A majority shareholder of a corporation generally enjoys significant discretion over how the business will be run. However, the law nonetheless requires that a majority shareholder treat minority shareholders fairly, and avoid using the business for personal profit at the exclusion of the other shareholders. This is especially important in the context of mergers and acquisitions, where a majority shareholder might be enticed to sell the company at a price that other shareholders might find unfair.
Delaware law has explored this issue in some depth (and Delaware corporate law is generally instructive in all other states as well). Typically a controlling shareholder owes a duty of “entire fairness” to the minority shareholders upon sale of the company. This is a far more demanding standard than the one that typically applies to most business decisions. The law applies a heightened standard because the sale of a company can permanently deprive minority shareholders of the fair value of their shares. That being said, majority shareholders can avoid this high standard by following a protocol to protect the interests of the minority shareholders. In Kahn v. M & F Worldwide Corp., 88 A.3d 635, 644 (Del. 2014), the Delaware court held that a majority shareholder can avoid the “entire fairness” standard and instead apply the “business judgment rule” to the sale of a company by obtaining the approval of an unbiased committee from the board of directors, along with the approval of a majority of the minority shareholders. The business judgment rule creates a legal presumption that a controlling shareholder acted with the best interests of the other shareholders in mind, which makes it much more difficult for a minority shareholder to challenge the fairness of the sale of the corporation. Thus, a majority shareholder should be advised to follow this protocol, or else risk facing lawsuits over improper valuation of the company.
If you have any questions about the rights of minority shareholders, or if you are a controlling shareholder who is concerned about your duties to other shareholders in the sale of your company, feel free to contact our office at (805) 498-1212, or email us at email@example.com.
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