Controlling Shareholders and Related Topics

Question 1

When does a shareholder owe a duty to other shareholders?

Answer 1

A shareholder who also occupies a control position (such as a director position) or whose ownership is such that she has working control over the corporation owes a fiduciary duty to minority shareholders and, sometimes, to others (including the corporation). She cannot use a dominant position for individual advantage at the expense of minority shareholders or the corporation.

Question 2

What is a control premium?

Answer 2

Because of her control, the controlling shareholder may be able to sell her shares at a premium, which means that she can sell them for more than their economic value as a percentage of ownership of the company. This is called a control premium.

Question 3

Can the courts ever impose liability when the controlling shareholder sells her controlling interest? What happens if court finds them liable?

Answer 3

Yes, in three different scenarios:

1. Controlling shareholder sold to looters without making a reasonable investigation. If this happens, the court will disgorge the seller’s profit and the seller is probably liable to the corporation for damages.
2. Controlling shareholder defacto sells a corporate asset - individual does not have the right to do that.
3. Controlling shareholder sells a seat on the board. Again - the court will disgorge the seller of his or her profit.

Question 4

What is a freeze out and how will they be evaluated by the court?

Answer 4

A freeze out is a type of merger that is aimed solely at cashing out minority shareholders unfairly. The court will look at the transaction as a whole and determine whether there is a fair price and fair dealing. Some of the factors are: (1) whether the deal is tainted by self-dealing or fraud; (2) whether the minority shareholders are dealt with fairly; (3) whether there is a legitimate business reason for the merger.