Minority Shareholders are Empowered to Sue for Abuse of Control by Majority Shareholders

By Gerald P. (“Jerry”) Burleson, Esq., Member of the California Bar

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The Supreme Court of California announced a fundamental rule of fairness that must be respected in all situations where majority shareholders exercise their power to control the corporation: “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.”  Jones v. Ahmanson (1969) 1 Cal.3d 93, 108 [81Cal.Rptr. 592, 460 P.2d 464] (citing other cases).

Although other jurisdictions had recognized the potential for abuse of control when a majority shareholder sells her shares at a premium over investment value or in other specific situations, Jones v. Ahmanson was a landmark decision because it made California the first jurisdiction to hold controlling shareholders to a comprehensive standard of good faith and inherent fairness to the minority shareholders in any transaction where control of the corporation is a material factor. Jones v. Ahmanson, supra, 1 Cal.3d at p. 112.

The court was concerned that traditional tests of majority shareholder responsibility had failed to provide adequate protection to minority shareholders, particularly those in closely held corporations who the court felt were especially vulnerable to the whims of the majority.  Jones v. Ahmanson, supra, 1 Cal.3d at 111.  In Jones the controlling shareholders of a privately held savings and loan association set up a holding company, exchanged their controlling shares in the S&L for shares in the holding company and then conducted a public offering of the holding company’s stock without allowing the S&L’s minority shareholders to participate in any of these transactions although the transactions had the effect of destroying the limited market for the S&L’s shares and left its minority shareholders unable to realize most of the value of their investments.

The plaintiff in Jones was a minority shareholder who brought a class action in behalf of all of the S&L’s minority shareholders contending that in carrying out these transactions while excluding the minority from the opportunity to participate in them, the majority shareholders breached their fiduciary duty owed to the minority.  The court in Jones found that the plaintiff had stated a good case against the majority shareholders for breach of their fiduciary duty to the minority shareholders and declared that if the plaintiff proves her case at trial, as damages, “. . . equity demands that the minority stockholders be placed in a position at least as favorable as that the majority created for themselves.”  Jones v. Ahmanson, supra, 1 Cal.3d at 117-118.

Jones v. Ahmanson was an important step forward in the protections afforded minority shareholders in California from unfair and inequitable treatment by insiders, including officers, directors and controlling stockholders.  Although Jones involved a transfer of controlling shares, arguably, control of the corporation is a material factor in any transaction where the net result of it is a benefit to the controlling shareholders that is not shared proportionately by all of the shareholders.

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