Minority Shareholders Can Assert Individual Breach of Fiduciary Duty Claims

Where a minority shareholder alleges that two other minority shareholders—whose combined shares constituted a majority of the stock—acted in concert and controlled the company, the minority shareholder had sufficiently alleged she was owed a special duty.  Kelly v. Nolan, 2022 NCBC 37 (J. Davis).  As a result, the minority shareholder had successfully asserted a Barger exception and could maintain her individual claim for breach of fiduciary duty.

Plaintiffs were two shareholders in a professional corporation, Piedmont Foot Clinic, P.A. (“Company”). Plaintiffs each owned 10% of the Company’s stock. Defendants Nolan and Hauser each owned 40% of the Company’s stock (“Defendant Shareholders”).  Pursuant to an agreement between the shareholders, the Company’s expenses “would be shared equally in spite of the disparate ownership,” and the expenses would be deducted from each shareholder’s share of profits before distribution.  As it turned out, Plaintiffs later learned that Defendant Shareholders had incurred numerous expenses (i.e., salaries provided to non-working family members, professional hockey tickets and various inflated fees) which were unjustified and provided no benefit to the Company. Ultimately, the Company was sold, but Plaintiffs alleged Defendant Shareholders refused to distribute their proportional share of the proceeds.  Plaintiff filed suit against the Defendant Shareholders asserting, inter alia, individual claims for breach of fiduciary duty.  Defendant Shareholders moved to dismiss, contending that Plaintiffs’ breach of fiduciary duty claims were derivative and not individual in nature and, as a result, Plaintiffs lacked standing to assert that claim.

The Business Court disagreed.  While acknowledging that North Carolina law generally requires a shareholder to bring any claim for harm done to the company as a derivative claim, the Business Court also recognized that the Supreme Court in Barger v. McCoy recognized an exception to this general rule where: a) a special duty exists between the wrongdoer and the shareholder; or b) where the shareholder suffered an injury separate and distinct from that suffered by other shareholders. (Opinion, ¶27).  Moreover, because North Carolina law has recognized that where two minority shareholders—each lacking a majority ownership on their own—act together to form a majority interest and thereafter collectively take action at the expense of other minority shareholders, the Business Court held those minority shareholders acting in concert owe a fiduciary duty to the minority.  (Id., ¶29).  The existence of that fiduciary duty—the Business Court explained—satisfies the “special duty,” announced by Barger and its progeny.  (Id., ¶28).  As a result, the Business Court held Plaintiffs could maintain their individual breach of fiduciary duty claims against the Defendant Shareholders.

Additional Legal Points:

  • A breach of contract must be based upon a contractual obligation, not a recital discussing the overall purpose of an agreement. (Opinion, ¶38).
  • Where a party cannot show an actual breach of a contract’s express terms, it is precluded from also asserting a claim for breach of the implied covenant of good faith and fair dealing in the same contract. (Id., ¶41).
  • To maintain an unfair and deceptive trade practice, the action must be something more than the internal conduct of the parties within a single market participant.  (Id., ¶52)
  • So long as a substantive, underlying claim remains, a party can maintain a claim for civil conspiracy which—if successful—would apply joint and several liability to each co-conspirator. (Id., ¶66).

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