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Law School Case Brief

Smith v. Atlantic Props., Inc. - 12 Mass. App. Ct. 201, 422 N.E.2d 798 (1981)

Rule:

Mass. Gen. Laws ch. 156B was intended to provide desirable flexibility in corporate arrangements. The provision is only one of several methods which have been devised to protect minority shareholders in close corporations from being oppressed by their colleagues and, if the device is used reasonably, there may be no strong public policy considerations against its use.

Facts:

Defendant shareholder used his veto power to prevent plaintiffs, all other shareholders, from declaring dividends in defendant close corporation. In consequence, the government assessed tax penalties against defendant corporation. Plaintiffs requested lower court to determine dividends to be paid, to remove defendant shareholder as a director, and to order him to reimburse defendant corporation for penalty taxes assessed against it. The lower court ordered defendant corporation to pay dividends and defendant shareholder to reimburse corporation for penalty taxes, and it retained jurisdiction.

Issue:

Did the Defendant commit a breach of his fiduciary duty to other stockholders, when he opposed the declaration of dividends?

Answer:

Yes.

Conclusion:

The court ruled that shareholders in a close corporation owe one another a fiduciary duty. The majority shareholders in a close corporation may ask judicial protection from a minority shareholder who acts oppressively. Defendant shareholder's actions exceeded what was reasonable.  His refusal to declare dividends recklessly ran serious and unjustified risks of precisely the penalty taxes eventually assessed, risks which were inconsistent with any reasonable interpretation of a duty of utmost good faith and loyalty.

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