The Fiduciary Duties of Controlling Shareholders

Corporations are intricate machines made up of countless moving parts. When they work harmoniously, great things can be accomplished, and many people can profit for their confidence in the organization. However, when even one member falls out of concert, the results can be devastating. This is why fiduciary duties are such an important legal requirement of many who work for a corporation. It’s just as essential for controlling shareholders as it is for the board of directors to honor them.

Fiduciary Duties Explained

While the legal definition may differ slightly from state to state, the simplest way to explain fiduciary duties is to say that it means acting selflessly on behalf of another. Doctors, lawyers, and those responsible for wards all have fiduciary duties. Doctors can’t decide to give their patients placebos in order to pocket the real medication or sell it on the side. Lawyers can’t profit off the secrets of their clients. Guardians aren’t allowed to tell a ward’s life story to the news.

However, leaders within a corporation have this same responsibility. This might seem strange because they’re always trying to profit from the corporation. But here, fiduciary responsibility means not attempting to profit on one’s own if it means hurting the corporation. It’s important to understand, too, that shareholders are considered a part of the corporation as well.

Controlling Shareholders

But, those who sit on the board of directors aren’t the only ones who have to play fair. Controlling shareholders have a fair amount of influence themselves, meaning they too have a fiduciary duty to the corporation.

What designates someone as a controlling shareholder? As the name suggests, it means they have power over fundamental components of the corporation. They may actually control it, if they own enough shares. But it usually takes far less to have a vote in who’s on the board and who’s not. That’s an awful lot of influence. In fact, sometimes shareholders rival the power held by the board itself.

So it’s understandable, then, that controlling shareholders can’t act against the corporation’s best interests. One example of how this could go wrong is if a controlling shareholder bought an even larger share of a competitor before dropping all the shares they had in the original corporation. Doing this would be extremely profitable, but it would also hurt shareholders with much smaller interests.

The Right to Self-Interest

That being said, controlling shareholders are still shareholders and are thus allowed to act in that capacity. When they vote, for example, no law says they can’t do so in their best interest. They also wouldn’t be neglecting their fiduciary duty if they decided against selling off some of their own shares solely because it would help other holders.

If this seems a bit confusing, you’re not alone. Countless lawsuits have been filed over accusations of people violating their legal responsibilities as a corporate fiduciary. So if you need help understanding this important topic, I’m here to help. In my capacity as a provider of nominee director services, I deal with this important matter all the time and have helped others make sense of it.