Donahue v. Rodd Electrotype Co., 328 N.E.2d 505 (1975) p.311

SUBJECT

distributing corporate control

FACTS

Plainitff seeks to rescind D's purchase of Harry Rodd's shares in Rodd Electrotype and to compel Harry Rodd to repay to the corporation the purchase price of said shares, together with interest from the date of purchase. The plaintiff alleges that the defendants caused the corporation to purchase the shares in violation of their fiduciary duty to her, a minority stockholder of Rodd Electrotype.

Plaintiff was left in a minority position with stock and was unable to get out. She said it was a breach of the fiduciary duty.

RULE

A closely held corporation is one in which the stock is held in a few hands, and wherein it is not at all, or only rarely, dealt in by buying or selling. The strict duty of loyalty is extended to all stockholders in closely held corporations.

HOLDING

We agree with the plaintiff that the corporate purchase of Harry Rodd's shares as an unlawful distribution of corporate assets to controlling stockholders. The decree of the Superior Court is reversed.

RATIONAL

Self serving conduct by directors is proscribed by the director's fiduciary obligation to the corporation. In a closely held corporation the minority stockholders may be trapped in a disadvantageous situation. Then the minority stockholder agrees to sell out at less than fair value, the majority has won. Corporate directors are held to a good faith and inherent fairness standard of conduct and are not permitted to serve two masters whose interests are antagonistic. When the corporation reacquiring its own stock is a closely held corporation, the purchase is subject to the additional requirements, in the light of our holding in this opinion (utmost good faith and loyalty to the other stockholders).

NOTES

Problems with minority shareholders in closely held corporations:
1. exit strategy
2. no ready market for minority shares
3. liability for other shareholders
4. unfair spending of other shareholders and minority shareholder has no say in it

Created on: Wednesday, October 20, 1999 at 12:32:05 (PDT)