I|duc|ary Dut|es of Ma[or|ty Shareho|ders |n New ork
What the Courts Say
Duty of Good Ia|th lender v Prescott 101 Au2d 418422 (1sL uepL 1984) 1he relaLlonshlp beLween shareholders ln a close corporaLlon vlsvls each oLher ls akln Lo LhaL beLween parLners and lmposes a hlgh degree of fldellLy and good falLh As was observed by Chlef !udge Cardozo ln MelobotJ v 5olmoo 249 n? 438 164 nL 343 346 (1928) A LrusLee ls held Lo someLhlng sLrlcLer Lhan Lhe morals of Lhe markeL place noL honesLy alone buL Lhe puncLlllo of an honor Lhe mosL senslLlve ls Lhen Lhe sLandard of behavlor 1he sLrlcL sLandard of good falLh lmposed upon a flduclary may noL be so easlly clrcumvenLed frqer v Price 204 lSupp2d 699 707 (Sun?2002) CorporaLe dlrecLors and conLrolllng shareholders of close corporaLlons are held 'Lo Lhe exLreme measure of candor unselflshness and good falLh' (clLlng ovooooqb v ovooooqb 226 n? 183 193 (1919)) 1hey may noL acL 'for Lhe aggrandlzemenL or undue advanLage of Lhe flduclarles Lo Lhe excluslon or deLrlmenL of Lhe shareholders' (clLlng Alpett v 28 wlllloms 5t cotp 63 n?2d 337 339 (1984)) Surely Lhey may noL acL lf Lhe sole purpose ls reducLlon of Lhe number of proflL sharers or ulLlmaLely Lo lncrease Lhe lndlvldual wealLh of Lhe remalnlng shareholders lJ (clLaLlons and lnLernal quoLaLlons omlLLed) -ei// v wfrburq Pincus co 39 Au3d 281 282 (1 sL uep'L 2007)
A mlnorlLy shareholder ln a close corporaLlon ls owed a flduclary duLy by Lhe ma[orlLy shareholders ln lcbbell lofo 5etvs v Iopltet lottoets 309 Au2d 288 302 (1 sL uep'L 2003) we held LhaL Lhe ma[orlLy could be ln breach of lLs flduclary duLy Lo mlnorlLy shareholders even when exerclslng an express conLracLual rlghL lf lL acLed malevolenLly and ln bad falLh solely for lLs own galn and ln a manner noL conLemplaLed by Lhe parLles agreemenL 1here under a secreL agreemenL Lhe defendanL exerclsed a rlghL malevolenLly for lLs own galn and Lo deprlve Lhe plalnLlffs of Lhe beneflL of Lhe [olnL venLure
Duty of Iu|| D|sc|osure ettix lnc v kfub 9 Mlsc3d 908 912 (Sup CL Monroe Co 2003) A flduclary owes a duLy of undlvlded and undlluLed loyalLy Lo Lhose whose lnLeresLs Lhe flduclary ls Lo proLecL 1hls ls a senslLlve and lnflexlble rule of fldellLy barrlng noL only blaLanL selfdeallng buL also requlrlng avoldance of slLuaLlons ln whlch a flduclarys personal lnLeresL posslbly confllcLs wlLh Lhe lnLeresL of Lhose owed a flduclary duLy 1hus Lhere ls an obllgaLlon of uLmosL candor sLrlcLly obllgaLlng a flduclary Lo make a full dlsclosure of any and all maLerlal facLs wlLhln hls or her knowledge relaLlng Lo a conLemplaLed LransacLlon wlLh Lhe oLher parLy Lo Lhe relaLlonshlp When a flduclary ln furLherance of lLs lndlvldual lnLeresLs deals wlLh Lhe beneflclary of Lhe duLy ln a maLLer relaLlng Lo Lhe flduclary relaLlonshlp Lhe flduclary ls sLrlcLly obllgaLed Lo make full dlsclosure of all maLerlal facLs 1he LransacLlon here wlLhouL quesLlon concerned a maLLer relaLlng Lo defendanLs flduclary relaLlonshlp wlLh plalnLlffs uefendanL Lherefore was obllgaLed ln negoLlaLlng LhaL LransacLlon Lo dlsclose any lnformaLlon LhaL could reasonably bear on plalnLlffs conslderaLlon of hls offer SLaLed anoLher way defendanL was under a duLy Lo dlsclose Lhe full facLs affecLlng Lhe value of Lhe sLock whlch he was selllng AbsenL such full dlsclosure Lhe LransacLlon ls voldable lndeed where a flduclary relaLlonshlp exlsLs beLween Lhe parLles Lhere musL be clear proof of Lhe lnLegrlLy and falrness of a LransacLlon beLween Lhem or any lnsLrumenL Lhus obLalned wlll be seL aslde or held as lnvalld
