What Fiduciary Duties Bind Majority Stockholders?

Introduction

Majority ownership in a close corporation carries more than voting power. In a tightly held family business, majority stockholders often influence the board, management, corporate finances, and important business decisions. That influence may create legal duties toward the corporation and, in appropriate circumstances, toward minority stockholders.

Philippine corporate law does not allow majority owners to use corporate control to divert assets, capture business opportunities, dilute minority interests, or impose oppressive arrangements. Although majority rule generally governs corporate affairs, it remains subject to the articles of incorporation, the Revised Corporation Code, fiduciary principles, and the prohibition against fraud, bad faith, and unfair prejudice.

What Is a Close Corporation?

Under Section 95 of the Revised Corporation Code of the Philippines, a close corporation is one whose articles of incorporation provide that: the issued shares are held by not more than a specified number of persons not exceeding 20; the shares are subject to permitted transfer restrictions; and the corporation neither lists its shares on a stock exchange nor makes a public offering.

The classification must be determined primarily from the corporation’s articles of incorporation. A corporation cannot simply claim the special rules applicable to close corporations based only on the fact that it is family-owned, privately held, or has a small number of stockholders.

The special provisions on close corporations do not apply to certain entities, including banks, insurance companies, public utilities, educational institutions, stock exchanges, and mining or oil companies. They also do not apply when at least two-thirds of the voting stock or voting rights is owned or controlled by a corporation that is not a close corporation.

Why Majority Stockholders Have Heightened Duties

Majority stockholders ordinarily have the power to elect directors and approve matters requiring stockholder consent. That power, however, cannot be exercised solely for personal advantage or to the detriment of the corporation and minority investors.

In Majority Stockholders of Ruby Industrial Corporation v. Lim, et al., G.R. No. 165887, 2011, the Supreme Court recognized that majority rule operates only within the limits of the articles of incorporation, lawfully adopted bylaws, and applicable law. The Court also emphasized that an issuance of shares may be challenged when controlling stockholders act in breach of trust to perpetuate or shift control, or to freeze out minority interests.

This principle is especially important in close corporations because ownership, management, and family relationships frequently overlap. A majority owner may formally act through a stockholder vote or board resolution, yet still incur liability if the transaction is fraudulent, oppressive, dishonest, or unfairly prejudicial.

Fiduciary Duties Under Philippine Corporate Law

Corporate fiduciary obligations include duties of obedience, diligence, and loyalty. Directors and officers must act within the corporation’s lawful purposes, avoid knowingly approving unlawful acts, exercise appropriate care, and refrain from acquiring personal interests that conflict with their corporate responsibilities.

These obligations are discussed in TOPROS, Inc. v. Chang, Jr., et al., G.R. Nos. 200070-71, 2021. The Supreme Court explained that corporate directors, officers, and controlling stockholders may not use their position, inside information, or corporate power for personal advantage to the prejudice of the corporation, stockholders, or creditors.

In a close corporation, the duty may be more direct because stockholders can participate actively in management. Section 99(e) of the Revised Corporation Code provides that stockholders actively engaged in the management or operation of a close corporation owe strict fiduciary duties to one another. They may also be personally liable for corporate torts when the corporation has not obtained reasonably adequate liability insurance.

Management by Stockholders

The articles of incorporation of a close corporation may provide that the business will be managed directly by the stockholders rather than by a board of directors. Under Section 96 of the Revised Corporation Code, stockholders are then treated as directors for purposes of applying the Code and are subject to the liabilities imposed on directors.

This arrangement does not eliminate fiduciary duties. Instead, it places those duties directly on the stockholders who manage the enterprise. They must therefore maintain corporate records, disclose conflicts, act for legitimate corporate purposes, and avoid using corporate resources for personal or family interests without proper authorization.

The Supreme Court’s ruling in Marasigan v. Marasigan, et al., G.R. No. 261125, 2023, clarified that the special privileges of a close corporation must be expressly and properly stated in its articles of incorporation. Without such an express provision, the general rules governing corporations continue to apply, even if the stockholders are also the directors.

Corporate Opportunities and Conflicts of Interest

A majority stockholder may breach the duty of loyalty by taking for personal benefit a business opportunity that properly belongs to the corporation. The opportunity should ordinarily be disclosed to the board, which must be given the chance to accept or reject it on behalf of the corporation.

In TOPROS, Inc. v. Chang, Jr., et al., G.R. Nos. 200070-71, 2021, the Court described the corporate opportunity doctrine as an application of the fiduciary duty to avoid conflicts of interest. A fiduciary who wrongfully takes a corporate opportunity may be required to hold the resulting profits in constructive trust for the corporation.

Liability generally depends on whether:

• The corporation was financially able to pursue the opportunity;
• The opportunity was within the corporation’s line of business;
• The corporation had an interest or expectancy in the opportunity; and
• The fiduciary’s acceptance created a conflict with duties owed to the corporation.

For example, a majority stockholder who learns through the family corporation’s negotiations that a valuable property is available for purchase may not secretly acquire the property personally if the corporation had the financial ability, business interest, and reasonable expectation of pursuing the transaction.

Share Issuances and Minority Freeze-Outs

Issuing additional shares may be legitimate when undertaken for a genuine corporate purpose and in compliance with the law. It may become objectionable when the real purpose is to dilute minority ownership, change voting control, or force minority stockholders out of the corporation.

