Wilkes v. Springside Nursing Home, Inc.
370 Mass. 842, 353 N.E.2d 657 (Mass. 1976)

  • Wilkes, Riche, Quinn, and Pipkin got together to start up a nursing home. They incorporated, and each put in an equal amount of money and received and equal number of shares.
    • They all worked for the nursing home and were paid a salary.
    • This type of arrangement is known as a close corporation. In many cases, the only incentive for investors to invest in a close corporation is that it gets them a job working there.
      • In this case, the corporation never declared a dividend, so the only money they investors made was via their salary as employees.
  • After a time, Wilkes’ relationship with the other partners deteriorated. At a Board meeting, they voted to stop paying Wilkes’ a salary and remove him from Board and as an officer of the corporation.
    • Wilkes had been doing his job, and there was no accusation of misconduct or neglect. It’s just that the other shareholders didn’t like him and didn’t want him around anymore.
      • That’s known as a freeze-out.
  • Wilkes sued for breach of fiduciary duty.
    • Wilkes argued that the other shareholders breached the partnership agreement, and they breached their fiduciary duty to him as a minority shareholder.
  • The Trial Court found for the other investors and dismissed Wilkes’ claim. Wilkes appealed.
  • The Appellate Court reversed.
    • The Appellate Court looked to Donahue v. Rodd Electrotype Co. of New England, Inc. (328 N.E.2d 505 (1975)) and found that shareholders in a close corporation owe one other the same fiduciary duty as partner in a partnership would owe.
    • The Court found that when a controlling group in a close corporation takes actions that hurt a minority shareholder, the courts must ask whether the controlling group has a legitimate business purpose for its actions. If they can do that, then the minority shareholder must be given an opportunity to demonstrate that the same business purpose could have been achieved through a different method that would be less harmful to the minority’s interests.