Owners in a closely-held corporation owe duties to each other. An owner, or shareholder is subject to legal liability if he or she violates a duty owed to another owner, or shareholder. The duties owed can be complex.
Fiduciary Duties Owed by Business Owners in Minnesota
In Minnesota, the shareholders in a closely-held corporation owe fiduciary duties to other shareholders, because their relationship is similar to that of partners. According to Minnesota state courts, fiduciary obligations in closely held corporations impose on each shareholder the “highest standards of integrity and good faith in their dealings with each other” and require each shareholder to deal “openly, honestly and fairly with other shareholders
Shareholders in closely held corporations have a duty to disclose material information about the corporation. The question of what information is “material” turns on the facts and circumstances of each case. A balancing of both the indicated probability that the event will occur and the anticipated magnitude of the event in light of the totality of the company activity, is necessary.
Why the Law Imposes Fiduciary Duties
There is no ready market in which a shareholder in a closely-held corporation may sell or transfer his or her shares. This makes shareholder disputes in closely-held corporations very frustrating to the minority shareholders.
Protection Against Unfair Prejudice by Business Owners in Minnesota
Minnesota Statute section 302A.751(1)(b)(3) provides minority shareholders with some protection against what is called “unfair prejudice.” When a shareholder has acted unfairly prejudicial toward another shareholder, courts must determine the appropriate remedy.
Minnesota Statute section 302A.751(3a) allows a court to “take into consideration the duty which all shareholders in a closely held corporation owe one another to act in an honest, fair, and reasonable manner in the operation of the corporation and the reasonable expectations of all shareholders as they exist at the inception and develop during the course of the shareholders’ relationship with the corporation and with each other.
Directors and officers act in a manner unfairly prejudicial toward one or more shareholders when they engage in conduct that frustrates the reasonable expectations of all shareholders in their capacity as shareholders or directors of a closely-held corporation.