Leslie v. Boston Software Collaborative, Inc.
undisclosed (2002)
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Rule of Law:
Shareholders in a close corporation owe one another a fiduciary duty of utmost good faith and loyalty. When majority shareholders take action that harms a minority shareholder, they must demonstrate a legitimate business purpose, and the court will weigh that purpose against the practicability of a less harmful alternative course of action.
Facts:
- In 1993, Mark Khayter, Robert Goulart, and Dennis Leslie formed a partnership that later became Boston Software Collaborative, Inc. (BSC), a closely-held corporation in which each was a founder and nearly one-third shareholder.
- Initially, compensation was based on billable hours, which disadvantaged Leslie due to his administrative role; in late 1998, the three agreed to an equalized salary plan.
- Friction grew as Khayter and Goulart wanted to revert to the billable-hours compensation model, while Leslie resisted. Concurrently, there were complaints from employees and customers about Leslie's unprofessional behavior and technical skills.
- On April 26, 2000, after a period of conflict, Leslie sent an email to a colleague which included a statement that his wife "reserves the right to shoot Bob and (or) Mark at a moments [sic] notice."
- The colleague forwarded the email to Khayter and Goulart, who immediately placed Leslie on unpaid leave.
- On June 12, 2000, Khayter and Goulart used their majority voting power to remove Leslie as a director and, as the sole remaining directors, terminated his position as treasurer, thereby ending his employment and all income from BSC.
Procedural Posture:
- Dennis J. Leslie filed a lawsuit against Mark Khayter, Robert F. Goulart, and Boston Software Collaborative, Inc. in the Massachusetts Superior Court, a trial court.
- The complaint included a direct action by Leslie for his own damages and a derivative action on behalf of the corporation.
- The case proceeded to a jury-waived trial before the judge.
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Issue:
Does terminating a minority shareholder's employment and all economic benefits from a close corporation, without first exploring less harmful alternatives, breach the fiduciary duty of utmost good faith and loyalty owed between shareholders in a close corporation?
Opinions:
Majority - van Gestel, J.
Yes, terminating a minority shareholder's employment and all economic benefits from a close corporation without first exploring less harmful alternatives breaches the fiduciary duty of utmost good faith and loyalty. Shareholders in a close corporation owe one another the same duty of utmost good faith and loyalty as partners. Under the test established in Wilkes v. Springside Nursing Home, Inc., majority shareholders must first demonstrate a legitimate business purpose for their actions. Here, Leslie's poor performance and behavior constituted a legitimate business purpose for taking some action. However, the analysis then shifts to the minority shareholder, who may show that the same objective could have been achieved through a less harmful alternative. The court found that Khayter and Goulart failed this part of the test by pursuing a complete 'freeze-out' without first trying less drastic measures, such as modifying Leslie's duties, providing further training, or insulating him from employees. The blunt termination, without a serious attempt to solve the problems in other ways, violated the duty of utmost good faith.
Analysis:
This case provides a crucial application of the fiduciary duties owed among shareholders in a close corporation, reinforcing the principles from Donahue and Wilkes. It clarifies that having a legitimate business reason to discipline a minority shareholder-employee is not an absolute defense against a breach of fiduciary duty claim. The decision establishes that majority shareholders have an affirmative obligation to consider less harmful alternatives before resorting to a 'freeze-out' that terminates the minority’s entire economic interest in the venture. The court's chosen remedy—awarding damages and reinstating Leslie to the board of directors rather than forcing a buyout—also illustrates the flexible equitable power courts wield to fashion a fair solution that stops short of dissolving the corporate relationship entirely.
