The Fiduciary Duty of Minority Shareholders to Preserve S Corporation Status

Abstract:     
A small business corporation may file a federal election to be taxed like an S corporation to which all shareholders must consent. Once an election becomes effective it can be terminated with disastrous effects if the corporation thereafter loses its status as a small business corporation. One opportunistic pathway for lost status is a transfer of stock by a minority shareholder to a wholly-owned entity when there is no transfer restriction agreement in place. This Article explores such opportunistic behavior where a minority shareholder seeks to exploit the threat to make such a transfer to extract a favorable buy out. Specifically, corporate case law has limited the right to transfer using gap filler fiduciary duties as well as contractual good faith. The Article also explores the role of the minority shareholder's lawyer in aiding and abetting a breach of such a fiduciary duty thereby making the lawyer directly liable to the corporation for substantial damages.

Number of Pages in PDF File: 14

Accepted Paper Series