Section Review

Corporate Shareholder Divorce

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,

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