In the context of a close corporation, a minority shareholder may have a direct cause of action for breach of fiduciary duty against a majority shareholder(s) based upon the majority’s oppressive conduct. Tri-State Petroleum Corp. v. Coyne, 240 W. Va 542 (2018).
Five siblings owned equal shares and partnership interests, respectively, in two small corporations and a limited partnership. As the operations of the businesses grew and became more successful, the siblings adopted various agreements, including a stockholders agreement and limited partnership agreement, to govern the businesses. Over the course of several years, one of the siblings had a falling out with the others and eventually his officer’s position with one of the corporations was terminated and his shares and interests in the various business were redeemed.
The ousted sibling brought a claim in the Circuit Court of Ohio County for breach of contract and breach of fiduciary duty and the court entered judgment for such sibling, awarding attorney fees and prejudgment interest. The rest of the siblings appealed and argued that the claim for breach of fiduciary duty was really a claim for breach of contract with respect to the aforementioned stockholder agreements and as a result such claim should be barred.
The siblings businesses’ were treated by the court like “close corporations” or ones with a small number of shareholders whose shares are not generally traded in the securities market. Because each of the siblings owned equal portions of the various businesses, the ousted sibling was considered a minority shareholder relative to his siblings prior to the redemption of his interests. The appellate court determined that much like officers and directors of a business corporation occupy a fiduciary relationship towards the corporation and its shareholders, in the context of a close corporation, the majority shareholders owe that same duty to minority shareholders.
The appellate court held that there is a broad type of conduct on the part of majority shareholders that may constitute a breach of fiduciary duty owed to the minority, including oppressive conduct, which is conduct that departs from the ordinary standard of good faith and fair dealing. An attempt to freeze or squeeze out a minority shareholder from deriving benefit from an investment by a private business without any legitimate business purpose constitutes oppressive conduct.
Additionally, the fiduciary duty owed to minority shareholders by the majority exists independently of agreements governing the business and would exist even if such agreements did not. In this case, steps by the majority shareholders to siphon off properties to separate companies in which the minority sibling was not a member to develop opportunities separately from him and the majority’s failure to notify the minority sibling of such actions breached a fiduciary duty to the minority shareholder that was derived separately from the existing shareholder agreements. Accordingly, the court did not err in entering judgment for the minority sibling’s breach of fiduciary duty claims.
