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Tyranny of the Majority: Fiduciary Duties to Minority Shareholders

I’ve written previously about fiduciary duties in the context of closely held LLCs and corporations in North Carolina, as well as direct versus derivative actions to enforce the same. Generally speaking, LLC members and corporate shareholders do not owe a fiduciary duty to one another, or to the company itself for that matter. Fiduciary duties normally arise by way of the member or shareholder’s status within the company. However, North Carolina recognizes the potential for majority shareholders to take advantage of their control over the company’s affairs and imposes a fiduciary duty on the majority shareholders to the minority shareholders. This duty applies equally in the LLC member context.

General Rule

Shareholders who are in control of a corporation have a direct fiduciary duty to the minority shareholders of the corporation. The majority shareholders do not have to occupy a position within the corporation, but rather represent more than 50% of the voting shares, either individually or as a group of shareholders working together to form a majority. The reason for this duty is because the majority shareholders largely control the company, even though the officers and directors control the day-to-day operations. Majority shareholders elect directors and officers. It would be easy for majority shareholders to take actions that would benefit themselves and harm the minority shareholders.

What Constitutes Minority Ownership?

The courts will generally only impose a fiduciary duty to shareholders who are minority in fact and in operation. If a minority shareholder is part of the control group – i.e., a 5% shareholder working with a 50% shareholder – the court will not protect that shareholder. However, if a majority shareholder is acting alone and represents a majority stake, the minority shareholders will be protected. Additionally, courts generally do not impose fiduciary duties where the company is owned 50-50 – neither shareholder is a minority owner.

What Duties are Owed?

Generally, majority shareholders have an obligation of good faith and the duty to act in the best interests of both the corporation and all of its shareholders. The Court of Appeals has previously held that “[i]t is the fact of control of the common property held and exercised, and not the particular means by which or manner in which the control is exercised, that creates the fiduciary obligation on the part of the majority stockholders in a corporation for the minority holders.” Norman v. Nash Johnson & Sons’ Farms, Inc., 140 N.C. App. 390, 407 (2000). The individual duty to minority shareholders allows a minority shareholder to bring a direct action against the majority shareholder(s) for breach of fiduciary duties. Nevertheless, a minority shareholder does not owe a fiduciary duty to another minority shareholder.

It is important to evaluate the strength of your claim with a competent business litigation attorney before moving forward with a civil action.