What Are the Duties that Officers, Directors, and Shareholders in a Closely Held Corporation Owe One Another?
The following are general principles regarding duties owed in a closely held corporation, but they may be modified by statute, agreements, or case law and do not govern every situation. The relatively new Business Corporation Law, G. L. Ch. 156D, provides considerable flexibility to change the rules governing a corporation.
What are the duties of the Directors of a Closely Held Corporation?
Directors of a Massachusetts corporation, including small closely held companies, stand in a fiduciary relationship to the company. As fiduciaries, their primary duty is to the Corporation, and their personal interests are subordinate to that duty. Directors’ basic duties comprise both the duty of good faith and care and the duty of loyalty. G.L. Ch.156D, 8.30 provides guidance in a Director’s decision making and allows consideration of the best interests of employees, shareholders, creditors, vendors, the corporation and of other factors.
What are the duties of the Shareholders of a Closely Held Corporation?
For stockholders in closely held corporations, the Massachusetts Supreme Judicial Court, the SJC, in the case of Donahue v. Rodd Electrotype Company of New England, Inc., established a higher standard: Stockholders in a close corporation owe one another substantially the same fiduciary duty in the operation of the enterprise that partners owe to one another, namely, a duty of the utmost good faith and loyalty. The SJC defined a close corporation as “typified by: (1) a small number of stockholders; (2) no ready market for the corporate stock; and (3) substantial majority stockholder participation in the management, direction and operations of the corporation.” In that context the majority shareholders owe a minority shareholder a duty of utmost fair dealing, disclosure and loyalty. This may be modified under certain circumstances.
What are the duties of Officers or Employees to a Corporation?
Massachusetts courts have ordinarily not distinguished the duty of corporate officers from the fiduciary duty of directors. Massachusetts cases state that “employees occupying a position of trust and confidence owe a duty of loyalty to the employer and must protect the interests of the employer.” Chelsea Industries, Inc. v. Gaffney, 389 Mass. 1, 11 (1983) Nonetheless, our courts have been vigilant to leave the managers of the Corporation broad discretion in the management of corporate business. Massachusetts courts generally find that corporate officers and directors are not to be held liable for “mere errors of judgment” or “bad business judgment” and the courts will not substitute their business judgment for that of the corporation’s management.
How do Massachusetts Courts apply the strict Donahue fiduciary standard to corporate opportunities?
“Uncle” Demoulas ran his supermarket chain so as to obtain most of the benefits of the business’s growth for himself, his deceased brother’s family, as shareholders, sued. In 1997, in Demoulas v. Demoulas Super Mkts., the state’s highest court sternly applied the Donahue standard, stating that “the directors of a corporation stand in a fiduciary relationship to the corporation.” It stated that they owe to the corporation both a duty of care and, more significantly for this case, a paramount duty of loyalty. “They are bound to act with absolute fidelity and must place their duties to the corporation above every other financial or business obligation.” Provisions in corporate documents can limit the duties discussed above of controlling shareholders to minority shareholders.