Ohio corporate law: First District Court of Appeals: Fifty percent owners of closely held corporations may owe heightened duty to co-owners

Hamilton County Common Pleas Judge Steven E. Martin

In a case expected to be appealed to Ohio’s Supreme Court, Hamilton County’s First District Court of Appeals upheld the ruling of Common Pleas Judge Steven Martin in Vontz v. Miller, et al., 2016-Ohio-8477, that the fifty percent owner of a closely held corporation owes her co-owner a heightened fiduciary duty of “utmost good faith.”

Two siblings share ownership of a beer and wine distributorship – both owning fifty percent of the shares of the company. Thus, argued Miller, neither has a controlling ownership. However, in this instance, the company’s board consisted of Vontz, Miller, and Miller’s husband and two children. Thus, while Vontz is a fifty percent shareholder, the board is dominated by Miller.

Vontz, in an effort to balance control of the company, had sought to call a shareholder meeting to elect a new board. Miller refused. Vontz then brought suit against his sister and her family.

Judge Martin issued an injunction to force a shareholder meeting. Miller and her family appealed. Arguing, in part that Miller, as a fifty percent owner (i.e. less than a majority owner) did not owe a fiduciary duty to her brother who also owned exactly fifty percent of the company. Absent a fiduciary duty to her brother, Miller should not be required to attend or otherwise acquiesce to a shareholder meeting.

The court found that where, as here, one owner dominated the board and refused to adhere to corporate formalities (e.g. holding shareholder meetings where that owner’s family could be removed from the board), then the heightened fiduciary does attach – despite the semantic arguments over whether there can ever be a “controlling shareholder” where two owners each hold fifty percent ownership:

Because Miller so dominated the corporation that she was in control to the exclusion of Vontz, the unusual facts of this case demonstrated that Miller was the controlling shareholder, even though she owned only 50 percent of the voting shares.

Under her heightened duty of good faith and loyalty, she had an obligation of fairness to Vontz. Her duty required her to act for his benefit by protecting his right to vote for the election of new directors. She breached that duty because, as Vontz clearly demonstrated, he was unable to exercise his voting power due to a freeze-out by Miller.

The Court of Appeals, while ordering modifications to some of the particulars of Judge Martin’s ruling, upheld the substance of Martin’s ruling.

Closely held corporations bring with them unique challenges, particularly when the owners are family as well as business partners. Finney Law Firm, can help you avoid these pitfalls ahead of time and navigate through them if a challenge has already arisen.