Closely Held Corporation (Donahue) Claims

In summary, all of the owners of closely held corporations owe each other a fiduciary duty. A fiduciary obligation is a responsibility to the other party to operate with utmost good faith and fair dealing. In contrast, every contract is said to have a covenant of good faith and fair dealing. The responsibility of those in a closely held corporation are greater than that responsibility.

In Massachusetts, the touchstone case detailing the right to bring a lawsuit to enforce the rights of the minority shareholders in a closely held corporation is Donahue v. Rodd Electrotype Co. of New England, 367 Mass. 579 (1975). For this reason, in Massachusetts this type of case is often referred to as a Donahue case. The Supreme Judicial Court noted in that in a close corporation there are a small number of shareholders; no ready market for the corporate stock; and substantial majority stockholder engaged in the operation of the company. Thus, close corporations resemble and are like partnerships in that a stockholder’s obligations to other shareholders are like a partner’s responsibilities to one and other.

At times Donahue lawsuits are necessary to ensure the rights of the minority stockholders of the corporation. An example: the need for a lawsuit might arise where the majority shareholders negotiate a lease for real estate between the corporation and the majority shareholders which is too favorable to the majority shareholders. This lease which causes the diversion of funds from the corporation to the majority shareholders through the payment of excess rent would be actionable. The lease benefits the majority shareholders to the detriment of the minority shareholders. Thus, the lease breaches the fiduciary duty between shareholders.

To discuss your closely held corporation case with Attorney Erickson call him at 978-929-9995.