By Thomas V. Bennett
The Supreme Judicial Court in the
case of
In this case, a corporation started
in 1973 had three shareholders. One of the shareholders (Walter)
became inactive in the company's business and he proposed in 1989
that his shares be purchased and he provided a draft agreement. He
also proposed Keyman Life Insurance to buy out a shareholder who
might die. Those negotiations went nowhere and in 1992, Walter was
removed as a director. Although he received notices of annual
meetings in the year 1993 and 1997, he did not attend the meetings.
He did meet with the other two shareholders two or three times each
year.
Walter died in 1997. After his death
his widow became the owner of his shares in the company. She sought
a special meeting of the shareholders and information on the
financial affairs of the company. The other two shareholders
refused to purchase her shares in the company. They also refused to
provide her with financial information about the company.
Ultimately, she brought suit.
The trial court found that the widow
was frozen out where the controlling shareholders acted in concert
to deny her the office of director; declined essentially all of her
requests for financial information; failed to provide audited
annual statements; failed to comply with the obligation to hold an
annual meeting; refused to pay dividends and refused to complete in
good faith an arbitration process that the minority shareholder
invoked pursuant to a provision in the corporation's Articles of
Organization regarding the transfer of shares.
The widow asked as a remedy that the
corporation buy her out. The trial judge found that the defendants'
actions left the widow shut out of the corporation and that she was
given no true opportunity to dispose of her shares.
The judge exercised the court's
equitable power to put the widow in the position she would have
been if there had been no wrongdoing by the defendants and ordered
the defendants to purchase the plaintiff's shares. The court found
that while no appellate decision existed ordering the purchase of a
minority shareholder's shares, that the remedy was not
inappropriate given that there is rarely a market for small close
corporation shares that bears any relationship to the shares true
value. In addition to awarding the remedy of a purchase, the court
gave the widow prejudgment interest from the date of her claim.
A divided Appeals Court agreed with
the trial court. On further appeal, however, the Supreme Judicial
Court did not agree with the remedy. The Court pointed out that the
proper remedy for a freeze out is to "restore [the minority
shareholder] as nearly as possible to the position of [s]he would
have had, had there been no wrongdoing" quoting from
The Court gave examples of some
other cases of what that restoration might be: If a minority
shareholder had a reasonable expectation of employment and the
corporation terminated wrongfully, the remedy might be
reinstatement, back pay or both;4 if a shareholder had a
reasonable expectation of sharing in the company's profits and had
been denied the opportunity, [s]he might be entitled to participate
in the favorable results of operations to the extent those results
were wrongfully appropriated by the majority.5
The Court in this case found that
the remedy that the Superior Court chose placed the plaintiff in a
significantly
Given the fact that the Court has
legislated, through case law, these substantial rights between
shareholders it may be appropriate for the Court to decline to
further to extend the remedies in a failed relationship among
stockholders of a small business corporation, but it seems to me
that where the Court has left the disgruntled shareholders of a
small business corporation is between a rock and a hard place.
The Court's finding that a fiduciary
relationship exists between the shareholders of a close corporation
is like that of a partnership is an appropriate identification of
that relationship. Small businesses corporations are like a
partnership. In fact, when people ask me what a law partnership is
all about, I tell them it is like a family business where you get
to pick your family members. When people join in a business
enterprise, it is to make money, sure, but it is also about trust;
the collaborative effort to achieve business goals which will
result in financial reward; it is about going somewhere everyday
and feeling good about people you work with and the work that you
are doing and how you feel about yourself.
Although the Court has analogized a
small business corporation to be like a partnership, a partnership
can be terminated by the decision of any partner. Where the Court
has left the shareholders of small business corporation now is like
saying you can get married, and if the relationship gets abusive
you can go to court and the court will assist you in remedying the
relationship, but you can't get divorced. It is time for the
legislature to address this problem.
When the legislature passed the
Limited Liability Company Act it provided that a member could
resign and if a member did resign, the member would be entitled to
receive within a reasonable time after resignation the fair value
of his limited liability company interest as at the date of
resignation based upon his right to share in the distributions of a
limited liability company unless there is a different provision
under a written operating agreement 6.
