California Corporation Law: Can Minority Shareholders be “Controlling” Shareholders?

As we have discussed, it has long been the law in San Diego and California that majority shareholders of corporations and other corporate entities owe fiduciary duties to other shareholders and owners. Among those duties are:

• Duty of loyalty to the corporation — that is, duty to not divert or convert business opportunities
• Duty of good faith to other shareholders — could also be phrased as a duty of fair dealing
• Duty to use best efforts for the corporation
• Duty of transparency with respect to corporate business and financial records

However, the law has been evolving over the last few years. These fiduciary duties no longer attach only to the “majority” shareholder, but now attach and constrain any and all “controlling” shareholders.

California Corporation Law: Non-Majority Shareholders can be “Controlling” Shareholders

The seminal California case with respect to shareholder fiduciary duties is Jones v. HF Ahmanson & Co., 460 P. 2d 464 (Cal. Supreme Court 1969). That case established that majority shareholders owe fiduciary duties to minority shareholders, particularly related to fair dealing. Jones has been interpreted to extend not merely to majority shareholders, but to controlling shareholders — those shareholders who may have less than 50% voting power but who, nonetheless, exercise control over corporate activities. The Jones opinion repeatedly uses the words “dominant or controlling shareholders” with respect to the duties that are owed.

Recent case law has emphasized this point. Thus, in Tien Le v. Lieu Pham, 180 Cal.App.4th 1201 (Cal. App. 2010), fiduciary duties were owed by a 50% shareholder. In Small v. Fritz Companies, Inc., 132 Cal.Rptr.2d 490 (Cal. Supreme Court 2003), a 39% shareholder (and also a director) owed fiduciary duties. In the case of Heckmann v. Ahmanson, 168 Cal.App.3d 119 (Cal. App. 2nd Dist. 1985), the court held that, depending on the factual circumstances, even a shareholder owning only 12% of the voting shares could be deemed a “controlling shareholder.”

California Corporation Law: “Controlling” Shareholder is a Fact Question

Whether a shareholder is a “controlling shareholder” is a question that depends on if he or she exerts sufficient control over a corporation’s affairs. Among the specific facts that a court will examine are these:

• Nominal voting power — number of shares
• Actual voting power — based on proxies or pooling agreements or shareholder “alliances”
• Other positions of power and control — that is, also being a director and/or part of senior management
• Power, by whatever means, over decision making and day-to-day activities of corporation

In one unpublished California case, the following allegations were held sufficient to allow the case to go forward on the questions of whether the shareholder was a “controlling” shareholder: shareholder owned 35% of the voting shares, was Treasurer and President (but not the CEO), he maintained sole and exclusive control over the corporation’s financial data, bank accounts, and records, he unilaterally entered into contracts on behalf of the corporation, he exercised control over the calculations of company profits and he retained authority over hiring and firing employees.

Contact San Diego Corporate Law

For further information, please contact Michael Leonard, Esq. of San Diego Corporate Law. Mr. Leonard has the experience to help your San Diego business with contracts, corporate formalities, and annual maintenance and with any other business-related legal matter. Contact Mr. Leonard by email or by calling (858) 483-9200.

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