As recognized in Majority Stockholders of Ruby Industrial Corporation v. Lim, et al., G.R. No. 165887, 2011, a share issuance may be challenged even when no pre-emptive right exists or when that right has been limited by the articles of incorporation. The controlling inquiry is whether the directors or controlling stockholders acted in breach of trust and sought to perpetuate or shift control or freeze out the minority.

Majority stockholders should therefore document the business reason for a new issuance, establish a fair valuation, provide adequate notice, observe applicable pre-emptive rights, and ensure that the transaction is not being used as a disguised transfer of control.

Shareholder Agreements and Voting Arrangements

Section 99 of the Revised Corporation Code recognizes written agreements among stockholders of a close corporation. These agreements may govern voting rights, the conduct of corporate affairs, and other arrangements among the parties, provided they are consistent with the articles of incorporation and applicable law.

A written voting agreement may require the parties to vote their shares in an agreed manner or according to an agreed procedure. An agreement is not invalid merely because it regulates corporate affairs or causes the parties to resemble partners among themselves.

However, a shareholder agreement cannot lawfully authorize fraud, unlawful distributions, concealment, abuse of corporate assets, or conduct that violates mandatory provisions of the Revised Corporation Code. Stockholders who assume managerial responsibilities through such an agreement may also assume liabilities imposed on directors.

What Conduct May Be Considered Oppressive?

Oppression is assessed from the substance and effect of the conduct, not merely from the form of the corporate action. Conduct may be oppressive when it substantially defeats the minority’s legitimate expectations or unfairly deprives minority stockholders of the economic or participatory benefits of ownership.

Examples may include:

• Withholding dividends while paying excessive compensation or benefits to majority owners;
• Using corporate funds for personal, family, or related-party expenses;
• Issuing shares primarily to dilute minority voting power;
• Excluding minority stockholders from information to which they are legally entitled;
• Diverting corporate opportunities to a majority owner or related entity; and
• Transferring corporate assets at an undervalue to entities controlled by the majority.

Not every disagreement with management constitutes oppression. A failed business decision made in good faith does not automatically create personal liability. The circumstances, decision-making process, disclosures, financial records, and actual effect on the corporation and minority stockholders must be examined.

Interlocking Corporations and Related-Party Transactions

Section 32 of the Revised Corporation Code provides that a contract between corporations with interlocking directors is not invalid merely because of that relationship, except in cases of fraud and subject to fairness and reasonableness.

Stockholdings exceeding 20% of the outstanding capital stock are considered substantial for purposes of interlocking directors. If the director’s interest in one corporation is substantial and merely nominal in the other, the transaction may be examined under the stricter rules on interested directors.

In practice, a transaction between a family corporation and another entity owned by the majority stockholder should be supported by independent valuation, full disclosure, disinterested approval where required, and records showing that the terms are fair to the corporation.

Available Corporate Protections and Remedies

Minority stockholders should first determine whether the conduct violates the articles of incorporation, bylaws, shareholder agreements, the Revised Corporation Code, or fiduciary principles. Depending on the facts, possible remedies may include inspection of corporate records, an action for damages, an action to recover corporate property or profits, an injunction, a derivative suit, or other relief authorized by law.

In close corporations, the statutory rules may also provide special remedies when acts of directors, officers, or controlling persons are illegal, fraudulent, dishonest, oppressive, or unfairly prejudicial. The corporation’s actual status must first be verified from its articles of incorporation because special remedies depend on the corporation qualifying as a close corporation under the statute.

A minority stockholder should preserve notices, minutes, financial statements, ledgers, contracts, messages, valuation reports, and evidence of related-party dealings. Corporate records are often essential in proving bad faith, diversion of assets, dilution, or the absence of a legitimate corporate purpose.

How Majority Owners Can Reduce Legal Risk

Majority stockholders and family-business managers should separate personal and corporate finances and avoid informal arrangements that are not reflected in corporate records. Every material transaction involving a majority owner, director, officer, family member, or related company should be fully disclosed and evaluated for fairness.

Before approving a transaction, the corporation should consider the following:

• Whether the transaction serves a genuine corporate purpose;
• Whether the affected decision-maker has disclosed all personal interests;
• Whether disinterested directors or stockholders should participate in the approval;
• Whether the price and terms are commercially reasonable; and
• Whether the transaction could dilute, exclude, or unfairly prejudice minority stockholders.

The corporation should also maintain accurate minutes, preserve supporting documents, observe notice and quorum requirements, and follow the articles of incorporation. A formal resolution is not a complete defense when the transaction is tainted by fraud, bad faith, conflict of interest, or unfair prejudice.

Conclusion

Majority ownership gives a stockholder substantial influence, but it does not confer unrestricted authority. In a close corporation, a majority owner who actively manages the business may owe strict fiduciary duties to the corporation and to fellow stockholders.

The safest course is to treat minority stockholders fairly, disclose conflicts, preserve corporate opportunities, support share issuances with legitimate business reasons, and document transactions involving related parties. Minority investors should promptly review corporate records and obtain legal advice when control is being used to dilute ownership, divert assets, or deny legitimate shareholder rights.

About Nicolas and De Vega Law Offices

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