Last June we reported on Griffin v. Jones, a Kentucky federal district court opinion holding, among other things, that shareholders of Kentucky corporations do not owe common law fiduciary duties to other shareholders. While that holding came as a surprise to many Kentucky business owners, it was confirmed in a recent opinion from the Kentucky Court of Appeals.
In Conlon v. Haise, we see an all-too-familiar scenario: a minority (47%) shareholder disagrees with a request from the majority (53%) shareholder to enter into a new buy-sell agreement. Allegedly faced with the threat that shares will be issued to further dilute his ownership interest, the minority shareholder tenders his shares pursuant to the current buy-sell agreement. But after doing so, he brings a claim for breach of fiduciary duties against the majority shareholder.
After reviewing Kentucky law (including the Griffin case), the Kentucky Court of Appeals held that there is no common law fiduciary duty between shareholders in Kentucky corporations. Without a duty, the minority shareholder’s claim of breach failed as a matter of law and his claim was dismissed, leaving him effectively no remedy for his allegations. As the Court noted, this is the first explicit ruling on this issue from a Kentucky state appellate court.
Shareholders who were surprised at Griffin are likely to be shocked that the Kentucky Court of Appeals agrees, but the Conlon opinion is the latest nail in the coffin on shareholder breach of fiduciary duty claims. Shareholders may have other claims, depending on the situation, but many will find themselves in the same position as the minority shareholder in Conlon: out of power and out of options.
In light of the Conlon opinion, we encourage owners and potential owners of Kentucky businesses to review our takeaways from the Griffin decision here. Often, the best way to protect your interests is to understand the situation and deal with potential issues on the front end of any business venture. The full Conlon opinion can be found here.