Duty of Good Faith
Fender v. Prescott, 101 A.D.2d 418,422 (1st Dept. 1984):
[T]he relationship between shareholders in a close corporation, vis-à-vis each other, is akin to that between partners and imposes a high degree of fidelity and good faith.
As was observed by Chief Judge Cardozo in Meinhard v. Salmon, 249 N.Y. 458, 164 N.E. 545, 546 (1928) : "A trustee is held to something stricter than the morals of the market place. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior."
The strict standard of good faith imposed upon a fiduciary may not be so easily circumvented.
Harger v. Price, 204 F.Supp.2d 699, 707 (S.D.N.Y.2002):
Corporate directors and controlling shareholders of close corporations ... are held ‘to the extreme measure of candor, unselfishness and good faith.’ ' (citing Kavanaugh v. Kavanaugh, 226 N.Y. 185, 193 (1919)).
They may not act ‘for the aggrandizement or undue advantage of the fiduciar[ies] to the exclusion or detriment of the shareholders.’ ' (citing Alpert v. 28 Williams St. Corp., 63 N.Y.2d 557, 559 (1984)). 'Surely they may not act if the sole purpose is reduction of the number of profit sharers, or ultimately to increase the individual wealth of the remaining shareholders.' Id. (citations and internal quotations omitted).
O'Neill v Warburg, Pincus & Co., 39 A.D.3d 281, 282 (1st Dep’t 2007):
A minority shareholder in a close corporation is owed a fiduciary duty by the majority shareholders. In Richbell Info. Servs. V. Jupiter Partners, 309 A.D.2d 288, 302 (1st Dep’t 2003), we held that the majority could be in breach of its fiduciary duty to minority shareholders, even when exercising an express contractual right, if it acted malevolently and in bad faith, solely for its own gain, and in a manner not contemplated by the parties' agreement. There, under a "secret agreement," the defendant exercised a right malevolently for its own gain and to deprive the plaintiffs of the benefit of the joint venture.
Duty of Full Disclosure
Ajettix Inc. v. Raub, 9 Misc.3d 908, 912 (Sup. Ct. Monroe Co. 2005)
[A] fiduciary owes a duty of undivided and undiluted loyalty to those whose interests the fiduciary is to protect. This is a sensitive and 'inflexible' rule of fidelity, barring not only blatant self-dealing, but also requiring avoidance of situations in which a fiduciary's personal interest possibly conflicts with the interest of those owed a fiduciary duty.
Thus, there is an obligation of utmost candor, strictly obligating a fiduciary "to make a full disclosure of any and all material facts within his or her knowledge relating to a contemplated transaction with the other party to the relationship". "[W]hen a fiduciary, in furtherance of its individual interests, deals with the beneficiary of the duty in a matter relating to the fiduciary relationship, the fiduciary is strictly obligated to make 'full disclosure' of all material facts"
The transaction here, without question, concerned a matter relating to defendant's fiduciary relationship with plaintiffs. Defendant, therefore, was obligated in negotiating that transaction "to disclose any information that could reasonably bear on plaintiffs' consideration of [his] offer." Stated another way, defendant was "under a duty to disclose . . . the full facts . . . affecting the value of the stock which [he] was selling". "Absent such full disclosure, the transaction is voidable" Indeed, where a fiduciary relationship exists between the parties, there must be clear proof of the integrity and fairness of a transaction between them, " 'or any instrument thus obtained will be set aside or held as invalid' "
Duty of Loyalty
Leiser v System D Rest. Holdings, Inc., 2010 NY Slip Op 20553 (Sup. Ct. N.Y. Co. 2010):
While a majority shareholder owes a fiduciary duty to the minority shareholders, plaintiff is not the majority shareholder. A shareholder in a closely held corporation also owes a fiduciary duty to the other shareholders not to co-opt or divert a valuable corporate opportunity she became aware of in her corporate shareholder capacity. Plaintiff's status as a shareholder of defendant, a closely held corporation, required her to devote her undivided, unqualified loyalty to the corporation and not to compete with it, place her private interests in conflict with its interests, or personally profit at its expense. Concomitantly, this fidelity obligated her to disclose any such situation.
Duty Not to Oppress
McCagg v. Schulte Roth & Zabel LLP, 2008 WL 4065920 at *8 (Sup.Ct. N.Y. Co. 2008):
It 'is the fiduciary duty owed by ... majority shareholder [s] in a closely held corporation to a minority shareholder, not to engage in oppressive actions toward minority shareholders.'
Matter of Kemp & Beatley, Inc., 64 N.Y.2d 63, 72-3 (1984):
A shareholder who reasonably expected that ownership in the corporation would entitle him or her to a job, a share of corporate earnings, a place in corporate management, or some other form of security, would be oppressed in a very real sense when others in the corporation seek to defeat those expectations and there exists no effective means of salvaging the investment.
A court considering a petition alleging oppressive conduct must investigate what the majority shareholders knew, or should have known, to be the petitioner’s expectations in entering the particular enterprise. Majority conduct should not be deemed oppressive simply because the petitioner’s subjective hopes and desires in joining the venture are not fulfilled. Disappointment alone should not necessarily be equated with oppression.
It is widely understood that, in addition to supplying capital to a contemplated or ongoing enterprise and expecting a fair and equal return, parties comprising the ownership of a close corporation may expect to be actively involved in its management and operation.
The shareholder in a close corporation is a co-owner of the business and wants the privileges and powers that go with ownership. His participation in that particular corporation is often his principal or sold source of income. As a matter of fact, providing employment for himself may have been the principal reason why he participated in organizing the corporation. He may or may not anticipate an ultimate profit from the sale of his interest, but he normally draws very little from the corporation as dividends. In his capacity as an officer or employee of the corporation, he looks to his salary for the principal return on his capital investment, because earnings of a close corporation, as is well known, are distributed in major part in salaries, bonuses and retirement benefits.