The “close corporation” form provides several benefits that may be attractive to the small or medium business. Though it closely resembles a partnership, the close corporation is a separate business entity and therefore provides its owners with another layer to limit personal liability. Additional benefits include free transferability of ownership, perpetuity of the corporate entity, and a structure for management, among others.
However, the close corporation may also include certain drawbacks, particularly as it concerns minority shareholders. Without a controlling vote, the minority shareholder may be subject to oppression by the controlling majority, including through refusal to issue distributions, the granting of excessive salaries and other benefits to majority owners, and lockout from the operation of the business. And although shares in a close corporation are normally freely transferrable, it may be difficult to find a market for a minority interest, and the minority shareholder may be unable to obtain the value of his or her interest in an arm’s length transaction. For that reason, the close corporation form depends on a relationship of trust, confidence and loyalty among the shareholders. That relationship is protected under Ohio law by the courts’ recognition of a heightened fiduciary duty between majority and minority shareholders in close corporations.
Under Ohio law, a “close corporation” may be self-identified, through a close corporation agreement, or may be identified by the courts as any corporation for which shares are not publicly traded on an open securities market and which has relatively few shareholders. The Ohio Supreme Court has held that shareholders in a close corporation owe each other a heightened fiduciary duty and that a majority shareholder may not act in his own benefit while denying equal opportunities to the minority. Based upon the heightened fiduciary duty, the courts of appeal have further held that a shareholder in a close corporation is not an employee at will and cannot be terminated without a legitimate business purpose. Absent a legitimate business purpose, a minority shareholder cannot be denied an equal opportunity to participate and receive a fair return from the business. Further, some Ohio courts have held that the burden is on the majority shareholder to establish that he or she acted fairly in dealing with the minority owner.
While the close corporation provides many benefits for its owners, the form is subject to abuse by the controlling shareholder. For that reason, Ohio law and the Ohio courts recognize special protection for minority shareholders, including a right to participate and benefit from the business, a right to information, and a framework of procedures for the management of the business and the distribution of profits. These special protections are embodied in a “heightened fiduciary duty,” the highest level of care recognized by the law, between the shareholders of a close corporation.
Brule Law Firm has extensive experience protecting the rights of minority owners and resolving business disputes between shareholders. Contact Brule Law Firm to find out how we can help.
However, the close corporation may also include certain drawbacks, particularly as it concerns minority shareholders. Without a controlling vote, the minority shareholder may be subject to oppression by the controlling majority, including through refusal to issue distributions, the granting of excessive salaries and other benefits to majority owners, and lockout from the operation of the business. And although shares in a close corporation are normally freely transferrable, it may be difficult to find a market for a minority interest, and the minority shareholder may be unable to obtain the value of his or her interest in an arm’s length transaction. For that reason, the close corporation form depends on a relationship of trust, confidence and loyalty among the shareholders. That relationship is protected under Ohio law by the courts’ recognition of a heightened fiduciary duty between majority and minority shareholders in close corporations.
Under Ohio law, a “close corporation” may be self-identified, through a close corporation agreement, or may be identified by the courts as any corporation for which shares are not publicly traded on an open securities market and which has relatively few shareholders. The Ohio Supreme Court has held that shareholders in a close corporation owe each other a heightened fiduciary duty and that a majority shareholder may not act in his own benefit while denying equal opportunities to the minority. Based upon the heightened fiduciary duty, the courts of appeal have further held that a shareholder in a close corporation is not an employee at will and cannot be terminated without a legitimate business purpose. Absent a legitimate business purpose, a minority shareholder cannot be denied an equal opportunity to participate and receive a fair return from the business. Further, some Ohio courts have held that the burden is on the majority shareholder to establish that he or she acted fairly in dealing with the minority owner.
While the close corporation provides many benefits for its owners, the form is subject to abuse by the controlling shareholder. For that reason, Ohio law and the Ohio courts recognize special protection for minority shareholders, including a right to participate and benefit from the business, a right to information, and a framework of procedures for the management of the business and the distribution of profits. These special protections are embodied in a “heightened fiduciary duty,” the highest level of care recognized by the law, between the shareholders of a close corporation.
Brule Law Firm has extensive experience protecting the rights of minority owners and resolving business disputes between shareholders. Contact Brule Law Firm to find out how we can help.
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