Shareholder and Partnership Disputes

Under both the North Carolina Business Corporation Act and the North Carolina Limited Liability Company Act, officers, directors, and LLC managers must act: (1) in good faith; (2) with the care an ordinarily prudent person in a like position would exercise under similar circumstances; and (3) in a manner they reasonably believe to be in the best interests of the company. These duties run primarily to the company, not to individual shareholders or members — which is why most claims for breach of these duties must be brought as derivative actions on behalf of the company. In LLCs, the operating agreement can modify these duties, but the starting point for any analysis is always the statute.

General partners occupy a relationship of fiduciary trust toward one another. As the North Carolina Supreme Court established in Casey v. Grantham, 239 N.C. 121 (1954), "the relationship of partners is fiduciary and imposes on them the obligation of the utmost good faith." North Carolina's partnership statute, N.C.G.S. § 59-51, makes each partner accountable as a trustee for any profits or benefits derived from transactions connected with partnership business. Unlike corporate officers and directors, partners do not have a statutory business judgment rule to shield their decisions. And unlike shareholders in a corporation, partners must bring claims for breach of fiduciary duty directly — there is no general partnership derivative action under North Carolina law.

The business judgment rule protects officers and directors from liability for decisions made in good faith. As the Court of Appeals explained in Seraph Garrison, LLC v. Garrison, 247 N.C. App. 115 (2016), the rule creates an initial presumption that directors acted with due care, on an informed basis, and in good faith in the best interest of the company — and a second, more powerful presumption that a decision by a loyal and informed board will not be overturned unless it cannot be attributed to any rational business purpose. To rebut these presumptions, a plaintiff must demonstrate that the officers or directors did not meet the applicable statutory standard when making the challenged decision.

In Meiselman v. Meiselman, 309 N.C. 279 (1983), the North Carolina Supreme Court established that the "rights or interests" of a minority shareholder in a close corporation include the "reasonable expectations" that shareholder had — those created at inception, as altered over time, and as developed through the parties' course of dealing. Courts examine the entire history of the relationship. Expectations must have been known to and concurred in by the other shareholders; privately held expectations that were never communicated are not "reasonable." When corporate managers or controlling shareholders act in ways that frustrate those reasonable expectations — even if technically within the scope of their legal authority — a court may grant relief, including dissolution or other remedies.

A direct claim belongs to the individual owner — it addresses a wrong done specifically to that person, such as being wrongfully excluded from management, denied access to company information, or subjected to disparate treatment. A derivative claim belongs to the company — it addresses a wrong done to the company itself, such as self-dealing by an officer or misappropriation of company assets. Under the Barger v. McCoy Hillard & Parks framework, 346 N.C. 650 (1997), a shareholder can bring a direct claim based on a company-level wrong only if they can show either (1) a special duty owed personally to that shareholder, separate from any duty owed to the company, or (2) an injury that is separate and distinct from the injury suffered by shareholders generally. In practice, the line between direct and derivative is often uncertain, and the cautious approach is to plead both in the alternative.

Before filing a derivative action, a shareholder or member must make a written demand on the company, specifically asking it to take "suitable action" to address the alleged wrongdoing. The company then has 90 days to respond before the plaintiff may file suit (unless the demand is rejected sooner, or irreparable harm to the company would result from waiting). Critically, North Carolina has abolished the futility exception that exists in some other states. Under prior law, a plaintiff could argue that demand would be futile because those in control would never authorize a lawsuit against themselves. That exception no longer exists: "the enactment of N.C. Gen. Stat. § 55-7-42 abolished the futility exception under North Carolina law." Allen v. Ferrera, 141 N.C. App. 284 (2000). The same rule applies to LLC derivative actions. The demand must also be specific — it must set forth what action the company should take, not merely catalog complaints.

Constructive fraud and breach of fiduciary duty both arise from relationships of trust, but they are distinct claims. The primary difference, as the Court of Appeals explained in Hauser v. Hauser, 252 N.C. App. 10 (2017), is that constructive fraud specifically requires proof that the defendant took advantage of their position of trust to benefit themselves. Breach of fiduciary duty does not require proof of self-benefit. More importantly for strategy: constructive fraud carries a 10-year statute of limitations under N.C.G.S. § 1-56, while breach of fiduciary duty claims must be filed within three years under N.C.G.S. § 1-52(1). In cases involving transactions that occurred several years ago, constructive fraud may be the only viable claim.

Yes — and those rights are among the most useful pre-litigation tools available. North Carolina statutes give owners of each entity type the right to inspect and obtain company financial information. For shareholders in a corporation, N.C.G.S. § 55-16-02 entitles them to annual financial statements and, with proper written notice and a stated proper purpose, the right to inspect corporate records. For LLC members, N.C.G.S. § 57D-3-04 provides comparable inspection and information rights. For partners, N.C.G.S. §§ 59-49 and 59-50 entitle each partner to full and true information about all partnership matters and to a formal accounting when circumstances justify one. When those in control refuse a legitimate inspection demand, that refusal can itself become evidence of concealment, support claims of oppressive conduct, and provide grounds for court-ordered access. The inspection demand is often the first move in a closely held business dispute, and it can be decisive.

Remedies in North Carolina closely held business disputes include: (1) compensatory damages to restore the harmed party to the financial position they would have occupied absent the breach, including lost profits and diminution in value; (2) recovery of misappropriated assets under a constructive fraud or conversion theory, bearing in mind that conversion requires a tangible asset and does not apply to purely intangible interests; (3) punitive damages and attorneys' fees under the civil embezzlement statute, N.C.G.S. § 1-538.2, when an officer, manager, or fiduciary has misapplied company funds or property; (4) injunctive relief to halt ongoing conduct — preventing a sale at an unfair price, blocking self-serving transactions, or preserving company assets from dissipation; (5) appointment of a receiver to oversee company operations while litigation is pending; (6) a court-supervised buyout at fair value under N.C.G.S. § 55-14-31(d) (corporations, by the corporation) or § 57D-6-03(d) (LLCs, by the company or one or more members), allowing the business to continue without the dissenters; and (7) dissolution of the entity as a remedy of last resort. Available remedies depend heavily on the specific claims, the entity structure, and — in LLC disputes — the terms of the operating agreement.

The North Carolina Limited Liability Company Act gives LLC members and managers broad latitude to define their rights and obligations through the operating agreement, which can expand, modify, or in many respects limit the fiduciary duties that would otherwise apply under statute or common law. This means that in many LLC disputes, the outcome turns entirely on what the operating agreement says — what protections it gives to minority members, what duties it imposes on managers, how it handles distributions, and whether it contains buy-sell, dissolution, or arbitration provisions. Courts are reluctant to imply duties not clearly set out in the agreement. If you are involved in an LLC dispute, the operating agreement is the single most important document in the case, and it needs to be read carefully by a lawyer who handles these disputes regularly.