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In a partnership, each partner owes each of the other partners individually a duty to act with the utmost good faith.
The appellant in this case, Samuel R. McLaughlin, a minority shareholder in a closely held corporation, asked the court to impose on shareholders in such corporations a duty to individual shareholders similar to the duty owed in a partnership. McLaughlin also asked the court to reverse the district court's holding that waivers of a provision of this closely held corporation's shareholder agreement were valid, and reverse its order denying amendments to McLaughlin's complaint.
Do shareholders owe each other a duty to act in the utmost good faith?
The court held that the appellee Greg Schenck, as a close corporation shareholder, owed McLaughlin individually a duty to act in the utmost good faith, but that he did not violate this duty because his actions did not thwart McLaughlin's reasonable expectations. Additionally, the court held that waivers executed by the board and the shareholders of the corporation were contaminated by a conflict of interest, the court, therefore, remanded for a determination of whether the waivers were fair. Finally, the court held that the district court did not abuse its discretion in denying McLaughlin's motion to amend by finding that the amendment would be futile.