Shareholder Oppression: When Majority Shareholders Breach Their Fiduciary Duties

Unlike other states, California has no cause of action called “shareholder oppression.” That does not mean shareholders are without a remedy. Instead of calling it “shareholder oppression,” California courts characterize this claim as an action for breach of fiduciary duty against the controlling shareholders. The same standards also apply to the majority owners of limited liability companies (LLCs) and partnerships.

What are the fiduciary duties of the controlling shareholders? In Jones v. H.F. Ahmanson & Co., (1969) 1 Cal.3d 93, the California Supreme Court described their duties:

[M]ajority shareholders, either singly or acting in concert to accomplish a joint purpose, have a fiduciary responsibility to the minority and to the corporation to use their ability to control the corporation in a fair, just, and equitable manner. Majority shareholders may not use their power to control corporate activities to benefit themselves alone or in a manner detrimental to the minority. Any use to which they put the corporation or their power to control the corporation must benefit all shareholders proportionately and must not conflict with the proper conduct of the corporation’s business. … The rule that has developed in California is a comprehensive rule of “inherent fairness from the viewpoint of the corporation and those interested therein.” The rule applies alike to officers, directors, and controlling shareholders in the exercise of powers that are theirs by virtue of their position and to transactions wherein controlling shareholders seek to gain an advantage in the sale or transfer or use of their controlling block of shares. 

Thus, majority shareholders breach their fiduciary duty when they exercise control of the company or seek a personal advantage in a way that is unfair, unjust, or inequitable to minority owners. This is the essence of a “shareholder oppression” lawsuit in California.

Of course, the fairness of any decision or transaction has to be examined on its own facts. If you are a minority owner and you believe the majority are treating you unfairly, contact an experienced attorney to help you protect and defend your investment.