Controlling Shareholder Duties

Owners of a majority of voting shares of a corporation or of sufficient shares to provide working control of the corporation have a duty of fairness toward the corporation and toward other shareholders. The duty of fairness is imposed by courts and includes a substantive duty regarding share prices and a procedural fairness duty requiring that the corporation and its non-controlling shareholders are dealt with fairly and with full disclosure.

• Transactions entered into by the controlling shareholder on the shareholder’s own behalf that may be transactions that would be advantageous for the corporation controlled by the shareholder;
• Transactions concerning the shares of the controlling shareholder that are not offered also to non-controlling shareholders;
• Transactions between the controlling shareholder and the controlled corporation; and
• Transactions resulting in cash-out and elimination of non-controlling shareholder positions.

If such transactions are challenged for lack of fairness, the controlling shareholder must show that disinterested corporate directors approved the transactions or that full disclosure was provided to the non-controlling shareholders prior to their concurrence in the transaction.