Tyranny of the Minority: North Carolina Business Court Explores Potential Fiduciary Duties of Minority Shareholders
The North Carolina Business Court recently issued an opinion considering whether a minority shareholder can ever be considered a “controlling shareholder” who owes a fiduciary duty to other shareholders. The court’s opinion indicates that if the minority shareholder exercises sufficient control over the corporate conduct at issue, the minority shareholder could potentially be on the hook for fiduciary duty claims.
In Corwin v. British American Tobacco p.l.c., 2015 NCBC 74 (August 4, 2015), the Business Court addressed claims arising out of a merger of tobacco companies in which Reynolds American, Inc. (RAI) acquired Lorillard, Inc. The transaction was funded in part through a share purchase by RAI’s 42% shareholder, British American Tobacco, p.l.c. (BAT).
The plaintiff, an RAI shareholder, brought a putative class action contending that the share purchase was unfair to RAI shareholders other than BAT. Among other claims, the plaintiff asserted breach of fiduciary duty claims against BAT. While shareholders generally do not owe fiduciary duties to other shareholders, it is well-established that controlling shareholders owe fiduciary duties to minority shareholders. The plaintiff contended that BAT was a controlling shareholder of RAI, notwithstanding that BAT owned less than half of RAI’s shares, and thus owed a fiduciary duty to the plaintiff and other RAI shareholders.
After thoroughly reviewing North Carolina law, the Business Court concluded that while North Carolina law imposes a fiduciary duty on controlling majority shareholders, its courts have left open the question of whether a minority shareholder can exercise sufficient control to warrant imposing a fiduciary duty on that shareholder. The court then considered the possible rules proposed by the parties. BAT proposed a bright-line rule that majority ownership (which BAT never had) is a prerequisite for imposing any fiduciary duty. The court refused to adopt this approach, reasoning that while this rule would provide certainty and predictability, its rigidity could also be abused and would have far-reaching consequences, and thus it was better adopted (if at all) by North Carolina’s legislature or appellate courts.
The court also examined the more flexible approach that the plaintiff proposed, and that is applied under Delaware law, which allows a minority shareholder to be considered a controlling shareholder if that shareholder exercised actual control over corporate conduct. Where a transaction is controlled by a board, this standard is met only if the minority shareholder exercised actual domination and control over the board in connection with that transaction. The court similarly refused to adopt this rule, but did state that it was “comfortable” that if North Carolina’s appellate courts did not adopt the bright-line majority ownership requirement, they would go no further than this standard in imposing fiduciary duties on minority shareholders.
Ultimately, the court concluded that under either proposed standard the plaintiff’s claims against BAT should be dismissed. If the majority ownership requirement applied, BAT owed no fiduciary duty because it was never a majority shareholder. Likewise, if the Delaware “actual control” standard applied, the plaintiff had not alleged sufficient facts to show actual control. In this regard, while there was ample evidence that BAT had influenced and shaped the transaction, the court concluded that the “extraordinary limitations” created by an existing governance agreement between RAI and BAT, which imposed severe restrictions on BAT’s ability to elect a majority of RAI’s board, foreclosed the plaintiff’s ability to show that BAT exercised actual control of RAI’s board in connection with the transaction.
While the Business Court’s decision does not expressly adopt a position on whether or when a minority shareholder may owe a fiduciary duty, it does suggest a willingness to consider that possibility, which is a new development in North Carolina law. Minority shareholders who exercise control over the board of directors in connection with a proposed transaction need to take this risk into account, particularly in the context of mergers and acquisitions.