Under What Circumstances Would a Minority Shareholder Owe Fiduciary Duties?

Group of business persons in business meeting in board room. Concept for When Do Minority Shareholders Owe Fiduciary Duties?

Illinois law specifies that any shareholder in a close corporation owes a fiduciary duty not only to the corporation, but to other shareholders. This includes minority shareholders. In addition, the shareholders of a regular corporation might also owe a fiduciary duty when the corporation operates in the same way as a close common law corporation — regardless of whether it is incorporated under the Illinois Business Corporations Act or the Close Corporations Act.

Specifically, a close corporation is one that looks like a partnership. There are a variety of factors a court would evaluate in determining whether a corporation resembles a close common law corporation, including the following:

  • Whether the stock is held in only a few hands
  • The frequency with which the stock is sold
  • Whether the stock is publicly traded
  • Whether all shareholders are officers or directors
  • Whether all shareholders participate in the corporation’s day-to-day business

Even if a court determines that a shareholder owes fiduciary duties to the corporation, there are a few steps they might be able to take to avoid owing them.

How Can Minority Shareholders Avoid Owing Fiduciary Duties?

Fiduciary duties can give rise to obligations a minority shareholder might not have anticipated. For example, owing a fiduciary duty might mean they can’t enter into deals with the company or compete with it. This can result in an unexpected loss of economic opportunity. Accordingly, there are a number of reasons a minority shareholder might wish to avoid owing fiduciary duties.

Pursuant to the Illinois Close Corporations Act, a shareholder may waive their fiduciary duties, as long as they have not yet been breached — this can be done by a shareholder in two primary ways. A shareholder can broadly waive their rights to control the corporation, vote shares, or serve in the role of a director. They can also avoid owing a fiduciary duty by executing a shareholder agreement that expressly states (1) no fiduciary duty is owed and (2) they do not have the ability to control the corporation simply because they have shareholder status. In the event litigation is commenced due to allegations of breach of fiduciary duty, a shareholder may be able to argue that they have no influence or control over the corporation.

Contact an Experienced Illinois Shareholder Dispute Attorney

Whether it is committed by a majority or minority shareholder, a breach of fiduciary duty can result in serious disruptions to a company — and cause substantial damages. Located in Rolling Meadows, Litico Law Group's corporate litigation attorney provides high-quality legal services in Illinois for a broad scope of business disputes. We welcome you to contact us at 847-307-5942 to schedule a consultation to learn how we can help.

Categories: Fiduciary Duty