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Law School Case Brief

Donahue v. Rodd Electrotype Co. - 367 Mass. 578, 328 N.E.2d 505 (1975)

Rule:

Due to the fundamental resemblance of a close corporation to a partnership, the trust and confidence which are essential to this scale and manner of enterprise, and the inherent danger to minority interests in the close corporation, stockholders in the close corporation owe one another substantially the same fiduciary duty in the operation of the enterprise that partners owe to one another. The standard of duty owed by partners to one another is the utmost good faith and loyalty. Stockholders in close corporations must discharge their management and stockholder responsibilities in conformity with this strict good faith standard. They may not act out of avarice, expediency or self-interest in derogation of their duty of loyalty to the other stockholders and to the corporation.

Facts:

Plaintiff Euphemia Donahue, a minority stockholder in the Rodd Electrotype Company of New England, Inc. (Rodd Electrotype), a Massachusetts close corporation, brought suit against defendants, who were the directors of Rodd Electrotype: Charles H. Rodd, Frederick I. Rodd and Mr. Harold E. Magnuson; Harry C. Rodd, a former director, officer, and controlling stockholder of Rodd Electrotype; and Rodd Electrotype. The minority stockholder sought to rescind Rodd Electrotype's purchase of Harry Rodd's shares in Rodd Electrotype and to compel Harry Rodd to repay to the corporation the purchase price of said shares, $ 36,000, together with interest from the date of purchase." The minority stockholder alleged that the defendants caused the corporation to purchase the shares in violation of their fiduciary duty to her, a minority stockholder of Rodd Electrotype. The Superior Court (Massachusetts) dismissed the suit, holding that the initial transaction had been carried out in good faith. The minority shareholder sought review of the decision.

Issue:

In an action by plaintiff minority stockholder seeking to rescind defendant close corporation's purchase of a controlling stockholder's shares, did defendant directors and majority stockholders cause the close corporation to purchase the shares in violation of their fiduciary duty to the minority stockholder?

Answer:

Yes

Conclusion:

On appeal, the Supreme Judicial Court of Massachusetts held that in a close corporation, all shareholders owed one another a strict duty of utmost good faith and loyalty. Further, the Court held that a controlling shareholder could not utilize its position to create an exclusive market for its shares. In this case, defendants had created a market for the controlling shareholder but refused to extend that market to plaintiff, thereby excluding her. Therefore, the Court reversed and held that either the initial sale had to be rescinded or defendants had to offer to purchase plaintiff's stock at the same price agreed upon in the initial sale. The case was remanded for entry of a judgment.

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