Controlling Shareholders

Question 1

What duties do a controlling shareholders owe minority shareholders?

Answer 1

Shareholder who has a control position (director position)OR has a controlling ownership interest owes a fiduciary duty to minority shareholder and sometimes to others (including the Corporation)

She CANNOT use dominant position for individual advantage at the expense of minority shareholder or the corporation

Most likely to be an issue with close corporations

Question 2

When is a controlling shareholder who sells his shares subject to liability?

Answer 2

If a controlling shareholder sells the stock for more than its economic worth (i.e. “control premium”), she generally gets to keep the excess

BUT, courts MAY impose liablity IF such a premium was the product of…

1) Selling to looters without making a reasonable investigation

REMEDY: The court would disgorge the sellers profit AND the seller is probably liable for all damages to the corporation

2) De facto selling corporate assets. Buyer has no interest in running the corporation, but bought the stock to get access to the corporate assets

REMEDY: ALL shareholders would share in the premium in addition to the controlling shareholder

3) Selling a seat on the board. Fiduciaries cannot sell positions

REMEDY: Disgorge profits

Question 3

What is the standard for controlling shareholder “freeze out” mergers?

Answer 3

All mergers must have a legitimate corporate purpose, EVEN IF approved by the requisite # of shares. E.g. Majority shareholder merges corporation w/ another corporation, which they own & minority shareholder’s interests are purchased

Standard = Court reviews whole transaction:

(1) overall course of dealing; AND 
(2) fairness of the price			

Factors: whether

 (1) deal is tainted by self-dealing or fraud;
(2) minority shareholders dealt with fairly;OR 
(3) legitimate business reason for merger		

Question 4

What is market trading on inside information?

Answer 4

Where director or an officer engages in market trading of her corporation’s stock based upon inside information from the corporation → breach of a duty to the Corporation

Remedy = corporation can sue to recover profit (i.e. it could be a derivative suit)

Question 5

What is the special facts doctrine (i.e. common law insider trading)?

Answer 5

Rule: all directors, officers & probably controlling shareholder owe an affirmative duty NOT to trade on “special facts” in a securities transaction with a non-insider → MUST abstain or ensure disclosure

A “special fact” means that a reasonable investor would consider it important in making an investment decision

A shareholder with whom the director or officer deals and violates the special facts doctrine can sue DIRECTLY (in her own name; not derivative)

Measure of damage = value of stock a reasonable time after public disclosure MINUS price paid by insider