legal advice for the family business

Alarge number of small businesses in our area are family owned and operated, or started by a group of friends. This often leads to the formation of a what is referred to under the law as a “closely held corporation,” or a “close corporation.” By law a close corporation has no more than 35 shareholders. The typical characteristics include: having a few shareholders, often only two or three; the shareholders usually live in the same geographical area, know each other, and are familiar with each other’s business skills; nearly all of the shareholders are involved in the day-to-day business; there is no established market for selling corporate stock; and all or most of the shareholders serve as directors, officers or have some key managerial role in the business.

The Business Corporation Act, which is adopted in North Dakota and Minnesota, provides that shareholders in a close corporation owe one another legal duties to act in an honest, fair and reasonable manner in the operation of the corporation. The law also requires shareholders to treat each other with “utmost loyalty” and “good faith.” “Good faith” is defined as being honest in conducting any act or transaction. These legal duties exist to protect each shareholder’s investment and expectations in being part of a corporation with so few shareholders.

For those shareholders that also act as directors or officers, it is important to know there are additional duties to act in good faith, in a manner the person reasonably believes to be in the best interests of the corporation and with ordinary care. Directors or those in control of a close corporation also cannot act fraudulently, illegally or in a manner considered “unfairly prejudicial” toward one or more shareholders.

It is not always easy to know what actions could constitute a breach of duty, especially because the act does not specify what actions are unlawful. Instead, the act broadly states the duties owed by directors, officers and shareholders. A few actions which could be considered a breach include failing to make appropriate financial distributions, freezing shareholders out of corporate affairs, or altering a shareholder’s ownership interests.

There are legal remedies available to aggrieved shareholders. For example, under the act, a shareholder may seek a forced buyout of his or her stock. In some instances, the shareholder may even seek a complete dissolution of the corporation and recovery of his or her costs and attorney fees for pursuing legal action. Our courts are also given broad power to grant any relief determined just and reasonable under the circumstances. It is therefore important for those in control of a close corporation to be mindful of the legal duties owed to the other shareholders.

Kasey

McNARY is a shareholder in the Serkland Law Firm and has been with Serkland Law Firm since 2010. Prior to joining Serkland, he served as a judicial law clerk for the East Central Judicial District in Fargo. Kasey graduated with distinction from the University of North Dakota School of Law. His practice focuses on commercial and business litigation, general civil litigation, collection cases and real estate matters, including foreclosure. He is licensed to practice law in state and federal courts in North Dakota and Minnesota.

This article was written and prepared by Kasey D. McNary, an attorney with the Serkland Law Firm in Fargo, North Dakota. For more information, call 701-232-8957, email kmcnary@serklandlaw.com or visit serklandlaw.com.