Without Equal? Pennsylvania Federal Court Charts New Path, Rules Fiduciary Duty Exists Between 50/50 Co-owners Of A Business
Robson & Robson, P.C. | JD Supra
April 28, 2023
There is arguably no more prevalent legal claim in business divorces than a claim of breach of fiduciary duty. Simply put (and I do mean), when one person owes a fiduciary duty to another, the person with the duty must act in the best interests of the person to whom they owe the duty.
When the co-owner of a closely held business owes a fiduciary duty to another shareholder of the business, the co-owner must act in the best interests of that shareholder. That means, among other things, treating the other shareholder in a way that allows them to realize the value of their interest in the business.
Fiduciary duties owed by 50% of co-owners under Pennsylvania law
Under Pennsylvania law, equal shareholders in a business tend not to owe fiduciary duties to each other. That makes perfect sense. It is difficult (though not impossible) for a 50% co-owner of a business to railroad their fellow 50% co-owner. Assuming each co-owner has the same power, control, and rights over the business as the other, neither co-owner should be able to abuse their authority. After all, each co-owner should be able to stop the other’s abuse.
But when shareholders are not co-equal, Pennsylvania imposes a fiduciary duty on majority shareholders to protect the interests of minority shareholders. Without this duty, majority shareholders could use their power to elbow out minority shareholders and take a disproportionate share of their businesses’ profits or take advantage of other benefits provided by their businesses at the expense of those minority shareholders.
This majority-to-minority fiduciary duty exists when shareholders have equal ownership of the company but not equal power or control. In situations where there are two 50% co-owners of a business, but one has more voting power than the other or has greater authority to run the business than the other, Pennsylvania courts will likely rule that the more powerful 50% co-owner owes a fiduciary duty to the less powerful 50% co-owner.
But what about when two 50% co-owners with equal power, control, and rights have a falling out and one tries to terminate the other’s employment? It would seem neither would owe a fiduciary duty to the other given that they’re on equal footing.
But a recent decision from the U.S. District Court of the Eastern District of Pennsylvania suggests that once that firing occurs, the co-owner doing the firing has more power and control than the co-owner who was just fired and, therefore, would owe a fiduciary duty to the fired co-owner.
Crossing the equality chasm
In Meyers v. Delaware Valley Lift Truck, Inc. et al., No. 18-1118, E.D. Pa. (May 13, 2021), two brothers, Jack and Jim, each owned half the shares of a closely held industrial equipment rental business, Delaware Valley Lift Truck, founded in 1985 by their father John. A shareholder agreement between the brothers contained a clause (albeit a sloppily drafted one) that allowed John to break any ties between them in the event of disagreements about “major decisions.” The brothers had equal power, control, and rights to make business decisions.
In late 2017, the relationship between Jack and Jim soured. They clashed over whether to fire a particular employee. Jack, the president, was intent on terminating this employee, believing that his conduct cost the company an important business deal. Jim, the secretary and treasurer, was close with the employee and tied his own continued employment at the company to the continued employment of the person about to be fired.
John apparently gave his blessing to Jack to “to do what he had to do that was best for the company and the employees” and supported whatever decision Jack made about whether Jim would continue working at DVLT. But John did not attend the meeting between Jack and Jim where their dispute came to a head. Thus, as the court recognized, it wasn’t clear if John broke the tie. The two brothers had differing views about what happened at the meeting, but agreed that Jack fired Jim…READ MORE
