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Keywords

appealtrialfiduciarytrustcorporationfiduciary dutygood faithbreach of fiduciary duty
plaintiffdefendanthearingtrialtestimonyfiduciarycorporationfiduciary dutygood faith

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Donahue v. Rodd Electrotype Co. of New England, Inc., 367 Mass. 578, 328 N.E.2d 505

Facts

Euphemia Donahue, a minority stockholder in Rodd Electrotype, brought action against the company's directors and a former controlling shareholder, Harry Rodd, to rescind the corporation's purchase of Rodd's shares. The purchase was made without offering Donahue the same opportunity to sell her shares, which she claimed violated the fiduciary duty owed to her as a minority stockholder. The trial court dismissed her complaint, finding no prejudice against her, but this decision was appealed.

The trial judge, after hearing oral testimony, dismissed the plaintiff's bill on the merits. He found that the purchase was without prejudice to the plaintiff and implicitly found that the transaction had been carried out in good faith and with inherent fairness.

Issue

Did the controlling stockholders of Rodd Electrotype breach their fiduciary duty to the minority stockholder by failing to provide her with an equal opportunity to sell her shares when the corporation purchased shares from the former controlling shareholder?

The plaintiff has characterized the corporate purchase of Harry Rodd's shares as an unlawful distribution of corporate assets to controlling stockholders. She urges that the distribution constitutes a breach of the fiduciary duty owed by the Rodds, as controlling stockholders, to her, a minority stockholder in the enterprise, because the Rodds failed to accord her an equal opportunity to sell her shares to the corporation.

Rule

Stockholders in a close corporation owe one another the same fiduciary duty as that owed by partners to one another, which includes the duty of utmost good faith and loyalty.

We hold that stockholders in the close corporation owe one another substantially the same fiduciary duty in the operation of the enterprise that partners owe to one another.

Analysis

The court analyzed the actions of the controlling stockholders in authorizing the purchase of shares from Harry Rodd without offering the same opportunity to Donahue. It concluded that this action constituted a breach of fiduciary duty, as the controlling stockholders failed to act in good faith and with loyalty towards the minority stockholder, which is a requirement in close corporations where trust and confidence among stockholders are paramount.

For the reasons hereinafter noted, we agree with the plaintiff and reverse the decree of the Superior Court. However, we limit the applicability of our holding to ‘close corporations,’ as hereinafter defined.

Conclusion

The court reversed the lower court's decree that dismissed Donahue's complaint and remanded the case for entry of judgment in her favor, recognizing the breach of fiduciary duty by the controlling stockholders.

Final decree insofar as it dismissed bill as to specific defendants and awarded costs reversed and case remanded for entry of judgment.

Who won?

Euphemia Donahue prevailed in the case because the court found that the controlling stockholders breached their fiduciary duty by not providing her an equal opportunity to sell her shares.

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