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 Supreme Judicial Court’s Goode v. Ryan decision, “neither the corporation nor a majority of shareholders is under any obligation to purchase the shares of minority shareholders when minority shareholders wish to dispose of their interest in the corporation.” In Goode, the minority shareholder was not being oppressed by the majority owners, so Massachusetts’ fiduciary duty rule was not a factor.
So the question remains: if majority owners breach their fiduciary duty by freezing out a minority shareholder, would a Massachusetts court force the majority to buy back the minority owner’s shares at a reasonable price? It’s not likely. In Brodie v. Jordan, the Supreme Judicial Court strongly discouraged such a remedy.
Investing in a close corporation is risky because there isn’t a market for your shares. You cannot force the majority shareholders to buy back your shares when you want to liquidate, even if they have frozen you out. That’s why it is wise to enter into an express agreement that envisions an eventual departure (to include a buy-back or liquidation provision) before investing in a close corporation.