What Fiduciary Duties Are Owed in a Closely Held Corporation?
What duties do shareholders in Minnesota owe each other? Breach of fiduciary duty claims is asserted when the shareholder relationship has deteriorated. These claims are often factually intensive. They can also be emotionally taxing if the shareholder relationship started from or grew into a friendship or involves claims between family members.
Shareholders of closely held corporations in Minnesota owe one another the duty “to act in an honest, fair, and reasonable manner in the operation of the corporation.” Minn. Stat. § 302A.751, subd. 3a. The common law fiduciary duty, sometimes called the “duty of good faith and fair dealing,” embraces substantive obligations that focus on the outcomes of shareholder conduct and procedural obligations that focus on process. Daniel S. Kleinberger, Why Not Good Faith? The Foibles of Fairness in the Law of Close Corporations, 16 Wm. Mitchell L. Rev. 1143, 1156 (1990).
The Minnesota Court of Appeals held in Gunderson v. Alliance of Computer Professionals, Inc., 628 N.W.2d 173, 186 (Minn. Ct. App. 2001) that:
Those in control of closely held corporations have a substantive obligation, for instance, not to withhold dividends or use corporate assets preferentially. See, e.g., Crosby v. Beam, 47 Ohio St.3d 105, 548 N.E.2d 217, 221 (1989) (stating that majority shareholders breached fiduciary duty by using their controlling power to give themselves benefits not enjoyed by the minority shareholders); Kleinberger, supra, at 1157 (stating that “[i]t is substantively unfair and a breach of fiduciary duty for a controlling shareholder or group of shareholders to appropriate overmuch of the enterprise’s economic benefits” or to “‘freeze out’ minority shareholders, either directly (e.g., by cutting dividends and selectively cutting salaries) or indirectly (e.g., by siphoning off assets to other ventures)”).
All close-corporation shareholders also have a procedural obligation not to engage in oppressive or unfair negotiating tactics that may otherwise “conform to the rough ‘moral[s] of the marketplace.’” Id. at 1160 (quoting Justice Cardozo’s famous admonition in Meinhard v. Salmon, 249 N.Y. 458, 164 N.E. 545, 546 (1928)); see Fewell v. Tappan, 223 Minn. 483, 494, 27 N.W.2d 648, 654 (1947); Evans v. Blesi, 345 N.W.2d 775, 779–81 (Minn.App.1984) (concluding that the use of surprise, bluster, and intimidation to persuade a minority shareholder to sell out violated the duty of good faith and fair dealing), review denied (Minn. June 12, 1984).
Close-corporation shareholders must similarly refrain from arbitrarily exercising discretion or veto power. See, e.g., Smith v. Atlantic Properties, Inc., 12 Mass.App.Ct. 201, 422 N.E.2d 798, 803 (1981) (holding that a shareholder who repeatedly and unjustifiably exercised his contractual right to veto any declaration of dividends was liable to the corporation for damages resulting from the unwarranted retention of earnings).
Likewise, close corporation shareholders owe each other a duty of loyalty, which encompasses an obligation to act with complete candor in their negotiations with each other. See, e.g., Berreman v. West Publ’g. Co., 615 N.W.2d 362, 371 (Minn. Ct. App. 2000) review denied (Minn. Sept. 26, 2000) (recognizing a fiduciary obligation to disclose material information about the corporation); see also Helms v. Duckworth, 249 F.2d 482, 487 (D.C.Cir.1957) (recognizing a fiduciary duty to disclose ulterior motives).
Knowing the fiduciary obligations you owe to your fellow shareholders and what they owe you is essential. Understanding such obligations can help ensure a positive co-shareholder relationship. It can also help safeguard that you are not being exploited or fighting a frivolous claim of a breach.