In a recent post, Professor Stephen Bainbridge discusses the question of when a controlling shareholder owes fiduciary duties to minority shareholders. Knowing when controlling shareholder owes fiduciary duties is one thing, what those fiduciary duties are and to whom they are owed are equally important questions. Interestingly, the California General Corporation Law neither expressly imposes nor describes the fiduciary duties of controlling shareholders. Thus, they are wholly the creation of the courts.
In an early case, the Court of Appeal held that a controlling shareholder owes similar, if not the same, duties as directors - a duty of good faith and a duty of care. Crebs v. Uplifters Country Home, 133 Cal. App. 88, 92, 23 P.2d 807, 809 (1933). If a controlling shareholder breaches of the duty of care, any injury is likely to fall upon the corporation, and not on the minority shareholder(s). In these cases, the claim will most likely fall be characterized as derivative, rather than direct.
Three decades later, the California Supreme Court described a controlling shareholder's duties as "a fiduciary responsibility to the minority and to the corporation to use their ability to control the corporation in a fair, just, and equitable manner". Jones v. H. F. Ahmanson & Co., 1 Cal.3d 93, 108, 460 P.2d 464, 471 (1969). According to the Supreme Court, the power to control the corporation "must benefit all shareholders proportionately and must not conflict with the proper conduct of the corporation's business". This breach does not necessarily involve harm to the corporation (although in some cases it could). If the injury is to the minority only, then the claim will most likely be direct, rather than derivative.
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