A corporation presents potential fiduciary duty issues for its directors, officers, shareholders, employees, and others. For shareholders, the general rule is that shareholders do not owe other shareholders or the corporation a fiduciary duty. There are certain circumstances in which a fiduciary duty may be imposed under California law. Jones v. H.F. Ahmanson & Co. (1969) 1 Cal.3d 93 cited some examples: when a majority shareholder usurps a corporate opportunity from, or otherwise harms, the minority shareholder. Another exception, it has been said, is in the case of a controlling shareholder or in a closely held corporation. The controlling shareholder has been held to owe a fiduciary duty to both the corporation and the minority shareholders.

In closely held corporations, there are two principal views of the fiduciary duty. The “majority” view among States holds that, at least in a closely held corporation, all officers, directors and shareholders are fiduciaries of each other. Accordingly, they owe each other a heightened fiduciary duty, similar to that which partners owe each other in a partnership. The “minority” view holds that in closely held corporations, controlling shareholders, owe fiduciary duties to the corporation. In addition, a controlling shareholder is not necessarily defined as a majority shareholder. The question is whether or not that shareholder exercises domination through actual control of corporate conduct. California cases hold that the fiduciary duties are owed to both the corporation and the other shareholders. The duties include the duties of loyalty, care, good faith, inherent fairness and equal opportunity for minority shareholders.

Corporate shareholders have valuable property rights and majority shareholders may not use their power to control corporate activities to benefit themselves alone or in a manner detrimental to the minority. Any use to which they put the corporation or their power to control the corporation must benefit all shareholders proportionately and must not conflict with the proper conduct of the corporation’s business. The rule applies alike to officers, directors and controlling shareholders in the exercise of powers that are theirs by virtue of their position and to transactions wherein controlling shareholders seek to gain an advantage in the sale or transfer or use of their controlling block of shares. This is a rule of inherent fairness from the viewpoint of the corporation and those interested therein.

California holds that directors owe fiduciary duties to the corporation and to its shareholders. (See, e.g., Bancroft-Whitney Co. v. Glen (1966) 64 Cal.2d 237, 345; Small v. Fritz Companies, Inc. (2003) 30 Cal.4th 167; Professional Hockey Corp. v. World Hockey Assn. (1983) 143 Cal.App.3d 410.). In addition, attempting to waive corporate directors’ and majority shareholders’ fiduciary duties to minority shareholders, at least in private close corporations, has been held to be against public policy. In Neubauer v. Goldfarb (2003) 108 Cal.App.4th 47, a contract provision in a buy-sell agreement purporting to effect such a waiver was declared void.

The fiduciary duties of directors include the duty of care and the duty of loyalty. (Frances T. V. Village Green Owners Association, et al. (1986) 42 Cal.3d 490, 513). A Director should act in the best interests of the corporation and its shareholders. Directors should act as an ordinarily prudent person in a like position would, under similar circumstances, including reasonable inquiry. In performing the duties of a director, a director shall be entitled to rely on information, opinions, reports or statements, including financial statements and other financial data, in each case prepared or presented by any of the following:

(1) One or more officers or employees of the corporation whom the director believes to be reliable and competent in the matters presented.
(2) Counsel, independent accountants or other persons as to matters which the director believes to be within such person’s professional or expert competence.
(3) A committee of the board upon which the director does not serve, as to matters within its designated authority, which committee the director believes to merit confidence, so long as, in any such case, the director acts in good faith, after reasonable inquiry when the need therefore is indicated by the circumstances and without knowledge that would cause such reliance to be unwarranted.

Directors and officers beware when accepting a position with a corporation. Discuss the ramifications with your legal counsel before jumping in.

Peter A. Kleinbrodt