8/13/2019 Writing Assignment 10

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Amanda Weiner Writing Assignment #10

The Massachusetts courts have developed fiduciary duties owed by controllingshareholders (including those that have an ad hoc controlling interest! to the remaining

shareholders of the same corporation" This concept is clearly demonstrated in both the Wilkes

andSmith

cases"n closely held corporations$ the fiduciary duties owed by controlling shareholders are

similar to those held by partners in a partnership% shareholders$ li&e partners have relative

fiduciary duties in the sense that they are obligated to act in the best interests of the company(loyal! but may sometimes be able to act in their self'interest without violating a fiduciary duty

(selfish!" These loyal and selfish aspects are permitted to overlap" owever$ this was not

always the standard" The original standard$ set out in Donahue$ stated that stoc&holders in the

corporation owe one another substantially the same fiduciary duty in the operation of theenterprise that partners owe to one another""" the standard of duty owed by partners to one

another is one of )upmost good faith and loyalty*+ with regard to their actions relative to the

operations of the enterprise and the effects of that operation of the rights and investments of

other stoc&holders$ stoc&holders in close corporations must discharge their management andstoc&holder responsibilities in conformity w, this strict good faith standard" They may not act out

of avarice$ e-pediency$ or self'interest in derogation of their duty of loyalty to the otherstoc&holders and to the corporation n other words$ the original standard re.uired shareholders

to always maintain their loyal to the company"

n Wilkes$ however$ the strict standard was rela-ed" The Wilkescase recogni/ed a right toselfish ownership by adusting the Donahuestandard" The ourt in Wilkesrecogni/ed and

e-pressed concern for the free/e out scenario$ in which a minority shareholder can be easily

fro/en out (depriving the minority of a position in the company! by the maority since there is

not a readily available mar&et for their shares" While a maority of shareholders in thecorporation trusted with ma&ing good business decisions$ it is also important to consider whether

the maority interest is balanced with the minority interest" Therefore$Wilkes

addressed the factthat shareholders in closely held corporations owe a duty of loyalty,good faith to othershareholders" f a minority shareholder alleges breach of that duty by the maority (by showing

oppression,free/e out,deprivation of value of interest,frustration of reasonable e-pectations!$ the

burden then turns on the maority to show that there was a legitimate business purpose for theiractions" 2nce that has been done$ the minority must then show that the same business purpose

could be achieved through a less harmful alternative action"

Smiththen addressed the issue of fiduciary duties owed by a minority shareholder" The

primary issue in that case was whether 3r" Wolfson$ a minority shareholder and former directorin the corporation and the sole dissenter for voting for dividends$ owed the same fiduciary duties

that a maority would owe a minority shareholder" The court held that the determining factor for

the fiduciary duty owed is whether a party would be considered a controlling party" f theminority shareholder is a controlling party$ then he,she owes the maority shareholders a

fiduciary duty as well" Therefore the maority is entitled bring matters to the court for decisions

that are unustifiable for the corporation*s interests" 4ecause 3r" Wolfson was the controllingparty in that he prevented the dividend payouts despite no real business ustification$ the ourt

determined he acted unreasonably and did not demonstrate utmost good faith and loyalty to the

business"