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The duties placed on shareholders in a close corporation are not meant to impose a straitjacket on legitimate corporate activity. The fiduciary duty imposed does not limit legitimate action by the controlling group in a close corporation that is taken to manage the corporation in the best interests of all concerned.
Plaintiff shareholder/employee (employee) of a closed corporation sued defendants, who included the corporation and the other two major shareholder/employees (control group), after his employment was terminated, and alleged that defendants mismanaged the corporation. The employee alleged failure to pay dividends, wrongful termination, freeze-out, and derivative damages for waste of corporate assets and breach of fiduciary duty. The corporation was a Subchapter S corporation for income tax purposes and was involved in computer software advisory services.
Was the control group's post-termination compensation reasonable?
The court fashioned equitable relief. The employee was entitled to the utmost good faith and fair dealing as a founder and nearly one-third minority shareholder. The employee's termination was justified. The control group did not act in good faith and should have made a serious attempt to solve the problem in other ways. A compelled buy-out or his return to work was not warranted or in the best interests of the corporation. In exercising its broad powers to determine the appropriate relief to remedy the wrong complained of and make the judgment effective, the court considered fair compensation to the employee for loss of employment and for amounts received by the control group in the nature of a dividend, and for participation in management. The court found the control group's post-termination compensation reasonable.