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What are the “fiduciary duties” owed by shareholders of the corporation?
Generally, shareholders of a corporation do not owe fiduciary duties to other shareholders. This situation may change in closely-held corporations or in corporations where shareholders also serve as officers or director. State law varies as to the extent that a shareholder owes fiduciary duties to the corporation itself. A state is more likely to recognize shareholder duties to the corporation in closely-held corporations.
- Note: Some states hold that, in certain circumstances, shareholders owe fiduciary duties to the minority shareholders of the corporation. This is the case when a single shareholder or designated group of shareholders owns a controlling interest in the corporation. In such a case, the controlling shareholder may incur special duties to those minority shareholders.
Discussion: How do you feel about shareholder fiduciary duties, or lack thereof? Should a shareholder have greater fiduciary duties to the corporation or to minority shareholders in a closely-held corporation? Why or why not?
Practice Question: Pam is a shareholder in a closely-held corporation. She owns approximately four percent of the outstanding shares. The three other shareholders own the remaining interest equally. Do these shareholders owe any fiduciary duties to the other shareholders?
- In a normal public corporation, shareholders do not owe fiduciary duties to each other. However, in closely-held corporations, the shareholders go into business with a small number of people they know very well. This means that besides the business relationship between them, the shareholders owe fiduciary duties to each other. Shareholders in a closely-held corporation owe other shareholders fiduciary duties if there is a closer relationship between them, such as family and not as business partners. Such a fiduciary duty is held on duties of utmost good faith, loyalty, honesty and fairness.