Wednesday, March 20, 2013

More Evidence that Kentucky Law Does Not Recognize Fiduciary Duties Among Shareholders

More Evidence that Kentucky Law Does Not Recognize
Fiduciary Duties Among Shareholders

     I have argued at length, and I think pretty well demonstrated, that the shareholders in a Kentucky corporation do not, qua shareholders, owe fiduciary obligations to one another.  This premise is the topic of a forthcoming article:  Shareholders Are Not Fiduciaries – A Positive and Normative Analysis of Kentucky Law, 51 Louisville Law Review ___ (2012-13).  The galley draft of this article is available on SSRN.  It is difficult to prove a negative, and that article could have easily been longer than it is (the journal said I could have 25 pages; I think I came in at 26).
       One point not addressed therein was a clear rejection of a statutory provision recognizing fiduciary duties among and between shareholders.
      The 1928 Model Business Corporation Act, at § 28(II), provided:
If, by the articles of incorporation, voting power is granted to the holders of shares of a certain class or classes and denied to the holders of shares of different classes, then the person or persons exercising such power shall stand in a fiduciary relation to the entire body of shareholders and shall be responsible to the corporation, for the benefit of all shareholders, for any violation of the obligations of such relationship.
      Under this provision, fiduciary duties would flow from those shareholders controlling the corporation to all of the shareholders and the corporation.
      Kentucky, in 1946, adopted the 1928 Model Business Corporation Act, codifying it at KRS ch. 271.  See 1946 Ky. Acts, ch. 141.  That adoption was near complete and without modification.  There was, however, at least one telling change between the Model Act and the Kentucky adoption thereof.  While Kentucky otherwise adopted § 28 thereof without alternation, subsection (II) of § 28 was not adopted.  Compare 1928 Model Business Corporation Act § 28 with KRS § 271.315 as enacted in 1946 Ky. Acts, ch. 141, § 1. 
      In 1946, Kentucky could have adopted a model act expressly creating fiduciary duties among shareholders.  Instead, the only provision of the Model Act providing for fiduciary duties among shareholders was excised from the Model Act before its adoption in Kentucky.

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