Fiduciary Duties of Controlling Shareholders
Controlling shareholders own a majority of a company's stock or influence most of a corporation's board of directors. That larger claim means dominant shareholders owe specific responsibilities to minority shareholders and the corporation at large. But the law is unsettled on just how substantial those controlling shareholders' obligations are. Several cases outline circumstances in which controlling shareholders can set aside the interests of minority shareholders, and new precedents in this area of corporate law continue to emerge.
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Legal Foundation
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The legal underpinning regarding controlling stockholders' fiduciary duties dates to the mid-1970s, when courts found that majority shareholders must operate on the good-faith standards that apply to a company's partners. The notion that controlling stockowners owe fiduciary duties comes from their ability to impose their will in ways resembling the power reserved for the board of directors. Controlling shareholders often elect directors, giving stockholders the ultimate influence and the accompanying fiduciary duties. Controlling shareholders can be personally liable for damages if they violate their fiduciary obligations.
Ambiguities
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Uncertainty reigns among rules governing fiduciary duties. Court decisions have not answered whether majority stockholders owe a primary duty to other shareholders, or whether their foremost responsibility is to the company. In situations involving a minority shareholder's employment with the company, that minority stockowner claims fiduciary duty. Some courts have found fiduciary duty applies only when a majority stockholder benefits at a company's expense, while others have ruled that controlling stockowners violate their responsibilities if they enrich themselves without providing the same benefits to minority shareholders. Still other courts have opined that fiduciary duties hold in matters related to corporate assets, but not in operational issues.
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Exceptions
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Fiduciary duties don't apply without exception. For example, setting aside one's own interests is a key element of fulfilling fiduciary duties, but controlling stockowners have the right to operate in their own interests when they're acting exclusively in their position as shareholders. Also, owning a majority of a company's stock doesn't always translate into substantial power over a board of directors or a business. When directors act on the wishes and demands of minority stockholders, the fiduciary duties imposed on controlling shareholders loosen. And though a majority stockowner can breach his duties and face personal responsibility if he sells his interest to predatory buyers, that responsibility holds only if the controlling shareholder knew the buyer was dishonest.
New Laws
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Case law regarding fiduciary duties continues to change. Earlier legal thinking regarded controlling stockownership as tantamount to corporate partnership. Emerging interpretation holds that controlling stockownership differs significantly from partnership, because not even majority shareholders can manage or bind other stockholders. Thus do stockowners lack the power and dependence of fiduciaries. Corporate officers and directors do maintain such power and dependence, and may have more of a fiduciary duty than any shareholder.
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References
- "Hofstra Law Review"; Controlling Shareholders Owe No Duty to the Minority; Paula Dalley; November 2005
- DealLawyers.com: VC Strine Addresses Duties of Selling Controlling Shareholder
- Weil, Gotshal & Manges: Fiduciary Duties of Controlling Shareholders
- Lawyers.com: Fiduciary Responsibilities - Corporations
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