353 N.E.2d 657 (Mass. 1976)
In 1951 Wilkes acquired an option to purchase a building and lot located on the corner of Springside Avenue and North Street in Pittsfield, Massachusetts, the building having previously housed the Hillcrest Hospital.1 Riche, an acquaintance of Wilkes, learned of the option and interested Quinn and Pipkin in joining Wilkes in his investment.2 The four men met and decided to participate jointly in the purchase of the building and lot as a real estate investment which they believed had good profit potential on resale or rental.3 They later determined that the property would have its greatest potential for profit if operated as a nursing home.4
Wilkes consulted his attorney who advised that if the four men were to operate the nursing home as planned they would be partners and liable for debts.5 On the attorney's suggestion ownership of the property was vested in Springside, a corporation organized under Massachusetts law.6 Each of the four men invested $1,000 and subscribed to ten shares of $100 par value stock in Springside.7 It was understood by all that each would be a director of Springside and each would participate actively in the management and decision making involved in operating the corporation.8 It was further understood that each would receive money from the corporation in equal amounts as long as each assumed an active and ongoing responsibility.9
The work was apportioned with Wilkes in charge of repair upkeep and maintenance of the physical plant and grounds, Riche supervising kitchen facilities and dietary aspects, Pipkin available for medical problems, and Quinn dealing with personnel and administrative aspects.10 Initially each received $35 a week which increased to $100 by 1955.11 In 1959 after a long illness Pipkin sold his shares to Connor who received the same weekly stipend and participated as a director and financial adviser.12 In 1965 the stockholders sold a portion of the corporate property to Quinn after Wilkes prevailed on a higher sale price, after which the relationship between Quinn and Wilkes began to deteriorate.13
In January 1967 Wilkes gave notice of his intention to sell his shares.14 In February 1967 at a directors meeting the board established salaries with a substantial weekly increase for Quinn and $100 for Riche and Connor but none for Wilkes.15 At the March 1967 annual meeting Wilkes was not reelected as a director or officer.16 On August 5, 1971, Wilkes filed a bill in equity for declaratory judgment in the Probate Court for Berkshire County naming Quinn, Riche, the executors of Connor and Springside as defendants seeking damages in the amount of the salary he would have received.17 A master issued his final report in late 1973 which was confirmed in late 1974 after Wilkes's objections were overruled resulting in judgment dismissing the action on the merits.18 The Supreme Judicial Court granted direct appellate review.19
Whether Wilkes should recover damages for breach of the alleged partnership agreement entered into in 1951?20
In light of the theory underlying this claim, we do not consider it vital to our approach to this case whether the claim is governed by partnership law or the law applicable to business corporations.21 This is so because, as all the parties agree, Springside was at all times relevant to this action, a close corporation as we have recently defined such an entity in Donahue v. Rodd Electrotype Co. of New England, Inc., 367 Mass. 578, 585-586 (1975).22
No. The court determines that resolution of the partnership agreement claim is not necessary because the fiduciary duty owed among stockholders in a close corporation provides the framework for analyzing the dispute and granting relief to Wilkes.23 As all the parties agree, Springside was at all times relevant to this action, a close corporation as defined in Donahue v. Rodd Electrotype Co. of New England, Inc. The strict good faith standard from that case applies directly to the facts of this close corporation where the majority froze out the minority stockholder by terminating his salary and directorship.24
The court does not reach the question of breach of the partnership agreement.25
Whether the defendants as majority stockholders breached their fiduciary duty to Wilkes as a minority stockholder by their actions in February and March 1967?26
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.27 The standard of duty owed by partners to one another is one of utmost good faith and loyalty.28 When minority stockholders in a close corporation bring suit against the majority alleging a breach of the strict good faith duty owed to them by the majority, the court must carefully analyze the action taken by the controlling stockholders in the individual case.29 It must be asked whether the controlling group can demonstrate a legitimate business purpose for its action.30 When an asserted business purpose for their action is advanced by the majority, it is open to minority stockholders to demonstrate that the same legitimate objective could have been achieved through an alternative course of action less harmful to the minority’s interest.31
Yes. Applying this approach to the instant case, it is apparent that the majority stockholders in Springside have not shown a legitimate business purpose for severing Wilkes from the payroll of the corporation or for refusing to reelect him as a salaried officer and director.32 There was no showing of misconduct on Wilkes’s part as a director, officer or employee of the corporation which would lead to approval of the majority action as a legitimate response.33 It is an inescapable conclusion from all the evidence that the action of the majority stockholders here was a designed freeze out for which no legitimate business purpose has been suggested.34
In the context of this case, the duty of utmost good faith and loyalty would demand that the majority consider that their action was in disregard of a long-standing policy of the stockholders that each would be a director of the corporation and that employment with the corporation would go hand in hand with stock ownership.35
Quinn, Riche and Connor breached their fiduciary duty to Wilkes as a minority stockholder in Springside, and Wilkes is entitled to recover damages.36