In Wilkes v. Springside Nursing Home, Inc. the Supreme Judicial Court of Massachusetts decided that a shareholder in a closely held corporation could not be frozen out from participating in the corporation unless there was a legitimate business reason for his exclusion and this business purpose “could [not] have been achieved through an alternative course of action less harmful to the minority’s interest.” This opinion was preceded, fifteen months earlier, by Donahue v. Rodd Electrotype Co., where the same court decided that a minority shareholder in a closely held corporation had to be extended an “equal opportunity” to sell her shares back to the corporation if that privilege was afforded to a controlling shareholder. Both cases were grounded on the rationale that a closely held corporation ought to be viewed as a partnership and, as such, the shareholders owe to one another the fiduciary duties that partners owe to one another.
Donahue and Wilkes are each cases that could have reached the same conclusions on narrower grounds. In the case of Donahue, the court could have decided that the directors who authorized the repurchase had a conflict of interest and thus bore the burden of proving that their decision was fair to the corporation. While this may not have given plaintiff all she sought in the case, a remand would have given her leverage for a favorable settlement and, in the future, inhibited those controlling a corporation from favoring the interests of related stockholders. In Wilkes, the court could have ruled that the parties had a contractual understanding that they would all be directors, officers, and employees of the company, an understanding breached by the defendants. Alternatively, the court could have ruled that the payments to the defendants were at least partially constructive dividends in which the plaintiff should have shared. But, as in Donahue, these rulings might not have given the plaintiff all he sought and, perhaps more importantly, would have precluded the broad doctrinal change made by these precedents.
These two holdings, thus, are widely recognized as changing corporate law. To what extent is this assessment accurate? What was the state of the law when Wilkes and Donahue were decided? Were these decisions part of an activist streak by the Massachusetts Supreme Judicial Court, or aberrational to its jurisprudence? Did the decisions stimulate legislative action, or retard it? This Article answers, at least preliminarily, these questions, proceeding first, in Part I, with an analysis of the precedent and other authority supporting and undermining the decisions. Part II then considers the nature of the court at the time of these decisions, looking briefly at other significant precedents decided by the court. Part III reviews statutory provisions dealing with minority shareholders and Part IV considers other post-1975 developments in business association law.
Mark J. Loewenstein, University of Colorado Law School, WILKES V. SPRINGSIDE NURSING HOME, INC.: A HISTORICAL PERSPECTIVE, 33 W. New Eng. L. Rev. 339 (2011), http://digitalcommons.law.wne.edu/lawreview/vol33/iss2/5