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CALIFORNIA CORPORATE & SECURITIES LAW

Court Rules Coequal Stockholders Owe Fiduciary Duties To Each Other

Stockholders in closely held corporations often operate their companies as if they were partnerships.  Does that mean that the stockholders, like partners, owe fiduciary duties to each other?

In Jones v. H. F. Ahmanson & Co., 1 Cal. 3d 93 (1969), the California Supreme Court famously held:

Majority shareholders may not use their power to control corporate activities to benefit themselves alone or in a manner detrimental to the minority. Any use to which they put the corporation or their power to control the corporation must benefit all shareholders proportionately and must not conflict with the proper conduct of the corporation’s business.

Id. at 108.  The Nevada Supreme Court has not explicitly adopted Jones, but has recognized the possibility that minority stockholders may be able to pursue a breach of fiduciary duty claim against the majority stockholders.  Cohen v. Mirage Resorts, Inc., 119 Nev. 1, 11 (2003).

The paucity of Nevada authority on the existence and scope of any fiduciary duties owed by majority stockholders to the minority makes it difficult to predict whether the Nevada Supreme Court would impose fiduciary duties on co-equal stockholders.  Difficult or not, the Fifth Circuit Court of Appeals had to make that prediction in Hollis v. Hill, 232 F.3d 460 (5th Cir. 2000).  In that case, the court held

With only two shareholders and management responsibilities divided between them, a fiduciary relationship was created not unlike that in a partnership.

More recently, U.S. District Judge Charles R. Simpson III faced the same question. In Kirsch v. Dean, 2016 U.S. Dist. LEXIS 116084 (W.D. Ky. Aug. 29, 2016), Judge Simpson elected to follow Hollis, citing Judge Kent J. Dawson’s adherence to Hollis in Spitzmesser v. Tate Snyder Kimsey Architects, Ltd., 2011 U.S. Dist. LEXIS 68696 (D. Nev. June 27, 2011) and 2012 U.S. Dist. LEXIS 93045 (D. Nev. July 3, 2012).  However, Judge Dawson’s decisions involved claims against a majority, not co-equal stockholder.

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