Corporate law provides shareholders protections. Officers and directors of a corporation owe shareholders a fiduciary duty — a legal obligation to refrain from putting their own interests ahead of the shareholders’. In a closely held corporation, majority shareholders usually hold or control the officer and director posts, which means they owe fiduciary duties to minority equity owners. However, minority shareholders may also owe fiduciary duties, even if they do not hold leadership positions. Investors in close corporations often fail to consider the implications of the fiduciary duty they may undertake, which may expose them to significant liability.
Depending on circumstances, a “close corporation” can refer to any company owned and operated by a small group of entities or individuals. In essence, the corporation acts like a partnership. Ownership shares are not traded publicly and the company is exempt from many of the reporting and record-keeping requirements of the Illinois Business Corporation Act (IBCA). This lack of regulation makes the fiduciary duty among shareholders and the corporation more critical.
Depending on circumstances, including shareholder agreements, assigned management responsibilities and employment considerations, Illinois law may impose duties on all shareholders in a close corporation, including minority equity owners, to deal fairly, honestly, openly and in good faith with each other and with the corporation. These duties can apply to shareholders in companies that operate like close corporations — sometimes even companies that have not officially designated themselves as close corporations under the IBCA.
Minority equity shareholders in close corporations may wish to consider proactively eliminating any fiduciary duties they might owe – and might not realize they owe. Illinois law allows this option. Under the IBCA, with exceptions, a shareholder has no fiduciary duty to the corporation or any of its shareholders once he or she executes and delivers certain voting and management waivers, and if a well-drafted shareholder agreement clearly eliminates or moderates defined fiduciary obligations.
If you are a minority shareholder of a close corporation, or are considering becoming one, then you should consult with an experienced business entity attorney to understand the fiduciary duties that may affect you and to decide on the best way to deal with them.
The skilled lawyers of Schwartz & Kanyock, LLC are well-versed in corporate shareholder issues and can help you ensure your rights and interests are protected. Call today at 312-441-1040 or contact us online to request an initial consultation.