Closely Held Business – 7 Duties to Minority Owners

Generally, the majority owners of a closely held (private, non-public) business have certain legal obligations to the minority owners preventing the majority owners from abusing their position and taking certain corporate actions without the approval of the minority owners.

For example, in a general partnership where one partner owns 51% of the ownership interests in the partnership and the other partner owns 49% of the ownership interests, absent a written agreement to the contrary, in most jurisdictions the 51% owner has strict obligations and duties of loyalty, care and good faith to the 49% owner and to the business itself.

The concept of a majority owner having duties and obligations directly to minority owners arose in partnership law to prevent a majority owner from oppressing the rights of the minority owner. Certain legal doctrines such as the free transferability of business property and the business judgment rule frequently led to situations where the minority owner’s interest in the value of a business was diluted, significantly reduced in value or even made worthless, without the consent of the minority owner.

The duties of loyalty, care and good faith between partners in a partnership have also been applied to corporate shareholders. Although many states follow the modern Delaware approach of eliminating these duties for shareholders of a closely held corporation, the concepts have now made their way into corporate law in the form of a general duty of shareholders of a corporation to treat each other with “utmost good faith and fair dealing”, especially in the case of a closely held corporation.

The following examples are 7 situations where the majority owner has been found to have either (a) violated their duty of loyalty, care or good faith or (b) have not acted with the ‘utmost good faith and fair dealing’ in relation to the minority owner of a business:

  • Attempting to force a buyout of the minority owner by eliminating salary, distributions or dividends
  • Diluting a minority owner’s interest by issuing additional voting shares to force a buyout at low prices
  • Denying the minority owner access to important financial, tax or business enterprise information
  • Removing a minority interest from ongoing participation in management and decision making
  • Locking an employee out of a business, a workstation or any other type of shared company facility
  • Usurping and diverting corporate opportunities for the benefit of the majority owner instead of first offering the opportunities to the business
  • Diluting the minority’s ownership interest at unfair prices in order to force a buyout

Leave a comment

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.

%d bloggers like this: