What Are Shareholders' Duties?

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Being a shareholder is more about rights than duties. You have the right to vote for company directors and the right to let directors know your views on their decisions. The directors run the company, however -- shareholder control is usually indirect. If you're a majority stockholder in a closely held company -- one with few shareholders -- you have more control, so the rules change. Controlling shareholders have a duty to treat other investors fairly.

Controlling Shareholder

A closely held company is one in which five or fewer people own more than half the stock. A shareholder or group of shareholders who own a majority interest have the power to replace the board of directors, which gives those owners great influence. Courts have ruled that majority owners have a duty of "intrinsic fairness." If you're a controlling owner, you have an obligation to be open in your arrangements with the company, deal fairly with minority owners and set a fair price on your dealings with the firm.

Unfair Dealings

You can violate the intrinsic fairness standard if, for example, you arrange to have the company buy back some of your shares, but nobody else's. Other violations would be having the company contract with another business you own and paying you more than the market rate or squeezing out the other shareholders so you have full control. If the minority sues, you have to prove your dealings were fair. If, however, you can show the minority shareholders or disinterested directors approved the deal, the burden of proof is on the plaintiff to prove you were unfair.

Selling Stock Responsibly

As a majority shareholder, you have a fiduciary duty to use your best judgment and act in good faith when making decisions for the company. For example, if someone offers to buy your controlling interest, you have an obligation to investigate the offer and the buyer. If the buyer shows signs she's going to gut the company to turn a quick profit, you have to protect the other shareholders, not just think of the money you'll make from selling out.

Standards of Fairness

The law doesn't say that you can't get a better deal out of a stock sale than a minority owner. In California, for example, courts have found "bad faith" only when there's evidence of wrongdoing. For example, if a majority stockholder gets a premium offer for his shares and misrepresents the facts to the minority shareholders, that would be bad faith. When a shareholder breaches his duties, the minority owners can sue for damages.

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