What is a shareholder’s duty to another shareholder in a corporation where each shareholder owns a 50% interest? Does one 50% shareholder owe the other 50% shareholder a direct fiduciary duty? Is a 50% shareholder limited to bringing derivative claims on behalf of the corporation? These questions come up often in closely held businesses where there is an equal 50% interest between two shareholders and the law is not clear.
We recently successfully handled a matter that involved these very issues. In this case Kleinbard represented the defendant 50% shareholder in a claim brought in federal court by the 50% plaintiff shareholder asserting that the defendant shareholder had breached a fiduciary duty owed individually to the plaintiff by allegedly freezing him out of the company. The plaintiff shareholder sought to compel the defendant shareholder to buy out his 50% interest in the company based on its value prior to the alleged freeze-out. This raised the legal issue of whether, under Pennsylvania law, 50/50 shareholders in a closely held corporation owe each other a fiduciary duty. While the Pennsylvania Superior Court has rejected the notion that a fiduciary duty runs between 50/50 shareholders, the Pennsylvania Supreme Court has yet to address this issue.
The federal court granted judgment to the defendant shareholder without resolving the issue of whether a fiduciary duty exists between 50/50 shareholders. Instead, the court found that the claim alleged by the plaintiff shareholder primarily asserted injuries to the company and, therefore, only could be brought as a derivative claim on behalf of the corporation. It could not be brought by the plaintiff shareholder as an individual claim in an attempt to compel a buyout of his interest in the company by the defendant shareholder. While granting judgment to the defendant shareholder, the court left open the possibility that the plaintiff shareholder still could bring a derivative action on behalf of the corporation.
This matter highlights several issues that often arise in disputes between 50/50 shareholders. First, under Pennsylvania law, it remains uncertain if one 50% shareholder in a corporation can successfully bring a claim for breach of fiduciary duty against the other 50% shareholder. Second, a 50% shareholder attempting to bring such a claim must be able to assert injuries that are individual to the shareholder, not simply injuries being suffered by the company. Finally, a 50% shareholder always has the option of seeking to pursue a derivative claim on behalf of the company, but a derivative claim will not allow a shareholder in a closely held corporation to pursue the potential remedy of a forced buyout.