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 … Continue reading

The Power of Corporate Documents

The Power of Corporate Documents

I have written a great deal on this blog about the heightened fiduciary duties that exist between shareholders in a close corporation.  There is no doubt that these special duties are important and will govern many disputes between warring factions of a small business.  However, before either party starts lodging accusations of breach of fiduciary duty, it is wise for both sides to ascertain whether there is a written provision of the corporation’s articles of organization (or a shareholder agreement) that expressly governs the conduct or circumstances at issue.  Better yet, well before tensions arise – ideally, when relations are … Continue reading

How the State of Incorporation of Your Small Business Affects the Duties Owed Between Shareholders

incorporated

Let’s say that you are starting a small business in Massachusetts and are trying to determine where you should incorporate.  The Massachusetts Supreme Judicial Court has held that the law of the state where a Massachusetts corporation is incorporated governs matters of that corporation’s internal affairs.  This is true even where the corporation primarily conducts its business in a state other than its state of incorporation.  So, for example, a corporation doing business in Massachusetts but incorporated in Delaware will be subject to Delaware corporate law.  Therefore, the decision of where to incorporate is an important one and affects which … Continue reading

How Personal Bankruptcy Affects Your Business – and Your Business Partners

bankruptcy

Let’s say that your business is profitable, but for various reasons, your business partner is still struggling with his personal finances. In an ideal situation, your business partner would discuss these financial problems with you and, if the partner is unable to resolve his financial problems, give you an opportunity to buy his share of the business or dissolve the company before he resorts to filing for bankruptcy protection. Another option could be convincing your business partner to consider Chapter 13 bankruptcy instead of Chapter 7, which will allow for the repayment of debt over 3 to 5 years, protecting … Continue reading

Protecting Your Company in the Case of a Marital Divorce

businessdivorce

Last month, we discussed the legal saga between ex-spouses and fellow shareholders of the multi-billion dollar fashion house Tory Burch.  While it is a good cautionary tale for spouses who own a business together, most family-owned companies are much smaller enterprises.  There are more than 1 million businesses in the United States owned by married couples, and unfortunately, like other small businesses, most of them operate without a formal partnership or operating agreement outlining withdrawal or removal procedures of an owner.  If one partner wants out, or wants the other out, a marital divorce leads to a business divorce.  The … Continue reading

Pretense versus “Legitimate Business Reasons” for Freeze Outs

Boston Business Divorce

Under Massachusetts law, Wilkes v. Springside Nursing Home, Inc., 370 Mass. 842, 849-52 (1976) established a shifting burden of proof in close corporation freeze out cases. Wilkes instructs that in a close corporation freeze out suit, the defendant carries an initial burden of showing a legitimate business reason for its actions. Courts generally grant defendants a fair amount of discretion, but once a defendant has offered his reason, plaintiff then has the opportunity to show that the reason is simply a pretense, or that the defendant’s objectives could have been achieved in a manner less detrimental to the plaintiff. If … Continue reading