Removing Shareholders in Closely-Held Corporations

A breach of fiduciary duty by a shareholder in a closely-held corporation can have significant repercussions - financial, business-related, and otherwise. Often times these shareholders are also officers or directors, so their breach can have significant impact on the company. In some cases, another shareholder or even the company can seek to remove that shareholder from the company.

What is breach of fiduciary duty by a shareholder?

Majority, or controlling, shareholders have a fiduciary duty to the company and other shareholders. In closely-held corporations, even non-controlling shareholders can have fiduciary duties toward the company and one another. These include, but are not limited to:

  • Duty of good faith
  • Duty of fair dealing
  • Duty of honesty
  • Duty of loyalty
  • Duty not to compete

Examples of the types of breaches common in closely-held corporations that can warrant removal include:

  • Illegal actions
  • Minority shareholder oppression
  • Fraudulent activity
  • Misapplication or waste of corporate assets

What can be done?

When shareholders commit significant breaches of their fiduciary duties, the options available to the other shareholders depend on the position of the violating shareholder. The company can take the following actions, or, in cases where the company will not act, shareholders can take the actions on behalf of the company:

  • If the shareholder is an officer or director, the shareholders can vote to remove the offender from that role. If there is deadlock amongst the votes, the company/shareholder can file an action in court or arbitration to remove the officer or director.
  • If the violating shareholder is not an officer or director, the company/shareholder can file an action in court or arbitration to force the violating shareholder to sell all their shares.

If successful, it may be possible to have the company pay the attorney fees incurred by the individual shareholder. Oftentimes, the threat of removal can cause other shareholders caught breaching their fiduciary duties to exit a company. Other remedies include forcing a shareholder to pay damages caused by his or her misconduct.

Are you looking to explore your options after a shareholder has breached his or her fiduciary duties? Talk to a business litigation attorney today. Please call Chenoweth Law Group, P.C., at 503-446-6261.

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