Duty of Loya|ty eiser v 5ystem u kest o/dinqs lnc 2010 n? Sllp Cp 20333 (Sup CL n? Co 2010)
Whlle a ma[orlLy shareholder owes a flduclary duLy Lo Lhe mlnorlLy shareholders plalnLlff ls noL Lhe ma[orlLy shareholder A shareholder ln a closely held corporaLlon also owes a flduclary duLy Lo Lhe oLher shareholders noL Lo coopL or dlverL a valuable corporaLe opporLunlLy she became aware of ln her corporaLe shareholder capaclLy lalnLlffs sLaLus as a shareholder of defendanL a closely held corporaLlon requlred her Lo devoLe her undlvlded unquallfled loyalLy Lo Lhe corporaLlon and noL Lo compeLe wlLh lL place her prlvaLe lnLeresLs ln confllcL wlLh lLs lnLeresLs or personally proflL aL lLs expense ConcomlLanLly Lhls fldellLy obllgaLed her Lo dlsclose any such slLuaLlon
Duty Not to Cppress
,ccfqq v 5chu/te koth 2fbe/ P 2008 WL 4063920 aL *8 (SupCL n? Co 2008) lL ls Lhe flduclary duLy owed by ma[orlLy shareholder s ln a closely held corporaLlon Lo a mlnorlLy shareholder noL Lo engage ln oppresslve acLlons Loward mlnorlLy shareholders ,ftter of kemp 8eft/ey lnc 64 n?2d 63 723 (1984) A shareholder who reasonably expecLed LhaL ownershlp ln Lhe corporaLlon would enLlLle hlm or her Lo a [ob a share of corporaLe earnlngs a place ln corporaLe managemenL or some oLher form of securlLy would be oppressed ln a very real sense when oLhers ln Lhe corporaLlon seek Lo defeaL Lhose expecLaLlons and Lhere exlsLs no effecLlve means of salvaglng Lhe lnvesLmenL A courL conslderlng a peLlLlon alleglng oppresslve conducL musL lnvesLlgaLe whaL Lhe ma[orlLy shareholders knew or should have known Lo be Lhe peLlLloner's expecLaLlons ln enLerlng Lhe parLlcular enLerprlse Ma[orlLy conducL should noL be deemed oppresslve slmply because Lhe peLlLloner's sub[ecLlve hopes and deslres ln [olnlng Lhe venLure are noL fulfllled ulsappolnLmenL alone should noL necessarlly be equaLed wlLh oppresslon lL ls wldely undersLood LhaL ln addlLlon Lo supplylng caplLal Lo a conLemplaLed or ongolng enLerprlse and expecLlng a falr and equal reLurn parLles comprlslng Lhe ownershlp of a close corporaLlon may expecL Lo be acLlvely lnvolved ln lLs managemenL and operaLlon 1he shareholder ln a close corporaLlon ls a coowner of Lhe buslness and wanLs Lhe prlvlleges and powers LhaL go wlLh ownershlp Pls parLlclpaLlon ln LhaL parLlcular corporaLlon ls ofLen hls prlnclpal or sold source of lncome As a maLLer of facL provldlng employmenL for hlmself may have been Lhe prlnclpal reason why he parLlclpaLed ln organlzlng Lhe corporaLlon Pe may or may noL anLlclpaLe an ulLlmaLe proflL from Lhe sale of hls lnLeresL buL he normally draws very llLLle from Lhe corporaLlon as dlvldends ln hls capaclLy as an offlcer or employee of Lhe corporaLlon he looks Lo hls salary for Lhe prlnclpal reLurn on hls caplLal lnvesLmenL because earnlngs of a close corporaLlon as ls well known are dlsLrlbuLed ln ma[or parL ln salarles bonuses and reLlremenL beneflLs