Smith v. Atlantic Properties, Inc.
12 Mass.App.Ct. 201, 422 N.E.2d 798 (Mass.App.Ct. 1981)

  • Four investors incorporated Atlantic Properties.
    • They gave themselves 25% of the stock each.
    • They passed a by-law saying that no resolution by the Board was effective unless 80% of the shareholders voted for it.
      • Effectively giving each of the four investors a veto over any Board decision.
  • As Atlantic began to make money, three of the four investors wanted to take some of the profits out as dividends. The fourth investor, Wolfson, kept vetoing the dividend and wanted the money reinvested into the property owned by Atlantic.
    • The lack of dividends caused Atlantic to pay more taxes.
    • There was some evidence that Wolfson didn’t want the dividends because he didn’t want to pay personal taxes on them.
  • The other three investors (led by Smith) sued to force Atlantic to pay dividends, and to make Wolfson reimburse the company for the extra taxes they’d paid.
  • The Trial Court found for Smith. Wolfson appealed.
    • The Trial Court found that Wolfson’s veto was caused more by his dislike of the other investors and his desire to avoid additional personal taxes, than by any genuine desire to improve Atlantic’s properties.
  • The Appellate Court reversed and remanded.
    • The Appellate Court found that having a high voting requirement such as Atlantic had was legal.
    • However, the Court found that Wolfson had breached his fiduciary duty in exercising his veto, and held him personally liable for the extra taxes Atlantic had paid.
    • The Court sent it back to the Trial Court to determine what dividend would be appropriate.
  • Basically, this case said that setting up a corporation to give minority shareholders the ability to veto Board decisions is legal. However, those minority shareholders still retain a fiduciary duty to do what is best for the corporation.