Business Litigation Section Holds That Director In Professional Corporation Owes Fiduciary Duty To Fellow Shareholders

In a fascinating decision, the Business Litigation Section of the Superior Court of Massachusetts recently held that a terminated doctor/shareholder could bring a breach of fiduciary duty action against the controlling director.

The default rule in Massachusetts is that a director owes a fiduciary duty to the corporation itself, but not to individual shareholders. However, more than forty years ago the Supreme Judicial Court recognized an exception to that general rule, such that shareholders in a closely-held corporation with a close resemblance to a partnership “owe one another substantially the same fiduciary duties in the operation of the enterprise that partners owe to one another.” Donahue v. Rodd Electrotype Co. Massachusetts recognizes a second exception to the general rule where a controlling shareholder who is also a director proposes and implements a self-interested transaction to the detriment of minority shareholders.  See Intl Bhd. Of Elec. Workers Local No. 129 Benefit Fund v. Tucci.

In Punzak v. McIvor, the plaintiff had been a member and shareholder in Anesthesia Associates of Massachusetts, P.C. (“AAM”) for more than two decades, while he was employed as an anesthesiologist with AAM.  Plaintiff was also a shareholder in a related corporation, Plexus, formed to provide billing services for AAM.

In December 2013, Plaintiff’s employment with AAM was terminated after he sent two sarcastic reply-all emails regarding management to his colleagues.  After his termination, Plaintiff’s shares of both AAM and Plexus were involuntarily purchased by those corporations with “very substantial discounts for lack of control and lack of marketability.”

Plaintiff filed a breach of fiduciary claim against the president of AAM, and the president of AAM moved for summary judgment. The Court observed that neither of the two recognized exceptions to the general rule that no fiduciary duty is owed by a director to the shareholders of the corporation applied, as the 83 shareholder size was far bigger than any corporation which had been previously adjudged to be a closely-held corporation, and the president of AAM held the same percentage interest in the corporation as all other physician-shareholders. However, the Court held that a third exception to the general rule should apply under the circumstances, reasoning that “the attributes of a closely held corporation described in Donahue . . . are strikingly similar to those that pertain to professional corporations like AAM.  All the shareholders all perform similar services for the corporation that then pays them salaries for their work.  They are dependent on the corporation for their livelihood and can expect no return for their ownership interests in AAM other than through their salaries.  The shareholder/physicians refer to one another as partners.  Given the resemblance of this kind of professional corporation to a partnership . . . a president of AAM ought to have fiduciary obligations to each of his fellow physicians to treat them fairly, as well as obligations to AAM.”  Therefore, the Court dismissed the president of AAM’s motion for summary judgment on the plaintiff’s breach of fiduciary duty claim.

In the wake of Punzak, directors in professional corporations need to be careful to exercise their duties fairly with respect not only to the corporation, but also with respect to their fellow shareholders.

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