the corporation do not owe a fiduciary duty to the corporation or its shareholders.”  Cookies Food Products, Inc., by Rowedder v. Lakes Warehouse Distrib., Inc., 430 N.W.2d 447, 451 (Iowa 1988).

In Wisconsin, the fiduciary duty has not been extended to non-majority shareholders.  Estate of Sheppard ex rel. McMorrow v. Specht, 824 N.W.2d 907, 911 (Wis. Ct. App. 2012).

Arizona also imposes a fiduciary duty on shareholders who can exercise control over the corporation, but not with respect to minority shareholders who lack control over the corporation.  Powers Steel & Wire Products, Inc. v. Vinton Steel, LLC, 2021 WL 5495289 (Ariz. Ct. App. 2021).

Whether a fiduciary duty is owed by a minority shareholder to his/her co-shareholders and the corporation comes down to control. If the minority shareholder cannot control the direction of the corporation, generally speaking, the law does not impose a fiduciary duty. It thus is important to understand what the bylaws or shareholder control agreement provides for as it relates to decision making authority. Do decisions require unanimous consent of the shareholders, supermajority consent, or majority consent? If unanimous consent, an argument could be made that the minority shareholder does have control and thus a duty. The same is true if the minority holds enough to prevent a supermajority. But if not, the law is much less likely to recognize a fiduciary duty.

Further, if certain decisions require the consent of a minority shareholder (selling all or substantially all of the assets of the corporation, for example), and the minority shareholder fails to act in the best interests of the corporation (or act at all), the argument of whether there has been a breach by the minority shareholder likely becomes stronger.

While many shareholder disputes involve claims by the minority against the majority, the issue of whether a fiduciary duty is or is not owed by the minority shareholder can become part of what is often contentious and emotional litigation. Such a claim can be one to try to offset the majority shareholder’s wrongdoing or to try to minimize damages for the majority’s wrongdoing. Or it could be one of the rare cases in which a minority shareholder has an ability to control the corporation and breached her/his fiduciary duty.

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