Frozen in Place: SJC Rejects Shareholder’s Attempt to Compete with Close Corporation after “Freeze Out”

ice

As I have previously discussed on this blog, in Massachusetts, members of close corporations owe fiduciary duties to one another and to the corporation.  In Selmark Associates, Inc. v. Ehrlich, the Massachusetts Supreme Judicial Court (“SJC”) recently made clear that a shareholder who has been “frozen out” of a close corporation, but who retains an ownership interest in it, cannot compete with that corporation in violation of his continuing fiduciary duties. Selmark involved two Massachusetts close corporations, Selmark and Marathon, that provided outsourced sales support to companies lacking their own sales force.  Starting in 1997, Evan Ehrlich (“Ehrlich”) worked as … Continue reading

Everyone Wants a Say: Determining Who Gets to Vote on an LLC Derivative Suit

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The Massachusetts Appeals Court recently issued an interesting decision concerning the authority a group of LLC members needs to bring a derivative suit under Massachusetts law. The case, Williams v. Charles, involved an LLC called Frowmica, which was organized for the purpose of negotiating and financing the purchase of a taxicab business.  Within a year after entering into the operating agreement, relations between the LLC members began to deteriorate.  Some members claimed that the managing member, Jean Bernard Charles (“Charles”), had taken various actions adverse to Frowmica, such as terminating the operations manager without cause, wrongly paying himself a salary … Continue reading

The Deep Freeze

icecream

In a case recently filed in the Business Litigation Session, Plaintiff Susan Lombardi alleges that she is a 50% owner of the Braintree Emack & Bolio’s and that her former “sugar daddy,” the Defendant Robert Rook, is freezing her out of the franchise.  Rook is the founder, franchisor and principal of the Emack & Bolio’s company.  After Lombardi allegedly met Rook on the website “sugardaddy4me,” Lombardi’s role in the Braintree store skyrocketed from a counter worker to a 50% owner, with a promise of 50% of the store’s profits and a salary of $780/week, in just a few months.  In … Continue reading

No Duty To Buy Back Minority Shares

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A Court of Chancery of Delaware recently held that majority shareholders of a close corporation have no fiduciary duty in the buy back of a minority shareholder’s interest in the corporation.  The decision specifically mentions that Massachusetts differs from Delaware in that shareholders of a Massachusetts close corporation owe each other a fiduciary duty.  After reading the Delaware decision, one might jump to the erroneous conclusion that majority shareholders of a Massachusetts close corporation have a duty to purchase shares from minority owners who want to liquidate their investment.  But that is not true. As a blanket rule under the … Continue reading

The Price of Freezing Out a Partner

Frozen

A recent Massachusetts case provided an example at how an at-will partnership can often come to an abrupt end – with one partner escorted off the premises by an armed officer. In 2009, David Zak and Lisa Reed (a lawyer and a mortgage broker respectively) orally agreed to start a loan modification partnership in the aftermath of the subprime mortgage crisis. The pair split the profits from the business evenly and each received a bi-weekly salary. During the first year of the business, Reed attempted to have Zak agree to a written partnership agreement, but Zak assured her that none … Continue reading

Gold Medal: A Case Study Involving Over 30 Years of Buyout Negotiations

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Last month, the Massachusetts Supreme Judicial Court (“SJC”)weighed in on a contentious family business dispute in Chambers v. Gold Medal Bakery Inc.   This case demonstrates how heated (and litigious) family negotiations for a corporate buyout can become and clarifies the scope of shareholder and director access to privileged corporate documents. Gold Medal involves two closely held corporations that comprise a Fall River wholesale bakery and bread distributor.  (You might recognize their “Fiber One” bread products.)  Much like the infamous case involving the Demoulas brothers that we discussed in an earlier blog post, here the two LeComte brothers (Roland and Leo) … 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

More Problems Arise for Upper Crust

Upper Crust Pizza

It’s no secret that locally based pizza chain Upper Crust has recently been under scrutiny over its labor practices; illegally employing undocumented workers from Brazil, underpaying them for long workweeks and rescinding overtime pay ordered by the U.S. Department of Labor for weekend work.  Five former employees have a suit pending against the company for these practices.  In fact, the court recently certified the class in that lawsuit. As it turns out though, Upper Crust’s problems don’t end there. In dueling pleadings filed in Suffolk Superior Court, the co-owners of Upper Crust are now suing each other alleging misuse of … Continue reading