Do Minority Shareholders Ever Owe A Fiduciary Duty of Loyalty and Care to the Corporation and/or Other Shareholders?

It may seem surprising to many that Florida law has not clearly prescribed by statute or otherwise what duties, if any, minority shareholders may owe to the corporation and/or to other shareholders.  While minority shareholders in publicly traded or held corporations usually do not owe the same fiduciary duties of loyalty and care owed by officers and directors to the company and to its shareholders, what duties are owed to whom becomes much less clear in the context of closely held corporations.

A closely held corporation usually has no publicly traded market for its stock and often is owned by a small number of stockholders.  The three most common identifying traits of a closely held corporation  are: (1) a small number of shareholders; (2) no ready market for the corporate shares to be bought and sold; and (3) significant majority shareholder participation in the management, control, and operation of the company.  Based upon these characteristics, some authorities have analogized the closely held corporation to an incorporated partnership. If the shareholders of a closely held corporation are treated like partners under the law, some non-Florida courts have reasoned, then these stockholders all owe fiduciary duties to each other and the corporation.

In Donahue v. Rodd Electrotype Co. of New England, Inc., the Supreme Judicial Court of Massachusetts recognized that the close corporation bears striking resemblance to a partnership such that the shareholders of a closely held corporation are held to the same “utmost good faith and loyalty” and “punctilio of honor” as that owed by one partner to another partner in the operation of the partnership.¹ Specifically, the Donahue court held that the action of the controlling stockholders in authorizing the purchase of the former majority shareholders’ shares by the corporation without first providing an equal opportunity to the minority shareholder to sell the shares for the same price constituted a breach of fiduciary duty.² The court’s rationale was that, in the context of a closely held corporation, a majority shareholder has the opportunity to oppress or disadvantage minority stockholders, and while the minority can commence an action against the majority and the board of directors, courts are reluctant to interfere with corporate governance absent a finding of abuse of discretion or bad faith.³

At first blush, it appears that Florida courts were heading in the same direction in approving the Donahue “equal opportunity” principle (sometimes called shareholder-fiduciary rule) that closely held corporations are, in operation, like partnerships between two or three people who contribute capital, skills, experience and labor.  For instance, in Tillis v. United Parts, Inc., the court appeared to approve of the Donahue decision in recognizing that all stockholders in a closely held corporation owe one another a fiduciary duty.⁴

However, other Florida courts have been reluctant to embrace the partnership analogy in the context of closely held corporations.  Not unsurprisingly, the determinative factor in these cases is whether the minority shareholders are in a position to exert control over corporate affairs. For instance, in In re N & D Properties, Inc.¸ the court held that the minority shareholder owed a fiduciary duty to the corporation because the minority stockholder there was an insider who was involved in managing and operating the day to day affairs of the corporation.⁵  In so holding, the 11th Circuit stated that under general corporate theory, “[a] fiduciary . . . includes an officer, director, agent, majority shareholder or a minority shareholder exercising actual control over the corporation.”⁶

In the more recent decision of Zold v. Zold,  the court stated:

When a corporation has more than one shareholder, an officer/shareholder has a fiduciary duty to all shareholders. The corporation is not the personal piggy bank for any one shareholder simply because that shareholder may have a controlling interest in the corporation and is also the chief executive officer.⁷

Therefore, Florida has not conclusively adopted the viewpoint that a minority shareholder in a close corporation owes a fiduciary duty to the corporation and to the other shareholders.  This view has received some criticism because not all closely held corporations are, in operation, like partnerships as the Donahue Court stated.  To avoid future uncertainty regarding the fiduciary duties of shareholders in a closely held corporation, a carefully drafted shareholders’ agreement can clearly delineate these duties.

DISCLAIMER — THIS IS NOT LEGAL ADVICE. You should seek independent counsel to advise you regarding your specific situation, and IN NO EVENT ARE YOU TO RELY ON ANYTHING CONTAINED HEREIN.

• Kara L. Strochlic is a complex commercial litigation attorney with Olive Judd, P.A. Kara concentrates her practice on commercial, corporate, and probate litigation and has both trial and appellate experience.

[1] 328 N.E.2d 505, 593–94 (1975).

[2] Id. at 599.

[3] Id. at 589.

[4] 395 So. 2d 618, 619–20 (Fla. 5th DCA 1981).

[5] 799 F.2d 726, 732 (11th Cir. 1986).

[6] Id. at 731.

[7] 880 So.2d 779, 781 (Fla. 5th DCA 2004).