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Amanda Weiner

Writing Assignment #10

The Massachusetts courts have developed fiduciary duties owed by controlling shareholders (including those that have an ad hoc controlling interest ! to the remaining shareholders of the same corporation" This concept is clearly demonstrated in both the Wilkes and Smith cases" #n closely held corporations$ the fiduciary duties owed by controlling shareholders are similar to those held by partners in a partnership% shareholders$ li&e partners have relative fiduciary duties in the sense that they are obligated to act in the best interests of the company (loyal! but may sometimes be able to act in their self'interest without violating a fiduciary duty (selfish!" These loyal and selfish aspects are permitted to overlap" (owever$ this was not always the standard" The original standard$ set out in Donahue$ stated that stoc&holders in the corporation owe one another substantially the same fiduciary duty in the operation of the enterprise that partners owe to one another""" the standard of duty owed by partners to one another is one of )upmost good faith and loyalty*+ with regard to their actions relative to the operations of the enterprise and the effects of that operation of the rights and investments of other stoc&holders$ stoc&holders in close corporations must discharge their management and stoc&holder responsibilities in conformity w, this strict good faith standard" They may not act out of avarice$ e-pediency$ or self'interest in derogation of their duty of loyalty to the other stoc&holders and to the corporation #n other words$ the original standard re.uired shareholders to always maintain their loyal to the company" #n Wilkes$ however$ the strict standard was rela-ed" The Wilkes case recogni/ed a right to selfish ownership by ad0usting the Donahue standard" The 1ourt in Wilkes recogni/ed and e-pressed concern for the free/e out scenario$ in which a minority shareholder can be easily fro/en out (depriving the minority of a position in the company! by the ma0ority since there is not a readily available mar&et for their shares" While a ma0ority of shareholders in the corporation trusted with ma&ing good business decisions$ it is also important to consider whether the ma0ority interest is balanced with the minority interest" Therefore$ Wilkes addressed the fact that shareholders in closely held corporations owe a duty of loyalty,good faith to other shareholders" #f a minority shareholder alleges breach of that duty by the ma0ority (by showing oppression,free/e out,deprivation of value of interest,frustration of reasonable e-pectations!$ the burden then turns on the ma0ority to show that there was a legitimate business purpose for their actions" 2nce that has been done$ the minority must then show that the same business purpose could be achieved through a less harmful alternative action" Smith then addressed the issue of fiduciary duties owed by a minority shareholder" The primary issue in that case was whether 3r" Wolfson$ a minority shareholder and former director in the corporation and the sole dissenter for voting for dividends$ owed the same fiduciary duties that a ma0ority would owe a minority shareholder" The court held that the determining factor for the fiduciary duty owed is whether a party would be considered a controlling party" #f the minority shareholder is a controlling party$ then he,she owes the ma0ority shareholders a fiduciary duty as well" Therefore the ma0ority is entitled bring matters to the court for decisions that are un0ustifiable for the corporation*s interests" 4ecause 3r" Wolfson was the controlling party in that he prevented the dividend payouts despite no real business 0ustification$ the 1ourt determined he acted unreasonably and did not demonstrate utmost good faith and loyalty to the business"