Noncontrolling Shareholders: Fiduciary Duty to the Majority?

In most jurisdictions, in a closely-held corporation, the majority shareholders owe a fiduciary duty to protect minority shareholders. This rule is designed to protect minority shareholders from being ignored and squeezed out by the majority. ?“The basis for finding such a duty on the part of a shareholder in a closely held corporation is its ability, by virtue of actual control of corporate processes, to make decisions that are oppressive to the minority shareholders’ interests.” Electro-Mechanical Products, Inc. v. Alan Lupton Associates Inc., 2023 WL 2613819 (D. Colo. 2023).

But does the same rule apply in reverse, requiring minority shareholders to act as fiduciaries to the majority? Most states do not impose a fiduciary duty on minority shareholders, since they generally lack the power to harm the majority.

As the Colorado federal court noted in Electro-Mechanical Products, there may be an exception for a minority shareholder who exercises actual control over the board of directors. But no fiduciary duty is owed by a minority shareholder who merely has potential control or influence over the board, such as the power to stop a transaction. “Merely being able to stop a transaction does not give a minority stockholder the same level of power that a majority stockholder would have, because a majority stockholder would have the power both to stop a transaction?and to make it happen.” Id. (citing Delaware law).

Thus, in a closely-held corporation, prudent shareholders will seek independent legal advice on their duties to each other. The rule of thumb is that majority shareholders owe a fiduciary duty to minority shareholders. But that rule may not apply when a minority shareholder actually controls the board of directors.