Does a Florida minority shareholder in a closely held corporation owe a fiduciary duty to fellow shareholders?

• Author: Russo-Di Staulo, Francesca

You and your friends form ABC Corp. After a lot of hard work, effort, and time, ABC Corp. becomes very profitable and you and your friends make lots of money. So much money that one of your friends decides that being a 25 percent shareholder in ABC Corp., is not enough. Your friend decides to form another company that will compete against ABC Corp., while retaining his stock interest in ABC Corp. What is your recourse ? Does your former friend, a minority shareholder, owe a fiduciary duty to ABC Corp., and the other shareholders?

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In Florida, the answer is not clear, and the direction the courts seem to have taken may surprise you. While much has been written about the fiduciary duties owed by officers and directors in corporations and the duties of majority shareholders or controlling shareholders in both publicly held and closely held corporations, comparatively little has been said about the minority shareholder's obligations to his fellow shareholders in a closely held corporation.

Instinctively, one would think that because of the unique attributes of a closely held corporation and the perceived common analogy of such corporations to partnerships that the answer would be in the affirmative and that such a duty should be recognized and imposed upon the minority shareholder in this type of corporation. Indeed, this appears to be the direction that the Massachusetts courts have taken on this subject beginning with the decision of Donahue v. Rodd Electrotype Co. of New England, Inc., 367 Mass. 578, 328 N.E. 2d 505 (1975), and the line of cases that have followed in that state. Instead, in Florida, it appears that cases analyzing whether minority shareholders owe a fiduciary duty to a corporation or to the other shareholders are sparse and they appear to leave more room for debate on the subject.

The focus of this article is to highlight for the reader the view that some of the Florida courts have adopted on this subject and to see how they compare with the decisions of the Massachusetts (1) courts, specifically, the Donahue decision and its progeny.

Fiduciary Duty to the Corporation and to Minority Shareholders

Typically, the subject of fiduciary duty (2) owed to a corporation or other shareholders arises in the context of the duty owed by the corporation and/or its majority or controlling shareholders to the minority shareholders of the corporation. (3) As a general rule, controlling shareholders or majority shareholders owe a fiduciary duty to the minority in all corporations, including publicly held corporations. (4) This seems logical, since while on the one hand "[t]he majority has the right to control," on the other hand, when it does, it "occupies a fiduciary relation toward the minority, as much so as the corporation itself or its officers and directors." (5) Accordingly, majority control brings with it a fiduciary duty to deal fairly with the minority and to avoid managing the corporation in the majority's sole interest or in a manner that oppresses the other shareholders or commits a fraud upon their rights. (6)

The fiduciary duties owed by majority or controlling shareholders, however, may not necessarily extend to the sale of stock. Florida courts, for instance, have held that the majority stockholder has no duty to a minority shareholder in the sale of stock even when the stock is sold at a premium or constitutes a controlling interest. (7)

Unique Attributes of a Closely Held Corporation

A closely held corporation is usually identified as one which has no "trading market for its shares" and which often (but not always) has only a few shareholders. (8) The three most common characteristics of this type of corporation include: 1) a small number of stockholders; 2) no ready market for the corporate stock; (9) and 3) substantial majority stockholder participation in the management, direction, and operations of the corporation. (10)

With such characteristics, the closely held corporation resembles a partnership. Indeed, some authorities would go so far as to describe the closely held corporation as akin to an "incorporated" or "chartered" partnership. (11)

It is the tendency to analogize the closely held corporation to a partnership which accounts for the Massachusetts approach that minority shareholders in closely held corporations owe a fiduciary duty to their fellow shareholders. Likewise, it may be the Florida courts' tendency to criticize this same analogy that appears to account for the controversy in Florida as to whether such a duty exists with respect to minority shareholders. (12)

Massachusetts Law Appears to Recognize a Fiduciary Duty

Donahue v. Rodd Electrotype Co. of New England, Inc., (13) is the leading case in Massachusetts supporting the view that all shareholders of a closely held corporation are fiduciaries to one another. In this case, Donahue, a minority stockholder in a closely held corporation brought suit against the directors of the corporation, against a former director, officer, and controlling shareholder of the corporation and against the corporation itself seeking to rescind the corporation's purchase of the former stockholder's shares. (14) Donahue argued that the defendants caused the corporation to purchase the former director, officer, and controlling stockholder's shares in violation of their fiduciary duty to her, a minority stockholder, because the defendants failed to grant her an equal opportunity to sell her shares to the corporation on the same terms. (15) The court agreed with the minority stockholder and, noting the distinguishing characteristics of closely held corporations, held that the stockholders in a close corporation owed each other the same fiduciary duty as is owed by one partner to another in a partnership. The court further held that the controlling stockholders' authorization of the purchase of stock by the corporation from themselves without granting an equal opportunity to minority stockholders constitutes a breach of that fiduciary duty. (16) This has become known as the "equal opportunity" principle.

The Donahue "equal opportunity" principle rests upon three main premises: 1) the Donahue holding was explicitly limited to "close corporations"; (17) 2) Donahue likened the closely held corporation to a partnership; (18) and 3) because of the partnership analogy, Donahue warned that the fiduciary duty owed by shareholders in a closely held corporation is owed by all of the shareholders and not only majority shareholders. (19)

According to Donahue, most closely held corporations are "really like partnerships, between two or three people who contribute capital, skills, experience and labor." (20) In the court's opinion, the relationship among the stockholders in a close corporation is just like that of partners in a partnership; meaning that if the enterprise is to succeed, then the relationship must be one of "trust, confidence and absolute loyalty." (21)

As the court explained, "[b]ecause of the fundamental resemblance of the close corporation to the partnership, the trust and confidence which are essential to this scale and manner of...