Exergen was a close corporation controlled by Pompei, its founder, president, and majority shareholder. The plaintiff left another job to work full time for Exergen, bought shares through employee offerings, and expected continuing employment and an opportunity to become a major shareholder. He was later not given additional stock opportunities and was terminated in 1987. The plaintiff eventually sold his shares back to the corporation in 1991 for $17 per share, which he considered a fair price and which yielded a significant return on his investment.
Issue
Does a majority shareholder in a close corporation breach the fiduciary duty of utmost good faith and loyalty by terminating a minority shareholder's at-will employment where the minority shareholder had expected continuing employment, but stock ownership was not formally tied to employment and the shareholder was fairly compensated for his stock?
Rule
In a close corporation, shareholders owe one another a fiduciary duty of utmost good faith and loyalty, but the majority retains substantial discretion in business decisions, including hiring and firing employees. Termination of a minority shareholder's employment can constitute a breach of fiduciary duty only where the facts show the kind of unfair freeze-out or disregard of established stockholder arrangements recognized in Donahue and Wilkes; not every discharge of an at-will employee who also owns stock gives rise to such a claim.
🔒
See the holding & full analysis
Create a free KwikCourt account to unlock the rest of this brief — and practice the case.
The court's holding and reasoning
Doctrine tests, pitfalls & exam hypotheticals
10 practice questions + 4 AI-graded essays on this case
One of 10 multiple-choice questions for this case. Pick an answer to see why.
Blue Harbor Sensors, Inc., a closely held company in Boston, employs Nina Shah as an at-will vice president. Nina bought 6% of the company's shares through optional employee offerings, was later fired by the majority shareholder without any legitimate business reason, and two years later sold her shares back to the company for the same fair price paid to other departing shareholders, yielding a substantial gain over her purchase price.
Under the majority rule, Nina's strongest argument for breach of fiduciary duty will likely fail because
Explanation. The majority opinion holds that a minority shareholder in a close corporation does not prove a fiduciary breach merely by showing that an at-will job ended without a legitimate business purpose. Liability requires facts resembling an unfair freeze-out or disregard of an established arrangement linking ownership and employment. Here, Nina's stock was acquired through optional offerings, not formally tied to her job, and she later received fair value, indicating independent investment value. (Derived from Merola v. Exergen Corp. (n.d.).)