- Duties To Minority Shareholders In A Closely Held Corporation
- March 3, 2008 | Author: Christopher M. Ernst
- Law Firm: Buckingham, Doolittle & Burroughs, LLP - Cleveland Office
Minority shareholders in closely held corporation can expect to be owed a fiduciary duty by the majority shareholders. Fiduciary duties arise out of a relationship that is based on mutual trust, confidence, loyalty and good faith. They require a person to act in good faith, with all due care and with a sense of loyalty. Under Ohio law, it has long been established that officers and directors of a company owe fiduciary duties to the business that they serve. However, the law is shifting to afford more and more protection to minority shareholders to make sure that they are not harmed by the pernicious actions of the majority shareholders.
This shift started several years ago when the U.S. Supreme Court recognized that majority shareholders owed a fiduciary duty to minority shareholders. Realizing that a close corporation is a restrictive environment, because of the small number of shareholders, the lack of a readily available market to be able to sell shares, and the customary control by the majority shareholders in the daily operations of the business; the Supreme Court recognized that majority shareholders had to be charged with the duty of “utmost good faith” when dealing in matters that would affect the minority shareholders.
This standard has been slightly weakened over the years so as not to prevent the majority shareholders from effectively managing the business.
The Ohio Supreme Court followed this basic line of thinking when it recognized that minority shareholders could suffer damages at the hands of majority shareholders that were separate and distinct from those damages suffered by the corporation. Prior to this shift, a minority shareholder could bring an action only as a “derivative action” where the shareholder, in effect, stood in the place of the corporation. In the case, Crosby v. Beam (1989), 47 Ohio St.3d 105, 548 N.E.2d 217, the Court first recognized that a minority shareholder could sue individually, rather than on behalf of the company. This case involved a minority shareholder who alleged that the majority shareholders had acted improperly by paying themselves unreasonable salaries, reimbursing themselves for personal expenses, using company property for personal uses, purchasing life insurance for their personal benefit, and taking improper, low-interest loans from the company (thereby depriving the corporation of interest income). Lastly, it was claimed that all of these acts of wrongdoing were carried out pursuant to a conspiracy between the majority shareholders.
The Ohio Supreme Court ruled that where “majority or controlling shareholders in a close corporation breach their heightened fiduciary duty to minority shareholders by utilizing their majority control of the corporation to their own advantage, without providing minority shareholders with an equal opportunity to benefit, such breach, absent a legitimate business purpose, is actionable. Where such a breach occurs, the minority shareholder is individually harmed. When such harm can be construed to be individual in nature, then a suit by a minority shareholder against the offending majority or controlling shareholders may proceed as a direct action.” As a result, minority shareholders received the ability to stand up for themselves and fight back when the majority shareholders started to abuse their powers.
In the end, Ohio recognizes that majority shareholders have a heightened fiduciary duty to the minority shareholders. Operation of a business to the exclusive benefit of the majority shareholders – and the detriment of the minority shareholders – is not permissible under Ohio law. At Buckingham, Doolittle & Burroughs, LLP, we have great experience in prosecuting and defending matters involving the interrelationships between majority and minority shareholders. We recognize that there are times where significant differences in opinion may occur between shareholders and that those differences may potentially lead to illegal conduct. Prompt and efficient resolution is necessary to make sure that everyone’s rights are protected.