Thursday, June 7, 2012

Shareholders Are Not Fiduciaries

Shareholders Are Not Fiduciaries

I have written, and the Louisville Law Review has accepted for publication, Shareholders are not Fiduciaries – A Positive and Normative Analysis of Kentucky Law.
This article considers a seemingly simple question – is the statement “shareholders in a Kentucky business corporation stand in a fiduciary relationship with one another” an accurate statement of the law?  In fact it is not. 
          As is detailed therein, as a matter of positive law:

·         no Kentucky court has held there to be a fiduciary relationship among shareholders save in one narrow fact situation, and that decision may now be invalid consequent to intervening developments in the controlling statute; and

·         in comparing the Business Corporation Act to other of Kentucky’s business organization statutes, each addressing inter-owner fiduciary duties, the absence of a statutory inter-shareholder duty must evidence the absence of such obligations. 
Turning to a normative analysis, the absence of inter-shareholder fiduciary obligations is correct as:
·         the inter-shareholder relationship lacks the features of a fiduciary relationship;

·         the imposition of fiduciary duties among shareholders does violence to the statutory construct of majority control of the corporate enterprise;

·         the existence of such duties would do violence to a consistent form in which, by statute, fiduciary obligations are imposed upon only those charged with the day to day management of the venture; and

·         there are a variety of alternative structures in which, if desired, inter-owner fiduciary duties do exist. 
This article concludes with a review of how perceived cases of oppression may be addressed through contractual (as contrasted with fiduciary) remedies.
            The working draft of the article can be accessed through SSRN.  LINK

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