Yes, what the other owners did was unfair and illegal. In a small company where the owners are like partners, they have to treat each other with 'utmost good faith and loyalty.' Kicking an owner out of their job is a common way for the majority to 'freeze out' a minority owner and cut them off from any profits, which is a breach of that loyalty. While the majority needs to be able to run the business, they can't just bully a minority owner for personal reasons. The court created a test: if the majority takes action that hurts a minority owner, they must prove they had a 'legitimate business purpose' for it. In this case, the other owners had no good business reason to fire Wilkes. They just didn't like him anymore, which doesn't count. Their actions were a personal attack, not a business decision.

Yes, the big bosses were unfair to Mr. Wilkes, because they didn't have a good reason for stopping his pay and firing him. I think they did this to be mean to Mr. Wilkes, maybe to make him sell his part of the company for less money. The big bosses should have remembered their deal that being a boss and having part of the company meant you got a job too, that Mr. Wilkes helped start the company and expected to keep being a boss, and that this meant Mr. Wilkes wouldn't get any money from the company. The court said the case isn't over and sent it back to figure out how much money Mr. Wilkes should get for the pay he missed.

—"*** majority shareholders breached their fiduciary duty to the minority by removing a minority shareholder from the payroll of a close corporation, which had never paid a dividend, and there was no legitimate business purpose for the removal."

"It must be asked whether the controlling group can demonstrate a legitimate business purpose for its action.... In asking this question, we acknowledge the fact that the controlling group in a close corporation must have some room to maneuver in establishing the business policy of the corporation.... If called on to settle a dispute, our courts must weigh the legitimate …

—by terminating a minority stockholder's employment or by severing him from a position as an officer or director, the majority effectively frustrate the minority stockholder's purposes in entering on the corporate venture and also deny him an equal return on his investment

The SJC has held that majority stockholders "have certain rights to what has been termed `selfish ownership'in the corporation which should be balanced against the concept of their fiduciary obligation. "

Controlling shareholders do not breach their fiduciary duty if they demonstrate a legitimate business purpose for their action. See id

When an asserted business purpose for their action is advanced by the majority, however, we think it is open to minority stockholders to demonstrate that the same legitimate objective could have been achieved through an alternative course of action less harmful to the minority's interest

Even if the business judgment rule applies, it is possible for courts to find such actions harmful if the end result could have been achieved with less injury to the minority shareholder.

This claim is based on Massachusetts law, which provides that shareholders in a close corporation owe each other the duty of "utmost good faith and loyalty."

We have previously analyzed freeze-outs in terms of shareholders'"reasonable expectations" both explicitly and implicitly.

Courts are disinclined to interfere in internal corporate operations involving management decisions, subject to the principle of majority control.

Yes, the majority shareholders breached their fiduciary duty. Stockholders in a close corporation owe one another a duty of utmost good faith and loyalty, similar to that owed between partners. Terminating a minority shareholder's employment and directorship, which is often the primary means for a return on investment in a close corporation, constitutes a 'freeze-out' that violates this duty. While the controlling group in a close corporation must have discretion to manage the business, its actions cannot be based on personal animosity in derogation of the minority's interests. To balance these competing interests, courts must ask whether the controlling group can demonstrate a legitimate business purpose for its action. If such a purpose is shown, the minority shareholder may still prevail by showing that the same objective could have been achieved through a less harmful alternative. Here, the defendants offered no legitimate business purpose for terminating Wilkes's salary and position; the action was a personal 'freeze-out' designed to deny him the benefits of his investment, thus breaching their fiduciary duty.

Yes, the majority shareholders breached their fiduciary duty to Wilkes, because they failed to demonstrate a legitimate business purpose for terminating his salary and removing him from corporate office. I conclude this was an improper freeze-out of Wilkes, a minority shareholder, possibly to pressure him to sell his shares below value. The majority must consider their long-standing policy that employment and stock ownership were linked, that Wilkes was an original investor who expected to continue participating, and that this assured Wilkes would receive no return on his investment. The judgment dismissing Wilkes's complaint is reversed and the case remanded to determine the damages he is owed in lost salary.

Wilkes v. Springside Nursing Home, Inc.

Case Podcast

Rule of Law:

The Legal Principle

Facts:

Procedural Posture:

How It Got Here

Issue:

Legal Question at Stake

Opinions:

Majority, Concurrences & Dissents

Analysis:

Why This Case Matters

Gunnerbot