When minority stockholders in a close corporation bring suit against the majority alleging a breach of the strict good faith duty owed to them by the majority, the court must carefully analyze the action taken by the controlling stockholders in the individual case. It must be asked whether the controlling group can demonstrate a legitimate business purpose for its action. In asking this question, the controlling group in a close corporation must have some room to maneuver in establishing the business policy of the corporation. It must have a large measure of discretion, for example, in declaring or withholding dividends, deciding whether to merge or consolidate, establishing the salaries of corporate officers, dismissing directors with or without cause, and hiring and firing corporate employees. When an asserted business purpose for stockholder action is advanced by the majority, it is open to minority stockholders to demonstrate that the same legitimate objective could have been achieved through an alternative course of action less harmful to the minority's interest. If called on to settle a dispute, the court must weigh the legitimate business purpose asserted by majority stockholders, if any, against the practicability of a less harmful alternative.
On August 5, 1971, the plaintiff (Wilkes) filed a bill in equity for declaratory judgment in the Probate Court for Berkshire County, naming as defendants T. Edward Quinn (Quinn), Leon L. Riche (Riche), the First Agricultural National Bank of Berkshire County and Frank Sutherland MacShane as executors under the will of Lawrence R. Connor (Connor), and the Springside Nursing Home, Inc. (Springside or the corporation). Wilkes alleged that he, Quinn, Riche and Dr. Hubert A. Pipkin (Pipkin) entered into a partnership agreement in 1951, prior to the incorporation of Springside, which agreement was breached in 1967 when Wilkes's salary was terminated and he was voted out as an officer and director of the corporation. Wilkes sought, among other forms of relief, damages in the amount of the salary he would have received had he continued as a director and officer of Springside subsequent to March, 1967. A judge of the Probate Court referred the suit to a master, who, after a lengthy hearing, issued his final report in late 1973. Wilkes's objections to the master's report were overruled after a hearing, and the master's report was confirmed in late 1974. A judgment was entered dismissing Wilkes's action on the merits. The Court granted direct appellate review. On appeal, Wilkes argued in the alternative that (1) he should recover damages for breach of the alleged partnership agreement; and (2) he should recover damages because the defendants, as majority stockholders in Springside, breached their fiduciary duty to him as a minority stockholder by their action in February and March, 1967.
Did the lower court err in dismissing Wilkes’ complaint against the majority stockholders in Springside regarding the latter’s breach of fiduciary duty?
The Court concluded that the master's findings were warranted by the record and the final report was properly confirmed. However, the Court reversed that portion of the judgment that dismissed plaintiff's complaint and then remanded the case to the probate court for entry of judgment against defendants for breach of fiduciary duty with respect to the freeze-out of plaintiff.