Similarly, the Limited Liability
Partnership Act is governed by the provisions of general
partnership act which gives a partner the benefit of the unilateral
ability to call it a day.7
Ironically in another recent case of
the SJC,
Below is a suggested addition to
Massachusetts General Laws, Chapter 156D which borrows heavily from
Chapter 208, Section 34 as a possible mechanism for shareholders to
part:
"
One of the most destructive pieces
of litigation of recent memory is the Demoulas9 family
fight which seemed to be all about who was "right". However, the
byproduct of that legal warfare was that legal careers were
destroyed and reputations tarnished. Clearly, there should be a
more constructive way for people to go their own way in a business
setting without the need to prove "fault". Although a forced sale
of a business or parts thereof, like that of a divorce, can be a
costly and bitter experience, it is generally thought to be a
better course of action than requiring people to stay indefinitely
in a destructive relationship.
Donahue v. Rodd Electrotype Co. of New England,
Inc.1Brodie v. Jordan2Zimmerman v.
Bogoff.3 better position that she would have
enjoyed absent the wrongdoing and well exceeded her reasonable
expectations of the benefit of her shares. The Court noted that the
remedy of a forced buyout may be an appealing one for a court of
equity in that it results in a "clean break" between the
acrimonious shareholders yet the Court found that this rationale
would require a forced share purchase in virtually every freeze out
case given that resort to litigation is in itself an indication of
the inability of shareholders to work together. The Court suggested
that the Court below on remand have an evidentiary hearing to
determine the plaintiff's reasonable expectations of ownership;
whether such expectations had been frustrated; and, if so, the
means by which to vindicate the plaintiff's interests. The Court
suggested that if the breaches visited upon the plaintiff resulting
in deprivations can be quantified, the appropriate remedy may be
money damages.Bernier v. Bernier,8 the Court in
addressing the division of assets with respect to a business
enterprise owned by a divorcing couple laid out a thoughtful
blueprint on what factors should be taken into account in
determining the buy-out value of a small business where it is
determined that one shareholder will buy out the
other.Forced Shareholder
sale.
Upon a complaint in an
action brought at any time by a shareholder of a close corporation,
provided there is personal jurisdiction over both shareholders, a
court may make a judgment for either of the shareholders to buy out
the interest, directly or through a stock redemption of the other
for either cash or over time based upon the circumstances of the
corporation including, but not limited to, the profitability of the
corporation and the cash flow availability of the corporation. In
addition to or in lieu of a judgment for payment , the court may
assign to either party all or any part of the assets of the
corporation, including but not limited to, hard assets,
receivables, good will, all other intangible assets of the
corporation . In determining the amount of money, if any, to be
paid, or in fixing the nature and value of the property, if any, to
be so assigned, the court, after hearing the witnesses, if any, of
each party, shall consider the length of the shareholders
association with the corporation, the conduct of the shareholders
during the corporate relationship, the age, health, station,
occupation, amount and sources of income, vocational skills,
employability, estate, liabilities and needs of each of the
shareholders and the opportunity of each for future acquisition of
capital assets and income. The court may also consider the
contribution of each of the shareholders in the acquisition,
preservation or appreciation in value of their respective stock
ownership and the contributions of each of the shareholders to the
success of the corporation. When the court makes an order for
payment on behalf of a party, said court shall determine whether or
not the party leaving the corporation has health insurance or other
health coverage available at reasonable cost that may be extended
to cover the departing party as part of the compensation
package.
A close corporation is a
corporation that (1) has a small number of stockholders, (2) no
ready market for the corporate stock, and (3) a substantial
majority participation in the management, direction and operations
of the corporation. The rights of a shareholder under this section
shall be personal to the shareholder and may not be reached by a
spouse or creditor of such shareholder."
Notes
1. 367 Mass. 578, 328
N.E.2d 505 (1975).
2. 447 Mass. 866, 857
N.E.2d 1076 (2006).
3. 402 Mass 650, 661,
524 N.E.2d 849, 855 (1988);
4.
5.
6. Mass. Gen. Laws ch.
156C, § 32 (2007).
7. Mass. Gen. Laws ch.
108A, § 31 (2007).
8. 449 Mass. 774, 873
N.E.2d 216 (2007).
9.
Shulkin v. Shulkin, 301 Mass. 184, 192-93; 16
N.E.2d 644 (1938). See Wilkes v. Springside Nursing Home, Inc.
370 Mass. 842, 353 N.E.2d 657 (1976).Crowley v. Comm'cns For
Hosps., Inc. 30 Mass. App. Ct. 751, 573 N.E.2d 996
(1991).Demoulas v. Demoulas Super Market, Inc., 424 Mass. 501,
677 N.E.2d 159 (1997)., the SJC looked at what the
remedies are for a breach of that duty. established law that in a
"close corporation" the stockholders owed each other a fiduciary
duty in the operation of an enterprise that partners owe to one
another. The duty is of the "utmost good faith and loyalty". In a
recent case,