The Myth of the Closely-Held Corporation
Florida Law: Closely-Held Corporations
A closely-held corporation, also called a close corporation, is generally defined as a corporation in which the stock is not freely traded and is held by only a handful of shareholders. While this term has been used frequently by Florida courts to describe small, family-held corporations (a single search on Westlaw revealed roughly 30 cases), the term appears nowhere in Florida’s Business Corporations Act. What gives?
In a nutshell, save one exception, Florida law makes no distinction between a corporation with 3 shareholders and a corporation with 100,000 shareholders. The same and often onerous requirements for meetings, record-keeping, shareholder notice, etc., apply to any for-profit corporation. As a result of the flexibility offered under the law to LLCs, many newer small businesses have elected to organize under Florida’s LLC Act instead.
Many have attempted to argue that in a closely-held Florida corporation, shareholders owe each other fiduciary duties akin to the partners in a partnership. This view has been adopted by courts in other states, beginning with Massachusetts, and there are strong policy reasons for adopting such a rule. Because of the small number of shareholders in a closely-held corporation, and the fact that the shares are not generally marketable, one might think intuitively that the shareholders should owe one another fiduciary duties. The problem with this argument is that the Florida Supreme Court concluded in 1953 that a corporation could not be analogized to a partnership – in essence, if you choose to use the corporate form, you’re stuck with applying the Business Corporations Act as written. Thus, minority shareholders in a closely-held corporation owe each other and the corporation no fiduciary duties; only the controlling shareholders or directors owe duties that run to the corporation and to the minority shareholders.
Nevertheless, I mentioned one exception. Under section 607.0732, Florida Statutes, the shareholders of a corporation with fewer than 100 shareholders may enter into a specific kind of “shareholder agreement” that dispenses with certain formalities required by the Business Corporations Act. Through a unanimous, written agreement, the shareholders may:
- restrict the power of, or eliminate entirely, the board of directors;
- authorize distributions whether or not in proportion to a shareholder’s ownership of shares;
- establish who will serve as an officer or director, as well as the term of office;
- establish rules regarding the exercise of voting rights by shareholders;
- establish rules for the transfer or use of corporate property by shareholders, directors, and officers;
- establish which officers, directors, shareholders, or combinations thereof may exercise corporate powers or manage the corporation;
- require dissolution upon the occurrence of a specified event; and
- set forth any other duty, obligation, or benefit that does not otherwise violate the Business Corporations Act.
Specifically, the agreement may not (a) eliminate or reduce the fiduciary duties owed by officers, directors, and majority shareholders to the corporation; (b) relieve directors of liability for breaches of their duties; (c) adversely affect a shareholder’s right to bring a derivative action on behalf of the corporation; or (d) eliminate appraisal rights for minority shareholders. The existence of the agreement must also be noted on each share certificate or on the information statement for non-certificated shares.
While a shareholder agreement under this statute offers some flexibility to the shareholders of a closely-held corporation, most small businesses will find that the LLC offers a more flexible business entity. If you do choose to form your business as a corporation, remember that section 607.0732 is the only outlet from the complicated formalities required of Florida corporations.
Contact Rabin Kammerer Johnson at 561-659-7878 or 877-915-4040 for your case involving a closely held corporation or entity.