Do I as a majority stockholder have a fiduciary duty towards minority stockholders?

Lets say John is the majority stockholder and managing director of a small real estate firm that manages and supervises residential and commercial realtors.  Jane is the minority stockholder in the business, knows her way around the industry and thinks that the business has huge potential for growth and success.  John on the other hand likes the size and manageability of the firm as it currently stands.  John therefore makes sure that the business pays out as much in dividends as possible to the stockholders, and doesn’t leave anything left over to invest in and expand the business.  John is in the business for the long haul, and so is Jane, but she feels trapped because she can’t get out of the business and receive the true value of her shares based on the current size and condition of the company.  What rights does Jane have and what obligations does John have towards Jane when making decisions for the business.

 

The Supreme Court said in Southern Pacific Co. v. Bogert, 250 U.S. 483, 487-88: “The majority has 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.”  There is a distinction between a stockholder voting as a stockholder, and when that stockholder votes as a director.  “[W]hen he votes as a director he represents all the stockholders in the capacity of a trustee for them and cannot use his office as a director for his personal benefit at the expense of the stockholders.” Zahn v. Transamerica Corporation, 162 F.2d 36 (3rd Cir. 1947).

 

The Supreme Court also held: “A director is a fiduciary . . .So is a dominant or controlling stockholder or group of stockholders . . . Their powers are in trust . . . Their dealings with eh corporation are subjected to rigorous scrutiny and where any of their contracts or engagements with the corporation is challenged the burden is on the director or shareholder not only to prove the good faith of the transaction but also to show its inherent fairness from the viewpoint of the corporation and those interested therein.” Pepper v. Litton, 308 U.S. 295, 306 (1939).

 

Yes, majority stockholders have fiduciary duties towards minority stockholders.  This does not however, give the minority the power to hold the majority hostage according to their every whim and fancy.  Minority stockholders aren’t able to control the business in the same way that majority stockholders can.  But the majority shareholder needs to take the minority’s wants and desires into account when making decisions as the director of the company.

 

Contact your local counsel to determine the best ways to implement these ideas into your business.

 

Photo By: Moyan Brenn