The Limits on the Heightened Fiduciary Duty Owed to Minority Shareholders in Close Corporations

A recent Ohio appellate court decision vividly demonstrates that a majority shareholder’s heightened fiduciary duty to a minority shareholder is not without bounds and does not protect a minority shareholder simply because that shareholder has been disadvantaged by the majority’s actions. As long as the minority shareholder has an equal opportunity to benefit from the majority’s action and there is a legitimate business purpose, the action should stand.

Ohio’s Ninth District Court of Appeals recently reaffirmed that tenet of Ohio law in Scala v. Scala, even though the practical effect of the majority’s actions was to reduce the equal voting power of the minority shareholder. In that case, three brothers (M, B, and C) each controlled one-third of the company, but M and B were aligned against C. M and B voted to adopt an amendment whereby, if a shareholder wanted to sell his shares, he had to offer them first to the company. If the company declined to redeem the shares, the selling shareholder could offer his shares to any shareholder of his choosing. The ploy played out predictably: M offered his shares to the company, and C’s motion to redeem the shares was rejected by the majority, leaving M free to sell his shares to B and effectively giving him two-thirds of the shares and control of the company.

C’s lawsuit, claiming that M and B had violated their fiduciary duties, was ultimately unsuccessful. The Court reaffirmed the long-held principle of Ohio law that majority shareholders have a heightened fiduciary duty to the minority. But it also applied limitations on that duty: only actions that do not benefit the minority shareholder equally and lack a legitimate business purpose are actionable.

As applied to the battling brothers, the Court found that the ploy was not actionable because: (1) The amendment on the redemption of shares applied equally to all shareholders, even if it was used against C in this instance.

(2) There was a legitimate purpose for the amendment, preventing a deadlock, which could harm the company and ultimately lead to dissolution.

The Court acknowledged that the amendment acted to deprive C of his equal vote but found that a minority shareholder cannot frustrate the will of the majority simply because he disagrees with the majority’s course of action.

The takeaway for shareholders in a close corporation: Ohio law protects minority shareholders, but the protections are not without limits. What might appear to be oppression of a minority shareholder may actually be a legitimate exercise of the majority’s power.

If you have any questions about this ruling, please contact Christopher C. Koehler or any member of the Frantz Ward Litigation Practice Group.