Brodie v. Jordan

Supreme Judicial Court of Massachusetts · Corporations

CorporationsClose corporationsMinority shareholder freeze-outRemedies for breach of fiduciary dutyclose corporationfreeze-outminority shareholdermajority fiduciary duty

Facts

Malden Centerless Grinding Co., Inc. was a close corporation whose shares were held equally by Walter Brodie, Robert Jordan, and David Barbuto; after Walter died, the plaintiff inherited his one-third interest. The defendants excluded the plaintiff from corporate decision-making, voted against her nomination as director, failed to provide requested financial and operational information, and did not perform a requested valuation of the company. The corporation had paid no dividends since 1989, and the defendants were the only ones receiving ongoing financial benefits connected to the business. The trial judge found a freeze-out and ordered the defendants to purchase the plaintiff's shares at her proportionate share of the corporation's net assets.

Issue

When majority shareholders in a close corporation have frozen out a minority shareholder, may a court order the majority to buy the minority's shares as a remedy where no shareholder agreement, bylaw, article provision, or other circumstance gave the minority a reasonable expectation of being bought out? More generally, what remedy is appropriate for such a freeze-out?

Rule

The proper remedy for a close-corporation freeze-out is to restore the minority shareholder as nearly as possible to the position she would have been in absent the wrongdoing by vindicating her reasonable expectations of benefit from ownership. The remedy should compensate for denied benefits and may include money damages for quantifiable losses and prospective injunctive relief, but it should not grant the minority a windfall or excessively penalize the majority. A forced buyout is improper on this record where the minority had no reasonable expectation that the corporation or majority shareholders would be obligated to purchase her shares.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

Elm Harbor Tooling, Inc., a close corporation in Worcester, Massachusetts, has three shareholders. After Dana Pike inherited her late brother’s 25% stake, the other two shareholders excluded her from meetings, refused to share financial records, and paid themselves large salaries while the company paid no dividends. Dana sues and proves a fiduciary breach, but there is no shareholder agreement, bylaw, or article requiring anyone to buy her shares.

Which remedy is most consistent with the governing rule?

Explanation. The majority opinion holds that the remedy for a freeze-out should restore the minority shareholder as nearly as possible to the position she would have occupied absent the wrongdoing by protecting her reasonable expectations of benefit from ownership. Where no agreement, bylaw, article, or other circumstance gave Dana a reasonable expectation of being bought out, a forced buyout would improperly improve her position by creating a market for an otherwise illiquid close-corporation interest. The proper approach is damages for quantifiable deprivations and prospective injunctive relief as appropriate. (Derived from Brodie v. Jordan (n.d.).)