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Avoiding Legal Pitfalls When Employees Are Also Minority Shareholders

It is well recognized that the shareholders of a Massachusetts close corporation are fiduciaries of each other.  As a rule, this is true for majority shareholders, but the law may be much more nuanced regarding the duties of minority shareholders. A close reading of the Supreme Judicial Court's decision in the leading case Donahue v Rodd Electrotype, as well as the reasoning behind the commonly understood rule, suggests a minority shareholder's obligation to the majority is limited and depends on their ability to control or influence the close corporation and not simply their status as shareholders.  Moll, D., Of Donahue and Fiduciary Duty:  Much Ado About . . . ?, 33 Western New England L. Rev. 471, 478 (2011); See also, Blaiklock, A., Fiduciary Duty Owed By Frozen-Out Minority, 30 Ind. L. Rev. 763, 774 (1997).

Because the market for shares of a close corporation is limited, it may be unclear how a minority shareholder can divest ownership in the close corporation and any accompanying fiduciary duty.  Merriam v. Demoulas Super Markets, Inc., 28 Mass. L. Rptr. 284, 2011 WL 1663117 (Mass. Super. Ct. 2011) (discussing factors that determine whether minority shareholder had a fiduciary duty to refrain from selling shares in a manner that would terminate the corporation's status as an "S-Corp").  Indeed, even where a minority shareholder is terminated or "frozen out" of the company, the minority shareholder may not be entitled to have their shares bought back by the company.  Brodie v.  Jordan, 447 Mass. 866, 872-73 (Mass. 2006).

This ambiguity in the law is particularly significant when the minority shareholder is also an employee of a close corporation.  If the shareholder is separated from the company, they could be stuck with unmarketable shares of stock that potentially restrict them for a competitor.  In that situation, mere status as a minority shareholder does not clarify the scope of any duties owed.  Keating v. Keating, 2003 WL 23213143, *18 (Mass. Super. Ct. Oct. 3, 2003) (noting that frozen out minority shareholder was only employable in competing business and holding that the fiduciary duty not to compete was released upon minority shareholder's termination from the company).

The best way to avoid these pitfalls is to ensure that a well-drafted shareholder or employment agreement governs the rights and duties of minority shareholders.  See Chokel v. Genzyme Corp., 449 Mass. 272, 278 (Mass. 2007) (holding that parties may shape their fiduciary duties by agreement).  Where no such agreement exists, litigation may be unavoidable if a dispute arises.  The attorneys at Fitch Law Partners LLP have experience drafting enforceable agreements and representing both majority and minority shareholders in disputes where no such agreements exist.

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