Traditionally, the law has considered only a company's board of directors and its executives owe a fiduciary duty to shareholders. These corporate insiders have control over the company and are managing it on behalf of shareholders. However, in recent years a view is emerging that some activist shareholders who own a substantial share in a company also owe some limited fiduciary duty to other shareholders.
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One aspect of shareholder fiduciary duty is that they owe loyalty to other shareholders. This fiduciary duty of loyalty means that they should not use their controlling interest in the company to extract a material economic benefit for themselves at the expense of the other shareholders. The California Supreme Court laid down, in the case of Jones vs. H.F. Ahmanson & Co., "Majority shareholders may not use their power to control corporate activities to benefit themselves alone or in a manner detrimental to the minority."
While controlling shareholders should not engage in acts that benefit them at the expense of other shareholders, they have some defences in such situations. They may be able to plead that, while there was a conflict of interest, their actions did not go against fiduciary duty since they were intrinsically fair to the company and the other shareholders. It is usually up to the controlling shareholder to prove that her actions were intrinsically fair. In some situations, the court may ask the plaintiff to establish that a transaction was not intrinsically fair. For instance, if a corporate acquisition went through after following the correct procedures, it may still be unfair since it was approved based on the vote of the majority shareholder.
Rise of Shareholder Activism
Historically, shareholders in corporations were more passive onlookers than active influences of the company's decisions. In recent years, some factors have given rise to increasing activism by shareholders. One of these is the emergence of institutional investors who have clout, including hedge funds. Another factor is that the Securities and Exchange Commission changed its federal proxy regulations in 1992 to enable large shareholders to more effectively exercise their vote. Financial innovation, such as the growth of derivative instruments, and the emergence of shareholder advisory services are other factors.
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