I Trusted Them… Doesn’t That Mean They Are My Fiduciary?A look at when a fiduciary duty likely arises amongst shareholders
The term “fiduciary” is a legal term which is often thrown around by non-lawyers. People tend to have a general understanding of what a fiduciary is; however, the term is often improperly used and even more often too broadly applied. One context in which people typically come to us thinking that there is without question a fiduciary relationship is in the context of shareholder relationships. As is the case with most things in the law, whether a fiduciary relationship amongst shareholders depends on a number of factors.
It has long been the law of North Carolina that as a general rule, shareholders do not owe a fiduciary duty to each other or to the corporation. Additionally, a minority shareholder does not owe a fiduciary duty to another minority shareholder. A majority shareholder likely owes a fiduciary duty to a minority shareholder, and our courts have also allowed a minority shareholder to pursue relief against fellow shareholders who together held a majority interest, served as corporate directors and officers, were firmly in control of the corporation, and had common interests stemming from their related, jointly owned business.
As should be apparent, when analyzing whether a shareholder either owes or is owed a fiduciary duty, we must consider first the shareholder’s ownership interest in the corporation. A true minority shareholder has the best argument that they are owed a fiduciary duty. A person who operates as a minority shareholder because others in the corporation have joined their collective shares and voting power to exercise control also has an argument for an existence of a fiduciary duty. If you are a true majority shareholder in a corporation, the best practice would be to assume that you owe a fiduciary duty to the minority shareholder(s).
The best argument a shareholder might have that they are owed a fiduciary duty by another shareholder is if they are a true minority shareholder in a business. A simple example of this is a corporation with two shareholders where one shareholder owns 75% of the corporation and the other shareholder owns 25% of the corporation. It is likely that the 75% owner owes a fiduciary duty to the 25% owner.
Another, very common, situation where we see a lot of arguments and litigation about the existence of a fiduciary duty, is the situation where a corporation has a number of co-equal shareholders. For instance, a corporation with four 25% shareholders. In this circumstance, there is no clear majority shareholder, as each owns 25% of the company. However, if three of the four shareholders join together to exercise control over the corporation, some courts have concluded that those shareholders owe a fiduciary duty to the other 25% shareholder. These situations tend to be very fact intensive in determining whether a fiduciary relationship exists.
At the heart of most fiduciary relationships are the issues of trust and fairness. If you are honest and fair with your fellow shareholders you will likely not find yourself facing potential liability, even if you are determined to be a fiduciary. This is because the existence of a fiduciary relationship in and of itself does not impose liability. Rather, a fiduciary duty must exist, and that duty must be breached, in order to create possible liability. With that in mind, it is very common in business litigation matters for one shareholder to assert a breach of fiduciary duty claim against another, whether well founded, or not, in a simple attempt to manufacture leverage over whatever the shareholder dispute happens to be.
If you would like to speak with a lawyer about fiduciary duties within your corporation, one of our experienced business litigation attorneys would be happy to review the facts of your particular situation with you.