Minority Shareholders Given More Ammunition

             Traditionally, in Pennsylvania, shareholders of a closely held corporation are limited under the Pennsylvania Business Corporation Law (BCL) in asserting their dissenters’ rights to two actions:  (1) moving to enjoin the undesired transaction or (2) receiving a value and payment for shares owned in the corporation.  See 15 Pa.C.S. § 1105.  However, a recent decision in the Pennsylvania Court of Common Pleas of Philadelphia County expanded those limitations.  If the majority shareholders of the closely-held corporation are alleged to have engaged in misfeasance, the minority shareholders are not limited to the two actions set forth in § 1105.

            The decision which expanded rights of minority shareholders examined the issue of whether minority shareholders were permitted to assert that majority shareholders breached the fiduciary duty owed to the minority shareholders.  Potok v. Rebh 2012 Phila. Ct. Com. Pl. LEXIS 60, March 5, 2012.  In Potok, the minority shareholders of a corporation alleged that the majority shareholders breached their fiduciary duty by not properly allocating funds received from a settlement.  The majority shareholders argued that under 15 Pa.C.S. § 1105, the minority shareholders’ dissenters’ rights were limited, thus excluding the minority shareholders from bringing a case for a breach of fiduciary duty.  In this case, however, the limitations do not apply since the minority shareholders are part of a closely held corporation and are bringing claims for misfeasance.

            Although they were allowed to allege a breach of fiduciary duty, the minority shareholders failed to show that the majority shareholders had breached their fiduciary duty.  As officers and directors, the majority shareholders owed a fiduciary duty not only to the shareholders, but also to the corporation.  In this particular case, however, an expert’s report of the valuation of the corporation’s assets left the minority shareholders without a factual basis to show that funds were misallocated. Thus, the minority shareholders did not have the evidence needed to show a breach of fiduciary duty.  Although the minority shareholders were not successful in this instance, they set a precedent which may have expanded their dissenters’ rights in the future.