Gallagher v. Lambert

New York Court of Appeals · Corporations

CorporationsClose corporationsStock repurchase agreementsAt-will employmentFiduciary dutyclose corporationminority shareholdermandatory buy-back

Facts

Gallagher was an at-will employee, officer, director, and minority shareholder of defendant Eastdil Realty. In 1981 he purchased an 8.5% interest under a written agreement requiring him to sell the shares back for book value if his employment ended for any reason before January 31, 1985; after that date, a higher earnings-based formula would apply. Gallagher helped write the provision, reviewed it with counsel, accepted its terms, and bought the shares. Eastdil fired him on January 10, 1985, and although he did not challenge the firing itself, he sought the higher post-January 31 repurchase price on the theory that the timing of the discharge breached a fiduciary duty.

Issue

May a minority shareholder in a close corporation who is also an at-will employee avoid the agreed pre-termination buy-back price and claim a higher repurchase price by alleging that the corporation breached a fiduciary duty by firing him before the contract's pricing date? Does such an allegation require reinstatement of fiduciary-duty-based causes of action despite the agreement's plain terms?

Rule

Where a minority shareholder in a close corporation contractually agrees that his shares must be repurchased at book value if his employment ends before a stated date, and the employer has unfettered discretion to terminate his at-will employment, the corporation does not commit a cognizable breach of fiduciary duty by enforcing the agreement according to its plain terms after terminating him before that date. The repurchase agreement defines the scope of the relevant fiduciary duty and courts will not alter that measuring device merely on allegations of unfairness.

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

In Chicago, North Harbor Capital, a close corporation, sold shares to its executive Maya Chen under a written agreement requiring resale at book value if her employment ended for any reason before June 30, 2027, and at a higher earnings-based formula afterward. Maya was an at-will employee and was fired on June 20, 2027; she does not challenge the firing itself but sues for the higher price, alleging the board timed her discharge to buy back her shares cheaply.

How should a court most likely rule on Maya’s fiduciary-duty claim for the higher repurchase price?

Explanation. The majority rule is that when an employee-minority shareholder agreed to a mandatory buy-back at book value if employment ends before a stated date, and the employee is terminable at will, the corporation does not commit a cognizable fiduciary breach merely by terminating employment before that date and enforcing the agreement as written. The court refused to replace the agreed measuring device with a higher valuation based only on alleged unfair timing.