Thursday, February 21, 2013

Donahue v. Rodd Electrotype Co. case brief

Donahue v. Rodd Electrotype Co. case brief summary
367 Mass. 578

SYNOPSIS: The plaintiff, who was a minority shareholder in a close corporation, appealed from a Massachusetts court's ruling, which dismissed the plaintiff's suit for rescission of a purchase, by defendant purchasers, of stock owned by a controlling shareholder.

-The controlling shareholder sold his stock to defendants.
-The defendants refused to purchase the plaintiff's stock.
-The trial court dismissed plaintiff's suit, stating that the initial transaction was carried out in good faith.

-On appeal, the court stated that in a close corporation, all shareholders owed each other a strict duty of the utmost loyalty and good faith.

-Further, the court held that a controlling shareholder could not utilize his/her position to create an exclusive market for the controlling shareholder's shares.
-In this particular case, the defendants had created a market for the controlling shareholder, however they refused to extend that market to the plaintiff, thereby excluding her.
-As a result, the court reversed and held that either the initial sale had to be rescinded or the defendants had to offer to purchase plaintiff's stock at the same price that was agreed upon in the initial sale.

The decree was reversed.
The case was remanded.

-Close corporation resembles a partnership.  The relations among the stockholders must be one of trust, confidence, and absolute loyalty if the enterprise is to succeed.  
1.  Small # of shareholders
2.  No ready market for corporate stock.
3.  Substantial majority stockholder participation in the management, direction and operation of the corporation.
-Stockholders in the close corporation owe one another substantially the same fiduciary duty in the operation of the enterprise that partners owe each other.  Utmost good faith and loyalty.  
-There is a less stringent standard in corporations.  Corporate directors are held to good faith and inherent fairness standard of conduct and are not permitted to serve two masters whose interests are antagonistic.  Their paramount duty is to the corporation and their personal pecuniary interests are subordinate to that duty.
-There is no ready market for shares of a close corporation, the opportunity to turn corporate funds to personal use must be equal amongst shareholders.    
-Majority shareholders generally owe a fiduciary duty to minority shareholders in a close corporation.

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