328 N.E.2d 505, 512 (Mass. 1975)
In 1935 Harry C. Rodd began employment with Royal Electrotype Company of New England, Inc., then a wholly-owned subsidiary of a Pennsylvania corporation.1 The following year Joseph Donahue was hired as a finisher of electrotype plates.2 In the years preceding 1955, the parent company made shares of the subsidiary available to both men.3 Rodd acquired 200 shares at twenty dollars each and Donahue obtained fifty shares in two twenty-five-share lots at the same price, while the parent retained 725 shares and Lawrence W. Kelley owned the remaining twenty-five.4
In June 1955 the subsidiary purchased the parent's 725 shares for $135,000, paying $75,000 in cash and issuing five $12,000 promissory notes, and also bought Kelley's twenty-five shares for $1,000.5 Harry Rodd, who had assumed the presidency earlier that year, thereby gained an eighty-percent controlling interest, leaving Joseph Donahue as the sole minority stockholder.6
The company was renamed Rodd Electrotype Company of New England, Inc. in 1960.7 Between 1959 and 1967 Harry Rodd distributed most of his shares equally to his two sons and daughter.8 By May 1970, when Harry Rodd was seventy-seven years old, his sons wished him to retire and he insisted on financial arrangements for his remaining eighty-one shares.9 At a special board meeting on July 13, 1970, the directors authorized the president to execute an agreement for the corporation to purchase forty-five of those shares at $800 each.10
The purchase was completed on July 15, 1970, after which Harry Rodd resigned as treasurer.11 In March 1971 the remaining thirty-six shares were transferred to his children, resulting in each child holding fifty-one shares while the Donahues held fifty.12 At a March 30, 1971 stockholders' meeting the Donahues first learned of the corporate purchase.13 Shortly afterward they offered their shares to the corporation on the same terms, but the corporation refused.14
Euphemia Donahue, who had become outright owner of the shares after her husband's death, brought suit against the directors, Harry C. Rodd, and the corporation seeking rescission of the purchase and repayment of the $36,000 purchase price with interest.15 After a trial at which oral testimony was heard, the Superior Court judge dismissed the bill on the merits.16 The Appeals Court affirmed, and the Supreme Judicial Court granted the plaintiff's application for further appellate review.17
Whether stockholders in close corporations owe one another the strict fiduciary duty of utmost good faith and loyalty that partners owe to one another?18
Stockholders in close corporations owe one another substantially the same fiduciary duty in the operation of the enterprise that partners owe to one another, the duty of utmost good faith and loyalty, rather than the less stringent good faith and inherent fairness standard applicable to directors and stockholders of all corporations.19
Yes. Rodd Electrotype meets the definition of a close corporation because it had a small number of stockholders, no ready market for its shares, and substantial majority stockholder participation in management.20 The relationship among the Rodd family as controlling group and the Donahues as minority stockholders therefore required the strict partnership-level standard of utmost good faith and loyalty in corporate operations.21
Stockholders in close corporations owe one another the strict fiduciary duty of utmost good faith and loyalty that partners owe to one another.22
Related opinions on this issue
Justice Wilkins agreed with much of what the Chief Justice says in support of granting relief to the plaintiff.23 However, he did not join in any implication that the rule concerning a close corporation's purchase of a controlling stockholder's shares applies to all operations of the corporation as they affect minority stockholders.24 That broader issue, which is apt to arise in connection with salaries and dividend policy, is not involved in this case.25
The analogy to partnerships may not be a complete one.26
Whether a close corporation's purchase of shares from a controlling stockholder without offering minority stockholders an equal opportunity to sell a ratable number of their shares at the same price violates that fiduciary duty?27
To satisfy the strict fiduciary duty, when a close corporation purchases shares from a controlling stockholder the controlling group must cause the corporation to offer each stockholder an equal opportunity to sell a ratable number of shares at an identical price.28 Failure to do so constitutes a breach because the purchase confers on the controlling group the benefits of a market for shares and access to corporate assets that are denied to the minority.29
Yes. The July 1970 purchase gave Harry Rodd, a member of the controlling Rodd group, both a market for previously unmarketable shares and access to corporate funds for personal use.30 The corporation did not extend the same opportunity to the Donahues, who were rebuffed when they sought identical terms, thereby violating the equal-opportunity requirement imposed by the strict fiduciary duty.31
A close corporation's purchase of shares from a controlling stockholder without offering minority stockholders an equal opportunity violates the fiduciary duty.32
Whether the July 1970 purchase of forty-five shares from Harry C. Rodd by Rodd Electrotype Company of New England, Inc. breached any fiduciary duty owed to minority stockholder Euphemia Donahue?33
A purchase by a close corporation of shares from a controlling stockholder without extending an equal opportunity to minority stockholders breaches the strict fiduciary duty of utmost good faith and loyalty owed among stockholders in a close corporation.34 The controlling group may not utilize its control to obtain special advantages and disproportionate benefit from share ownership.35
Yes. The Rodd family functioned as a single controlling group that caused Rodd Electrotype to purchase forty-five shares from Harry Rodd at $800 per share.36 The Donahues, who held fifty shares and first learned of the transaction at the March 1971 stockholders' meeting, were never offered a ratable opportunity to sell on the same terms.37 The trial judge found they did not ratify the purchase.38
The July 1970 purchase breached the fiduciary duty owed to Euphemia Donahue.39