I'm working on a law review article on fiduciary duties of controlling shareholders. In it, I take as given the longstanding proposition that controlling shareholders do owe fiduciary duties to the minority shareholders. But I believe there is a case to be made for the proposition that shareholders—majority or minority; controlling or not—should not be treated as fiduciaries at all. Here it is in a nutshell.
There are certain textbook fiduciary relationships, including those between attorney and client, executor and heir, guardian and ward, principal and agent, trustee and trust beneficiary, and senior corporate official and shareholder.[1] As with other examples of fiduciary relationships, all of these examples involve discretionary authority and dependency.[2] It is not merely that the fiduciary exercises discretionary powers that may impact the beneficiary, but that the beneficiary has justifiably reposed trust and confidence in the fiduciary.[3] Put another way, there must be reliance on the beneficiary’s part and de facto control and dominance on the part of the fiduciary.[4] The former is not merely vulnerable to the latter’s actions, but also relies on the latter to serve the beneficiary’s interests. Hence, as Judge Cardozo famously explained, fiduciaries are held to “the punctilio of an honor the most sensitive.”[5] As such, a fiduciary is obliged to put the interests of their beneficiary ahead of their own.[6]
None of this is true of the controlling shareholder—minority shareholder relationship. Granted, the controller wields discretionary voting power that could be used adversely to the interests of the minority, but the minority does not repose trust and confidence in the controller.[7] The minority does not rely on the controller to put the minority’s interests ahead of the controller’s own interests.[8]
Update: My friend and colleague Andrew Verstein sent along this comment:
I completely agree.
But, I do tend to think that it would be a better world if minority shareholders can begin to repose trust in majority shareholders - which they can do if the law effectively imposes such duties.
Of course, that still leaves many questions, such as this one: can the law just stipulate fiduciary relationships wherever they would be helpful, without any preexisting social understanding of trust? If randomized controlled studies proved conclusively that the economy would function better if everyone were a fiduciary to individuals younger than them, could we just decree such a relationship? Probably not. There seem to be practical and theoretic limits to instrumentally imposed fiduciary duties. And that makes your observation truly central to the debate.
[1] See U.S. v. Chestman, 947 F.2d 551, 568 (2d Cir. 1991) (listing “hornbook fiduciary relations”).
[2] Id. at 569.
[3] See Musalli Factory For Gold & Jewellry v. JPMorgan Chase Bank, N.A., 261 F.R.D. 13, 26 (S.D.N.Y. 2009), aff'd sub nom. Musalli Factory for Gold & Jewellry Co. v. JPMorgan Chase Bank, N.A., 382 Fed. Appx. 107 (2d Cir. 2010) (noting that claims of fiduciary status typically involve “a question of fact: whether someone reposed trust and confidence in another who thereby gains a resulting superiority or influence”). Professor Lipton proposes treating controlling shareholders as fiduciaries when they exercise “exercise discretionary control over assets that properly belong to the remaining shareholders.” Lipton, supra note 14, at 806. The difficulty is that that approach omits the requirement of justifiably reposed trust and confidence.
[4] See U.S. v. Margiotta, 688 F.2d 108, 125 (2d Cir. 1982) (explaining that “the concepts of reliance, and de facto control and dominance . . . are at the heart of the fiduciary relationship”).
[5] Meinhard v. Salmon, 164 N.E. 545, 546 (N.Y. 1928).
[6] See TVI Corp. v. Gallagher, No. CV 7798-VCP, 2013 WL 5809271, at *14 (Del. Ch. Oct. 28, 2013) (“The duty of loyalty is a corporate fiduciary's duty scrupulously to put the interests of the corporation and its shareholders before his or her own.”).
[7] FIND CITATION OF SUPPORT
[8] FIND CITATION OF SUPPORT
