Fraud, Deception and Bad Faith Among Shareholders.

What rights do you have as a shareholder when the person or people in control of the company engage in deception, fraud or theft? In the shareholder context, this question relates to the concept of breach of fiduciary duty.

A fiduciary duty is a responsibility arising out of special relationships between certain parties. It is the highest duty implied by law and requires the fiduciary to act in complete good faith, loyalty, fidelity, fair dealing and full disclosure of material matters. Shareholders or members in closely held companies have a fiduciary duty to act in a fair, reasonable and honest manner toward one another. In small businesses, shareholders are treated like partners in a partnership.

Similarly, officers and directors have certain fiduciary duties to the company including the duty of care, the duty of loyalty and the requirement to act in good faith. These duties ensure that the officers and directors serve the company and not just themselves.

When a controlling shareholder breaches any of these fiduciary duties, the other shareholders can assert a claim (bring a lawsuit) against them, either on their own behalf or on behalf of the company. Laws governing shareholder disputes in Minnesota provide that such shareholder disputes are tried to a district court judge rather than a jury. By law, the judges have wide discretion to fashion relief that best suits the circumstances. Depending on the circumstances, a court could order anything from dissolution or a shareholder buy-out to repayment of the damages caused to the company.

Here are some scenarios involving deception, fraud or bad faith that commonly arise:

• Where a controlling shareholder buys out a minority shareholder at a discounted price without informing the minority shareholder about a valuable impending transaction that would make the stock much more valuable;
• Where a shareholder takes money or assets of the company without a proper disclosure or accounting to the company;
• Where a shareholder takes a valuable business or investment opportunity that properly belonged to the company; or
• Where a controlling shareholder gives him or herself an excessive salary or otherwise allocates money of the company unfairly among the shareholders.

By all means talk to a lawyer if you are facing one of these situations. We are happy to provide a free initial consult regarding topics at Peters Law Firm.