Merola v. Exergen Corp.
668 N.E.2d 351, 12 I.E.R. Cas. (BNA) 219, 423 Mass. 461 (1996)
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Rule of Law:
In a close corporation, a majority shareholder does not breach their fiduciary duty by terminating a minority shareholder's at-will employment if the minority shareholder receives a fair return on their stock investment and there is no established company policy linking employment to stock ownership for all shareholders.
Facts:
- Francesco Pompei was the founder, president, and majority shareholder of Exergen Corporation, a close corporation.
- In late 1981, Pompei offered the plaintiff full-time employment, leading the plaintiff to believe he would have continuing employment and the opportunity to become a major shareholder if he invested in the company.
- The plaintiff resigned from his previous job and began working full-time for Exergen on March 1, 1982.
- Between March 1982 and late 1983, the plaintiff purchased a total of 5,300 shares of Exergen stock.
- There was no general policy at Exergen linking stock ownership to employment for other employees, nor was it a company practice to distribute all profits as salaries.
- On April 16, 1987, Pompei terminated the plaintiff's employment.
- In 1991, the plaintiff sold his shares back to Exergen for $17 per share, a price he considered fair, which represented a significant return on his capital investment.
Procedural Posture:
- The plaintiff sued Exergen Corporation and its president, Francesco Pompei, in Massachusetts Superior Court.
- A jury found for the defendant on a deceit claim and provided an advisory verdict for the plaintiff on a breach of fiduciary duty claim.
- The Superior Court trial judge adopted the advisory verdict, ruling that Pompei breached his fiduciary duty and awarded the plaintiff $50,000 in damages.
- The defendants appealed to the Massachusetts Appeals Court.
- The Appeals Court affirmed the judgment against Pompei but reversed the judgment against the corporation.
- The defendant, Pompei, was granted further appellate review by the Massachusetts Supreme Judicial Court.
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Issue:
Does a majority shareholder in a close corporation breach the fiduciary duty of utmost good faith and loyalty to a minority shareholder by terminating the minority shareholder's at-will employment, when the employee had a reasonable expectation of continued employment but was fairly compensated for their stock upon its sale?
Opinions:
Majority - Lynch, J.
No. A majority shareholder in a close corporation does not breach their fiduciary duty by terminating a minority shareholder-employee under these circumstances. While stockholders in a close corporation owe one another a duty of 'utmost good faith and loyalty,' this duty does not make every termination of a shareholder-employee a breach. The court distinguished this case from precedent like Wilkes v. Springside Nursing Home, Inc., where employment was intrinsically linked to stock ownership for all shareholders and salary was the principal return on investment. Here, the plaintiff's investment yielded a significant return independent of his salary through the stock's appreciation, which he realized upon selling his shares at a fair price. Because the plaintiff was not deprived of the financial benefits of his investment and there was no broad company policy linking stock to employment, the termination, even if without a legitimate business purpose, did not constitute a 'freeze-out' or a breach of fiduciary duty.
Analysis:
This decision refines and narrows the 'freeze-out' doctrine applicable to close corporations as established in Donahue and Wilkes. It clarifies that the termination of a minority shareholder-employee, even without a legitimate business purpose, is not a per se breach of fiduciary duty. The ruling establishes that a crucial factor is whether the shareholder was deprived of the economic benefits of their investment. By finding no breach where the shareholder received a significant and fair return on their stock, the court signals to future litigants that the protections against freeze-outs primarily safeguard a shareholder's financial interest, separating it from their expectations as an at-will employee.
