The Minority's Duty of Loyalty in Close Corporations

Abstract

We are accustomed to thinking of corporate stock primarily as property, and of stockholders, particularly minority stockholders, as free agents in the exercise of their rights as property owners. The purpose of this article is to show that there are situations in which minority shareholders, like other holders of contract and property rights, may be obligated when exercising their rights as owners of stock to take the interests of other parties into account. The arguments for this proposition are based on principles which are well established in corporation law and in commercial law. The corporation law principle is the familiar duty of loyalty which is imposed on management and controlling shareholders; the commercial concepts are those requiring commercially reasonable behavior and the avoidance of unconscionable conduct in business dealings. The corporation and commercial law concepts are discussed briefly in parts I and II of the article, and in part III the principles developed in the preceding parts are related to the conduct of minority shareholders in close corporations in certain types of situations.