29 Apr The Plight – and Rights – of a Minority Shareholder
When most people think of corporations, they tend to think of huge multi-national conglomerates, with shares of ownership bought and sold daily on the stock exchanges. But far more common are what are called “closely-held” corporations – small businesses that are privately owned by just a handful of shareholders. Many times, these companies are owned and operated by family members or friends, and they are frequently run more like small partnerships than large corporations.
The owners of these businesses usually start off secure in the belief that there will never be a serious disagreement between or among the owners. But unfortunately, that doesn’t always hold true. When a dispute does arise, owners of less than a majority interest in the company may find themselves on the outside looking in. The reality in many small, privately-held companies is that one or two shareholders may exercise near total control over the company’s operations. By virtue of their majority ownership, these shareholders control who is on the board, who serves as an officer of the company, and other key decisions. Worse still, unlike public companies where shares can readily be bought and sold on the open market, minority shareholders in a closely-held corporation cannot easily sell their shares.
But despite this vulnerability, minority shareholders are not without options. While shareholders generally do not owe duties to each other or the company, North Carolina courts have recognized an exception in the case of majority stockholders in closely-held corporations. Specifically, the courts have recognized that the near unlimited power possessed by the majority owner or owners in these small companies imposes fiduciary duties that are owed to the holders of the minority interests. As a result, controlling shareholders in North Carolina have a duty to exercise good faith, care and diligence, and to protect the interests of the minority stockholders. If the majority act to further their own interests at the expense of the minority, they can face a legal action by the minority shareholders for breach of that fiduciary duty. In extreme cases, where squabbles among the owners threaten the company’s ability to conduct its business or the rights and interests of minority owners, an action can be filed asking a Court to dissolve the company and liquidate its assets.
At Parry & Tyndall, we have experience handling corporate governance disputes in companies of all sizes, including suits to enforce the rights of shareholders when necessary. We have significant experience handling cases in the North Carolina Business Court, where these types of cases are often decided. If you have questions about a corporate dispute, including possible claims of breaches of duty by company management and/or disputes between or among the owners of a closely-held company, please give us a call at 919.246.4676 for a free initial consultation.