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Minority Shareholders’ Rights in a Closely Held Corporation

by | Apr 15, 2016 | Closely Held Corporation

In a closely held corporation, minority shareholders are owed by the majority shareholders, and vice – versa, a fiduciary duty of utmost good faith and loyalty. Bernstein v. Pritsker, 30 Mass. L. Rep. 630, 2013 Mass. Super. Lexis 18 (Superior Court, Leibensperger, J., February 14, 2013), citing Donahue v. Rodd Electrotype Co. of New England, Inc., 367 Mass. 578, 593 (1975). Courts here held that duty analogous to the duty partners in a general partnership owe to one another. Bernstein, supra; Donahue, supra. If a closely held corporation were a “partnership”, the minority shareholder/partner would have “the right to inspect ‘any’ of the partnership’s books”. Bernstein, supra citing M.G.L. c. 108A §19.

As Judge Leibensperger held:

While the parties have elected to organize in the corporate form, the difference in the nature of a close corporation from a publically traded corporation demands a more expansive application of the standards of §16.02. A shareholder on the outside of a close corporation has limited access to what is going on inside. There is no public disclosure mandated by federal laws and enforced by the Security and Exchange Commission with respect to a close corporation…. While some articulation of the need for a detailed accounting (or other) records is directed by §16.02(c)(3) (requested records must be directly connected “to a purpose described with reasonable particularity”) a court should not be overly stringent in applying those requirements. A reasonable articulation of suspected facts, not mere speculation, supporting an inference of possible mismanagement or wrongdoing should be enough…The possibility of [ ] wrongdoing [in violation of the director’s and controlling shareholder’s fiduciary duties] is well recognized when a shareholder in a close corporation claims to be frozen out. See Id. at 588-89 (a typical element of freeze out may be the payment of exorbitant salaries in lieu of dividends.

Id. (Emphasis added).

If you are a frozen out minority shareholder of a closely held corporation and would like to learn more about your rights to inspect the books and records of your corporation, call us at  508-763-6604 or email [email protected].