Remedy Basics in Corporate Freeze Out Cases

Freeze Out

Given the intimate relationship between its members, shareholders in close corporations owe each other certain fiduciary duties.  When majority shareholders in such a corporation use their majority status to usurp control of the company, effectively “freezing-out” the minority shareholders, there’s a good chance they’ve breached one or more of those fiduciary duties.  In the event that such a breach occurs, Massachusetts courts have laid down some guiding principles as to the breadth of remedies available to frozen-out plaintiffs.

The basic remedial principles hold that although “the remedy should neither grant the minority a windfall nor excessively penalize the majority” and courts should not “radically transfer the nature of a minority shareholder’s asset or arbitrarily increase its value”, “the remedy should, to the extent possible, restore to the minority shareholder those benefits which she reasonably expected, but has not received because of the fiduciary breach.”[1]  “Courts have broad equitable powers to fashion remedies for breaches of fiduciary duty in a close corporation” and their choice of a particular remedy will only be reviewed for abuse of discretion.[2]

The courts may award both equitable relief and damages.  In Wilkes v. Springside Nursing Home, Inc., plaintiff was allowed to recover, both from defendants directly and from remaining corporate assets, the salary he would have received had he not been wrongfully deprived of his position as an employee and officer at Springside.[3]  In similar fashion, plaintiffs may also seek reinstatement to such a position as another form of relief or a forced declaration of dividends.[4]  In Massmanian v. Dubose, the court  preliminarily enjoined the plaintiff’s company from terminating him pending determination of his freeze-out claim.[5]

It is also important to keep in mind that although Massachusetts courts do not force the dissolution or sale of close corporations without some shareholder authorization[6] and similarly dislike forced share buyouts,[7] either remedy can be available if such relief is called for in the corporation’s operating agreement.  With Massachusetts courts allowing for such variety in both equitable and monetary relief, and the ability to craft your operating agreement to allow for more variety, freeze-out plaintiffs should not find themselves left out in the cold.

[1]Brodie v. Jordan, 447 Mass. 866, 870-72 (2006).


[3]Wilkes v. Springside Nursing Home, Inc., 370 Mass. 842, 854 (1976).

[4]Brodie at 870-87; see also Pointer v. Castellani, 455 Mass. 537 (2009).

[5]Massmanian v. DuBose, 20 Mass. L. Rep. 62 (Mass. Super. Ct. 2005).

[6]Pointer, 455 Mass. at 559-60.

[7]Brodie at 873, n. 7.

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