As discussed in several previous posts (here and here), Iowa law recognizes the existence of fiduciary duties between majority and minority shareholders in Iowa corporations. See Linge v. Ralston Purina Co., 293 N.W.2d 191, 194 (Iowa 1980); see also Cookies Food Prods., Inc. v. Lakes Warehouse Distrib., Inc., 430 N.W.2d 447, 451 (Iowa 1988). Often, however, the question is not whether a fiduciary duty exists, but rather, what does the majority-minority fiduciary duty require? In other words, what action(s) or inaction(s) amount to a violation of the majority-minority fiduciary duty?
On September 3, 2013, the United States Court of Appeals for the Eighth Circuit applied Iowa law to address one unique scenario and answer the following fiduciary-duty question: When a majority shareholder sells all of his/her ownership interests in a corporation, is the majority shareholder required – in discharging his/her fiduciary duties – to notify the minority shareholder of his/her intent to sell the majority interest?
Answering this legal question, the court noted that the parties failed to identify, and the court was “unable to locate, any Iowa legal authority holding that a majority shareholder must disclose to minority shareholders its intent to sell a controlling stake in a corporation.” Horras v. Am. Capital Strategies, Ltd., 12-3886, 2013 WL 4711389 (8th Cir. Sept. 3, 2013). In other words, neither the parties nor the Court were able to find an Iowa case that supported the minority shareholder’s argument that the majority shareholder’s fiduciary duties required him to disclose his intent to sell his majority interest in the corporation. Unable to find Iowa legal authority on point, the court turned to a well-recognized legal treatise, William Meade Fletcher, Cyclopedia of the Law of Corporations, and stated:
The treatise instructs that majority shareholders are ‘entitled to sell or not sell their stock as they see fit’ and only breach a fiduciary duty to minority shareholders ‘if the purchasers will loot or mismanage the corporation, or if the sale involves fraud, misuse of confidential information, wrongful appropriation of corporate assets, or personal use of a business advantage that rightly belongs to the corporation.’
Horras v. Am. Capital Strategies, Ltd., 12-3886, 2013 WL 4711389 (8th Cir. Sept. 3, 2013) (quoting 12B William Meade Fletcher, Cyclopedia of the Law of Corporations § 5805 (2012). In short and upon applying Iowa law, the United States Court of Appeals for the Eighth Circuit found that based upon the facts as the minority shareholder set forth within his complaint, the majority shareholder did not breach his fiduciary duty to the minority shareholder by simply electing not to notify the minority shareholder of his intent to sell stock – one may say a prime example of the “art of non-disclosure.” Assuming the same set of facts and taking into consideration the issues addressed by Fletcher, the court’s finding allows majority shareholders to sell their majority interests in a corporation without notifying a minority shareholder(s) that his/her corporation will likely be run and owned by an entirely different person / entity.
While the court concluded disclosure is not required under the facts of Horras, the court did identify certain circumstances where majority shareholders must proceed with caution when selling their majority ownership interest in a corporation. Specifically, if the majority shareholder is aware that the sale will result in a purchaser “looting” or “mismanaging” the corporation, then the sale may result in a breach of the majority-minority fiduciary duty. Similarly, if the majority shareholder’s sale to another involves “fraud,” the “misuse of confidential information,” a “wrongful appropriation of corporate assets,” or the “personal use of a business advantage the rightly belongs to the corporation,” then the sale may result in a breach of the majority-minority fiduciary duty; thereby, entitling the minority shareholder to relief.
A minority shareholder seeking to protect against such an outcome, may very well consider including a provision within the corporation’s bylaws that place certain restrictions and/or notification requirements upon the sale of any stock in the corporation. Should you or anyone you know have any questions on this topic, you should consider consulting with a corporate dispute attorney.
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