Corporate Freeze-Outs in Stockholder lawsuits under Massachusetts Law

Massachusetts business litigation lawyers are often called upon to represent minority shareholders (or defend controlling shareholders) in cases involving a claimed stockholder breach of fiduciary duty in a closely held corporation. Breach of fiduciary duty lawsuits arise where one stockholder (usually a majority stockholder), acts in a manner which wrongfully harms fellow stockholders.

The rule governing conduct among shareholders in small closely held corporations (and by extension to limited liability companies), was first enunciated by the Massachusetts Supreme Judicial Court in the case of Donohue v. Rodd Electrotype.

The Court there stated the principal which had long governed partners and partnerships, namely that partners owed one another a duty of utmost good faith and fair dealing would henceforth apply to shareholders in closely held corporations. The remedy for failure to observe this duty would be a suit between stockholders for breach of fiduciary duty.

Specifically the Massachusetts courts recognized the opportunity for the majority stockholders in Massachusetts corporations to oppress, disadvantage or “freeze-out” minority shareholders.

A fairly common Massachusetts business litigation claim in the involves typical corporate freeze-out situations. The freeze-out, so-called, can take several forms, but is generally intended to deprive the minority stockholder of rights or compensation. The majority may vote the minority shareholder off the board, or terminate the minority shareholder’s employment. This is sometimes coupled with some meager offer to repurchase the minority shareholder’s stock, or no offer at all. Since most small corporations do not declare dividends, the minority stockholding is useless unless there is a triggering event such as a merger or the corporation is acquired. The underpinning of the claim in each case is that the majority stockholder is using his “clout” to take advantage of the minority stockholder.

If you believe that you have a case for corporate freeze out or other breach of fiduciary duty, you must keep in mind that not every termination or restructure of a board or directors is actionable at law. If the Massachusetts business is able to demonstrate a “legitimate business purpose” for the act, even if it has the consequence of harming a minority stockholder, it may not be actionable in a court of law. While the Massachusetts courts desire to protect the minority stockholder, that desire is weighed against the understanding that management must have some discretion to make good business decisions.

It is crucial that you have an experienced Massachusetts business litigation attorney, who can evaluate the circumstances surrounding a freeze out and advise as to whether there is a good, valid claim for breach of fiduciary duty.

Just as important for the closely held corporation against whom a claim is brought, it is essential to retain experienced business legal counsel who have successfully brought and defended fiduciary duty claims in Massachusetts.

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Parker | Scheer has a proven and demonstrated record of success in corporate disputes. Should you need a claim evaluated or defended, please call or email our Boston business litigation department lead lawyer, Barry Scheer. If you prefer, you can also telephone our offices in Boston seven days a week at toll free 866-414-0400.

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