Key Business Court Decisions

A 50/50 Shareholder Is Unlikely To Owe Fiduciary Duties To Her Co-Owner

Where shareholders own a company equally, it is unlikely that they owe fiduciary duties to one another, especially where control of the board of directors is shared equally between them. Potts, et al. v. KEL, LLC, et al, 2019 NCBC 29 (J. Conrad).  Nonetheless, a shareholder who is also an officer or director might breach fiduciary duties owed to the company when engaging in transactions evidencing a conflict of interest.

Plaintiff and Defendant Leon Rives (“Rives”) were 50/50 owners of Steel Tube, Inc. (“Company”).  Both were the Company’s sole directors, and Plaintiff was president while Rives was secretary and treasurer.  Beginning in 2015 and over the course of the next 18 months, Rives had the Company engage in a series of significant financial transactions which benefited him or companies with whom he was associated, all without Plaintiff’s knowledge. Upon learning of the transactions, Plaintiff brought suit asserting, inter alia, individual and derivative claims for breach of fiduciary duty and constructive fraud.  Rives moved for summary judgment, arguing that he owed Plaintiff no fiduciary duties and that the transactions were otherwise immune from any such derivative claims.

As to the individual claims for breach of fiduciary duty and constructive fraud, the Business Court agreed with Rives.  While recognizing the existence of the “controlling shareholder” exception to the general rule that shareholders do not owe fiduciary duties to one another, the Business Court nonetheless held Plaintiff’s facts did not evidence Rives exercised the requisite control to invoke the exception.  Citing with approval the North Carolina Supreme Court’s recognition that a majority shareholder owes a duty to minority shareholders, Corwin v. British Am. Tobacco PLC, 371 605, 616, 821 S.E.2d 729, 7377 (2018), the Business Court found that, by definition, Rives was not a majority shareholder because Plaintiff and Rives each owned 50% of the Company. Moreover, Rives could not be considered the “controlling shareholder” of the Company because Plaintiff failed to prove Rives exercised control over the Company’s board of directors, a necessary element of the “controlling shareholder” analysis.  (Opinion, ¶26).  Evidence of equal board power among the two directors, combined with evidence that Plaintiff had blocked many of Rives’ proposal at the board level, showed that Rives lacked the necessary control over the board. 

Nonetheless, the Business Court found Plaintiff could maintains his derivative breach of fiduciary duty and constructive fraud claims against Rives for nearly all of the disputed transactions, since many of the transactions involved factual disputes over whether Rives had a conflict of interest existed which had been approved by the Company’s board.

Based upon this decision, while it is unlikely a co-owner of a business can maintain an individual claim for breach of fiduciary duty against her co-owner, such claims may still be able to be pursued on a derivative basis for the benefit of the business

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