Breach of Fiduciary Duty in Closely Held Corporations

Controlling shareholders of closely held corporations owe the other shareholders and the company a fiduciary duty. A breach of this duty can lead to harsh consequences. For example, a shareholder or the company can seek to remove a shareholder who breaches their fiduciary duty. The following is more on breach of fiduciary duty in closely held corporations.

When an individual owes another individual or an entity a fiduciary duty, that individual has the responsibility to act in the best interest of the other individual or entity. As already stated, in a closely held corporation, controlling shareholders, otherwise known as majority shareholders, have a fiduciary duty to the other shareholders and the company. But, even non-controlling shareholders can have fiduciary duties toward one another and the corporation.

The following are some of the fiduciary duties shareholders in a closely held corporation may owe other shareholders and the corporation;

• Duty to act in good faith
• Duty to be honest
• Duty to be loyal
• Duty not to compete
• Duty of fair dealing

The following are some of the breaches that are common in closely held corporations;

• Paying those in control excessive compensation
• Excluding a shareholder from corporate information
• Not following corporate formalities in notice and holding of meetings
• Denying a shareholder access to inspect records
• Diversion of corporate opportunities
• Physically locking out a shareholder who is an employee

Generally, what happens after a shareholder breaches their fiduciary duty depends on the position of the violating shareholder. That said, it is vital to note that if the company fails to act, shareholders have the right to act on behalf of the company.

Suppose the violating shareholder is also an officer or director. In such a case, the other shareholders can vote, and if the majority of shareholders vote to remove the violating shareholder from their role, they will be removed. If there is a deadlock among the votes, a shareholder or the company can file an action in court or arbitration to remove the violating shareholder.

On the other hand, if the shareholder who breached their fiduciary duty is not an officer or director, another shareholder or the company can file an action in court or arbitration to force the shareholder to sell their shares.

Other consequences that a shareholder can face for breaching their fiduciary duty include paying damages caused by their misconduct.

If a shareholder files an action in court to remove a violating shareholder or force a violating shareholder to sell their shares, they might incur attorney fees. In such a case, if the shareholder is successful, the company may pay the attorney fees incurred by the shareholder.

Whether you are a shareholder who is wondering what to do after another shareholder has breached their fiduciary duty or the shareholder being accused of breaching your fiduciary duty, it is crucial that you reach out to an attorney for legal guidance. Talk to our business law attorney at SAC Attorneys LLP.