Fiduciary Duty of Majority Stockholders in a Closely Held Corporation – Control of Stock

A question often arises regarding the nature and scope of the duty owed by a majority stockholder or stockholders to a minority stockholder in a closely held corporation.  In Biltmore Motor Corp. v. Roque, 291 So. 2d 114 (Fla. 3d DCA1974), the Third District Court of Appeal addressed this issue in the context of manipulation of stock issue by two majority shareholders against one minority shareholder where the majority shareholders made a decision to sell a new stock issue at a price materially less than its market value thus diluting the minority shareholder’s stock. 

The minority shareholder brought suit against the majority shareholders to revoke and rescind the recapitalization of the corporation.  The two defendants authorized the new stock issue, acting as the Board of Directors; the reason that they advanced for the change in capital structure was the repayment of certain loans that had serious impaired the capital of the corporation, jeopardizing its credit standing and ability to profitably conduct business. 

The evidence presented showed that plaintiff had been involved with the company for 11 years, as an employee, vice-president and director.  The defendants terminated his employment, and then made efforts to purchase plaintiff’s stock at an amount that was considerably less than the market value of the stock as testified to by an expert witness who estimated the value to be $6,900 per share.  Although the defendants offered plaintiff his right to purchase his prorate share of stock, the court found this to be an empty gesture as the defendants knew that plaintiff would not invest any more money in the company having been ousted from the corporate family.   In addition, the evidence showed that defendants began withdrawing sums of money for repayment of loans and in payment of undistributed earnings, and also raised their own salaries which was $17,500 in excess of the composite salary paid to all three stockholders prior to the termination of the minority stockholder.

Ultimately, the trial court found that there was no legitimate corporate purpose for the recapitalization of the company; that the only purpose was to dilute the plaintiff’s interest; that by recapitalizing, the defendants breached their fiduciary duty as majority stockholders; and accordingly, the trial court ordered the revocation and rescission of the recapitalization. 

The trial court’s decision was affirmed on appeal.  The Third District Court of Appeal noted that the defendants entered into a scheme directed against the minority shareholder, and the evidence in the record supported the trial court’s conclusion that no legitimate business purpose was shown for the actions of the majority stockholders.