Smoke signals: No fiduciary duty for minority shareholders, at least not yet.

Byline: David Donovan

Smoke has long been used for sending signals, but the North Carolina Supreme Court has sent some clear signals to stock owners while resolving a spat over smokes.

On Dec. 7 a narrowly divided court stubbed out a shareholders' revolt over Reynolds American's purchase of Lorillard Tobacco and reversed a Court of Appeals decision holding that a minority shareholder could owe a fiduciary duty to other shareholders. But the court nevertheless strongly implied that it was inclined to accept the reasoning of Delaware courts that such a duty could exist under the right circumstances.

Reynolds, based in Winston-Salem, bought Lorillard in 2014 for a mix of cash and Reynolds stock. At the time, 42 percent of Reynolds' stock was held by British American Tobacco (which now owns the whole lot). BAT helped finance the deal by buying enough shares of Reynolds to maintain its 42 percent stake in the company. Other shareholders were thus left with a smaller slice of a bigger company.

In theory, that should have left them no worse off, but some shareholders alleged that BAT had been permitted to buy the Reynolds stock at a sweetheart price. They sued, claiming that BAT had breached its fiduciary duty to them by using its influence over Reynolds' board to enrich themselves at the expense of other shareholders.

North Carolina's courts had never held that a minority shareholder could owe a fiduciary duty to other shareholders (usually that's reserved for majority shareholders), but the plaintiffs argued that North Carolina should adopt the reasoning of Delaware's courts and hold that a "controlling" shareholder could owe a fiduciary duty even if it owned a minority of shares. (A large number of companies are incorporated in Delaware, so decisions by its business court are unusually influential.)

North Carolina Business Court Judge James Gale dismissed the suit, concluding that even if the Delaware standard applied, BAT was not a controlling shareholder under that state's law. But in 2016 the Court of Appeals unanimously reversed, adopting the Delaware approach and finding that BAT had in fact acted as a controlling shareholder.

BAT out of hell

Like Gale, Chief Justice Mark Martin, writing for a 4-3 majority, did not explicitly adopt the Delaware standard. But also like the Business Court, Martin applied Delaware law in concluding that BAT did not owe any fiduciary duties because it was not a controlling shareholder.

John Wester, a business...