3. What is a “closely-held corporation”?
A closely-held corporation is owned and controlled by a small group of owners or shareholders. These shareholders hold the shares of stock necessary to elect most or all of the directors. Often, shareholders in a closely-held corporation will elect themselves to serve as directors and appoint themselves as officers. Family-owned businesses commonly organize as closely-held corporations. In these entities, members of a single family own most or all of the outstanding shares. They also serve as directors and officers of the business. Shareholders generally have limited fiduciary duties to the corporation. With a single or small group of shareholders holding a majority of the voting shares in the corporation, minority shareholders rarely have much influence in the corporation. In such instances, common law generally holds that majority shareholders have fiduciary duties to exercise care and loyalty with regard to the corporation. This is particularly true in closely-held entities. Given the difficulty of enforcing one’s rights, these standards offer little protection to the minority shareholder.
• Note: In some situations, minority shareholders may be able to bring a direct action against the corporation if their individual rights are harmed. Further, they may be able to bring a derivative action on behalf of the corporation against majority shareholders who fail to exercise care and loyalty in carrying out their corporate duties. In such actions, the court may assess damages against the majority shareholders or issue injunctions to halt the harmful conduct.
• Discussion: Do you believe that closely-held corporations should be governed or subject to the same governance requirements as widely-held or public corporations? Why or why not? Does the close connection between shareholders and the business entity affect your opinion? Why or why not?
• Practice Question: Can you identify the most profitable or heavily-capitalized, closely-held corporations in the United States?