A recent decision by the Supreme Judicial Court declared that sellers of shares in a closely held corporation did not breach their fiduciary duty when the sale imperiled the corporation's favorable S corporation status. See Merriam, et al. v. Demoulas Super Markets, Inc., et al., SJC-11098 (slip op., March 27, 2013)
A closely held corporation sought a judgment that minority shareholders had a fiduciary duty not to sell their shares if the sale would terminate the corporation's favorable S corporation status.
The corporation's articles of organization restricted stockholders from freely transferring their stock by putting in place a familiar procedure whereby the stockholder must first offer his shares to the corporation, but thereafter describes a discrete process of valuation and subsequent offer at a price to be determined by arbitrators.
The SJC held that such a clause in the articles of organization be treated as a contract between shareholders and the corporation. The clause restricting free sale of shares was a bargained for procedure for disposing of interests in the corporation. If the corporation had wished the procedure to reflect the importance of S corporation status then it should have included that in the articles or bylaws.
A shareholder in a close corporation always owes a fiduciary duty to fellow shareholders, however good faith compliance with the terms of an agreement entered into by the shareholders will satisfy that duty. The corporation cannot later require a shareholder who wishes to sell to be bound by additional substantive restrictions on the sale of their shares based on an asserted fiduciary duty that goes beyond a restriction imposed in the original articles or bylaws.
The SJC therefore rejected the corporation's argument that selling the shares, which could terminate its S corporation status, constituted a breach of contract or fiduciary duty. Further, the SJC rejected the corporation's argument that the sellers were required to reoffer their shares to the corporation should the sellers decide to offer the shares to a third party at a price lower than the value determined by arbitrators.
Click Here to contact Raymond Law Group for assistance with shareholder issues involving closely held corporations.