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Brodie v. Jordan - 447 Mass. 866, 857 N.E.2d 1076 (2006)

Rule:

Stockholders in a close corporation owe one another substantially the same fiduciary duty in the operation of the enterprise that partners owe to one another, that is, a duty of utmost good faith and loyalty. Majority shareholders in a close corporation violate this duty when they act to "freeze out" the minority.

Facts:

Plaintiff, a shareholder in a close corporation, sued defendants, the corporation's two other shareholders, claiming that defendants had "frozen" her out. The superior court found that defendants had breached their fiduciary duty, and ordered that they purchase the shareholder's shares. The appellate court affirmed and granted defendants' applications for further appellate review.

Issue:

Did the lower court err in ordering a buyout of plaintiff’s shares?

Answer:

Yes.

Conclusion:

The court concluded that it was error to order a buyout. There was nothing in the background law, the governing rules of the corporation, or any other circumstance that could have given the shareholder a reasonable expectation of having her shares bought out. In ordering defendants to purchase the shareholder's stock at the price of her pro rata share of the company, the judge created an artificial market for the shareholder's minority share of the close corporation with the perverse effect of placing the plaintiff in a position superior to that which she would have enjoyed had there been no wrongdoing.

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