Fiduciary Duties of Officers and Shareholders/Members
It is typical that small businesses do not have formal written agreements that govern and formalize the rights, duties and interests of the owners, officers and directors. Business operations and planning are often conducted orally and without documentation. In these circumstances, the principals should be cognizant of and understand their respective fiduciary duties to avoid liability and/or maintain the integrity of the business.
When a person is a fiduciary to another person or a company, they are duty-bound to be open, honest and act in good faith. Fiduciaries cannot merely act in their own self interests but rather must inform and protect the interests of others. Fiduciary duties arise from a range of different relationships such as lawyer/client, trustee/beneficiary, etc. They arise from situations where “confidence is reposed on one side and there is resulting superiority and influence on the other…” Toombs v. Daniels, 361 N.W.2d 801, 809 (Minn. 1985).
There are two areas in which fiduciary duties commonly become an issue in Minnesota businesses. The first relates to the fiduciary duties the officers (or managers in the LLC context) and directors (or governors in the LLC context) have to the company. The second relates to the fiduciary duties shareholders have to each other in the small, closely held business context.
Fiduciary Duties of Officers and Directors:
Officers and directors of a company are fiduciaries to the company. They are required to protect the interests of the company and act in the best interests of the shareholders (including members or partners in the LLC or partnership context). Their fiduciary duties to the company fall into three categories: (i) the duty of care; (ii) the duty of good faith; and (iii) the duty of loyalty.
Generally, the duty of care requires directors and officers to “inform themselves, prior to making a business decision, of all material information reasonably available” and to “act with requisite care” in discharging their duties. Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984). The duty of loyalty generally requires that officers and directors act in the best interests of the company and elevate its interests over their own. Finally, the duty of good faith, although less defined and more subjective, generally arises when a director or officer acts or fails to act with some kind of wrongful intent. See In re Walt Disney Co. Deriv. Litig., 906 A.2d 27 (Del. 2006).
Although business organizations are often established, in part, to insulate operators from liability, failure to act consistent with these duties may expose directors and officers to personal liability. Similarly, if you are a shareholder where the company directors or officers have breached these duties, you may have recourse for any resultant damages.
Fiduciary Duties of Shareholders:
Generally, a shareholder (or member in the LLC context) in a company does not have fiduciary duties relative to the other shareholders. However, in Minnesota, shareholders in “closely held” companies owe fiduciary duties to other shareholders because their relationship is considered tantamount to that of partners in a partnership. A closely held corporation in the corporation context is defined as a “corporation which does not have more than 35 shareholders.” Minn. Stat. §302A.011, Subd. 6a (2007).
Minnesota courts have held that in such circumstances, shareholders owe each other the “highest standard of integrity and good faith in their dealings with each other,” and require each shareholder to deal “openly, honestly and fairly with other shareholders.” Pedro v. Pedro, 489 N.W.2d 789, 802 (Minn. Ct. App. 1992).
Shareholders in closely held companies have no ready market to sell or transfer their ownership interests in the company. As such, they are often subject to unfair treatment by controlling shareholder(s). One common scenario is the shareholder “squeeze out” where the controlling shareholder(s) exclude the non-controlling shareholder from working at the company or from having a voice in management in the company. To provide some remedy for such oppressed shareholders, Minnesota statutes have granted broad powers to Minnesota courts to fashion equitable relief upon a finding that shareholders have acted in an “unfairly prejudicial” manner.
Minnesota courts have held that unfairly prejudicial is conduct that “frustrates the reasonable expectations of all shareholders in their capacity as shareholders or directors of a company.” Haley v. Forcelle, 669 N.W.2d 48, 59 (Minn. Ct. App. 2003). Courts will consider the history of the company and shareholders and any written agreements in determining the reasonable expectations of the shareholders.
These concepts are broad, subjective and somewhat dependent on the facts of each case. Typically, however, a shareholder who is excluded from a company in Minnesota is entitled to receive fair value for his or her ownership interests from the other shareholder(s) or the company. Other equitable remedies that may be appropriate include dissolution of the company, appointment of a receiver or the appointment of a special committee.
It is always better to resolve shareholder disputes through negotiation and reasonable compromise. Mutual fairness is always a key to resolution. However, where parties have acted with fraud and deception, or where dialogue has completely broken down, litigation is often the only option. Cases involving shareholder fiduciary duties are complex and costly. Good representation is imperative in such cases.
