The Massachusetts Supreme Judicial Court has held that buyout is not
within a court’s equitable power to impose as a remedy for violation of a
shareholder’s fiduciary duty. In Brodie
v. Jordan, (watch the oral argument here) the plaintiff inherited from her
husband one-third of the shares of a closely held corporation. The two
defendants owned the remaining shares. Plaintiff’s husband and the other
shareholders had a falling out in the early 1990s. Plaintiff’s husband died in
1997. The corporation has paid no money to plaintiff or her husband since 1995.
The defendants have not provided financial or operational information to
plaintiff, they have not performed a valuation of the company, nor has the
corporation held an annual meeting for five years. The Superior Court found
that the defendants violated their fiduciary duty of utmost good faith and
loyalty, required under Donahue and Wilkes, “by excluding her from corporate
decision-making, denying her access to company information, and hindering her
ability to sell her shares in the open market.” The Appeals Court affirmed and defendants did
not seek further review of the liability issue. The Superior Court judge
ordered the defendants to buy out the plaintiff at a price to be determined by
a court-appointed expert. No corporate document requires a shareholder to sell
or buy shares.
Justice Cowin, speaking for the court, made a subtle but
potentially far reaching assertion. After quoting various examples of
freeze-outs from Donahue, she
concludes, “What these examples have in common is that, in each, the majority
frustrates the minority’s reasonable expectations of benefit from their
ownership of shares. We have previously analyzed freeze-outs in terms of
shareholders’ ‘reasonable expectations’ both explicitly and implicitly.” She cites
two Massachusetts cases (including Wilkes) then cites the standard New Jersey, New York,
and North Carolina cases that use the reasonable expectations test to determine oppression.
As near as I can tell, Justice Cowin’s description of Massachusetts law is
incorrect. I’ve found no appellate case that analyzes the Donahue/Wilkes fiduciary
duty in terms of the minority’s reasonable expectations. In a footnote Justice
Cowin notes that Massachusetts is different
from those other states in that no Massachusetts statute permits a claim for relief for oppression. However, says she, the
standards for determining a breach of fiduciary duty and finding oppression are
often the same. That’s probably an accurate description of the law in other
states, but not (until now) in Massachusetts.
No matter. Justice Cowin then holds that the goal in a
freeze-out case is to restore the minority to the position it would have been
in had there been no freeze-out. Here, because no corporate document permits or
requires a buyout and no market for the corporation’s shares exists, ordering a
buyout provides a different and more favorable remedy than plaintiff would have
had if defendants had not violated their fiduciary duties. Justice Cowin then
makes a slippery slope argument that buyout would be appropriate in every
freeze-out case. Finally, she drops a footnote that distinguishes cases from
other states that permit forced buyouts. She correctly notes that those states
have statutes that permit involuntary dissolution and, by inference, the courts
in those states have arrogated the power to order a buyout. In Massachusetts, by
contrast, dissolution is only permitted for deadlock.
So it seems that Massachusetts is now using one of the standards for oppression as its test for determining
whether the Donahue/Wilkes fiduciary
duty has been violated. Where this leaves the rather elaborate weighing process
in Wilkes is unclear. Could it be
that Massachusetts is finally ready to abandon the notion that close corporation shareholders owe
one another the same duties partners owe one another?
Further, of course, this raises one of the more problematic
issues of the reasonable expectations test. That is, when the complaining
shareholder did not purchase shares from the corporation, to what extent should
the corporation and other shareholders be required to honor that shareholder’s
reasonable expectations? A stark example is a shareholder who obtains shares
from a parent. The parent and child may have very different, and reasonable,
expectations about the optimal investment horizon. Whose expectations should be
other shareholders respect?