The Business Mind
How to keep your company from attacking you: deal in good faith
My client, Daniel, called me recently with a worried heart. He’s the majority shareholder in a small manufacturing business. The company has suffered in the current economy as the sales of their luxury product nosedived over the last few years. Fearing the worst, Daniel began to cast about for new opportunities to bring to the table.
An opportunity came up for him to bring business to the company that would greatly increase revenue, and that would also allow him to make a lot of money in the process. He wanted to know how best to present this opportunity to the directors of the company, and to his fellow shareholders, and whether he needed to tell them that he stood to make money on the deal.
Firstly, I commended Daniel on his genuine concern for his fellow shareholders. Very often clients call me because they really don’t want to do the right thing, and they want to know how close to the line they can skirt without getting into trouble. But not Daniel. I gave him some idea of management’s and controlling shareholders’ fiduciary duties to the company, and to minority shareholders.
The management team of a company, including its directors and officers, and its controlling shareholders owe a duty of good faith and fair dealing to minority shareholders, and to the company itself (the duties would be the same if Daniel were instead the majority member of a limited liability company). These duties generally arise when a director, officer, or controlling shareholder is engaging in acts that compete with the company, or that takes a business opportunity away from the company.
The duties also arise when the controlling shareholder seeks to sell his or her controlling interest in the company, or when they deal with insider information, especially if the company is publicly traded. (Ask Martha Stewart if this is an issue.) The point is that a person in a position of power in a company must take care not to oppress minority shareholders, and to care for the company as well.
I told Daniel that if he properly disclosed his interest in this opportunity to the directors, and to minority shareholders, he would be immune from attack and liability. However, if he failed to do so, the director and minority shareholder could actually sue him for any resulting loss to the corporation.
Daniel fully disclosed his business opportunity to the directors, and to minority shareholders, and then stepped out of the picture and let the remaining directors decide whether or not to take advantage of the business opportunity that he had presented. Ultimately, the directors decided that the deal he brought to the table was in the best interest of all parties involved, and they voted to take advantage of it.
The minority shareholders were notified of the directors’ decision, and the deal was consummated. Within months the company’s revenues began to rise again, and the minority shareholders hailed Daniel as a hero.
© 2011. All Rights Reserved. Shaune B. Arnold, Esq. is a practicing attorney, business strategist and business coach. Contact her directly at Shaune@BusinessBootCampOnline.com. This article is intended for information purposes only. All legal issues should be considered in light of the particular circumstances involved. If you have legal questions, you should consult with an attorney.