Control shareholders have a fiduciary duty to the minority shareholders to act with “good faith and inherent fairness.” As such, majority owners have a fiduciary responsibility not to use their influence to engage in self-dealing, including actions that are unfairly prejudicial to the minority shareholders. Majority owners thus should not divert business opportunities, funds or compensation to their benefit, excluding minority owners from that same benefit. This is particularly the case when majority shareholders exercise their power to transfer control of the corporation or its shares.
Here are several examples of the types of change-in-control conduct that, if engaged in by majority owners, would demonstrate bad faith and unfairness to the minority:
However, if the shares sold would not be sufficient to elect a controlling majority of directors at a shareholders’ meeting, the arranged resignations may be invalid as constituting the “sale of corporate office (or directorships).”
Good Faith in Context
It should be noted that no California case has yet held that the premium obtained by a controlling shareholder for his or her shares must be shared with the minority shareholders in every case. In cases where a breach of duty was found, and the control shareholder was required to disgorge the premium, there was some additional element that demonstrated bad faith conduct and breach of the duty of fairness, from among the examples given previously: corporate looting, sale of corporate office, harm to the corporate business, misrepresentations to minority shareholder, or similar misconduct.
Nevertheless, it has been argued that “control” of the corporation is a corporate asset, so that all shareholders should be entitle to share proportionally in any premium obtained by the control shareholders for their shares. Nevertheless, the risk of litigation is high where the control shareholders get a “better deal” for their shares than is available to the other shareholders of the corporation. Controlling shareholders breach their fiduciary duty to the minority where they cause the minority to receive inadequate consideration more disadvantageous than that justified by their minority standing.
The remedy for the minority against the controlling shareholder is an action for damages – either by the corporation (in the form of a derivative suit brought by the minority shareholders) or by the minority shareholders directly (as individuals or as a class of injured shareholders). In any such litigation, minority shareholders can both enforce their rights and recoup their losses if they can demonstrate controlling shareholder misconduct.
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