Of Donahue and Fiduciary Duty: Much Ado About...?

23 Pages Posted: 7 Dec 2010

See all articles by Douglas K. Moll

Douglas K. Moll

University of Houston Law Center

Date Written: December 6, 2010

Abstract

This symposium essay seeks to articulate precisely how Donahue and its progeny changed the law of fiduciary duty in closely held corporations. Surprisingly, some of the changes that Donahue is credited with may not be changes in corporate law at all, while other changes suggested by Donahue (and acted on by later cases) deserve more attention.

Part II argues that certain changes in the law that Donahue is credited with are not really changes at all. Traditional corporate law, in other words, already provides a shareholder-to-shareholder fiduciary duty, imposes that duty on the minority in certain circumstances, and regulates the disproportionate award of de facto dividends. Moreover, Donahue’s partnership analogy does not effectuate a change in the law, as neither Donahue nor traditional corporate law would allow partnership principles to apply in toto to closely held corporation disputes.

Part III asserts that the real changes in the law brought about by Donahue are the protection provided to employment and management rights even in the absence of de facto dividends, and the dilution of business judgment rule deference in the closely held setting. Traditional corporate law does not consider employment and management interests to be part of one’s rights as a shareholder. Further, the business judgment rule ordinarily makes it especially difficult to challenge majority conduct that is harmful to those interests. By providing protection to employment and management rights and significant scrutiny of majority decisions that affect those rights, Donahue and its progeny did change the law in ways that benefit minority investors in closely held corporations.

Keywords: Donahue, Wilkes, fiduciary, duty, closely held, close, corporation, oppression, shareholder, minority, llc, limited liability company

Suggested Citation

Moll, Douglas, Of Donahue and Fiduciary Duty: Much Ado About...? (December 6, 2010). Western New England Law Review, Forthcoming, U of Houston Law Center No. 1720955, Available at SSRN: https://ssrn.com/abstract=1720955

Douglas Moll (Contact Author)

University of Houston Law Center ( email )

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