Judge Ricciuti, sitting in the Massachusetts Business Litigation Session, rejected a shareholder’s claim that she could shed herself of the fiduciary duty she owed to a close corporation by renouncing her shares in the corporation.
In Empire Dealer Services, Inc., et al. v. Guerin, et al., Empire Dealer Services, a close corporation, and John Kane, Empire’s sole director, president, treasurer, and secretary, sued Guerin, a former vice president and a minority shareholder of Empire, and Drive Dealer Performance, Guerin’s new company. The plaintiffs sought an injunction to stop Guerin from pursuing the new venture, claiming that Guerin was violating her fiduciary duties owed to Empire and Kane.
Guerin argued that her fiduciary duties to Empire and Kane ended when she renounced her shares in Empire. Guerin claimed that she had renounced her shares because Kane had allegedly committed wrongs against the company.
Judge Ricciuti rejected Guerin’s argument. “The Court,” he wrote, “strongly disagrees with this argument and concludes that Guerin remains a minority shareholder in Empire and thus owes fiduciary duties to Empire and Kane.”
Judge Ricciuti began by noting that “[s]hareholders in close corporations, including minority shareholders, owe fiduciary duties not only to one another, but to the corporation as well” (citation omitted). He then analyzed—legally and factually—Guerin’s novel “renunciation” theory.
Guerin’s claim that her duties to Empire and Kane ended when she renounced her shares is meritless on the facts and the law. Factually, she concedes that Empire and Kane have not accepted her renunciation, and nothing in the company’s by-laws permit her return of shares. Legally, nothing supports the notion that a shareholder of a close corporation can terminate her responsibilities this way. See Goode v. Ryan, 397 Mass. 85, 90–91 (1986) (“In the absence of an agreement among shareholders or between the corporation and the shareholder, or a provision in the corporation’s articles of organization or by-laws, neither the corporation nor a majority of shareholders is under any obligation to purchase the shares of minority shareholders when minority shareholders wish to dispose of their interest in the corporation.”). Moreover, Guerin’s novel theory of “renunciation” would run directly contrary to the guidance in [Donahue v. Rodd Electrotype Co. of New England, Inc., 367 Mass. 578 (1975)] and [Selmark Assocs., Inc. v. Ehrlich, 467 Mass. 525 (2014)]. Indeed, the Supreme Judicial Court held in Selmark that the termination of a shareholder from employment with the company did not end that shareholder’s duties to the company . . . . The same principle applies here. Thus, even assuming the truth of all of Guerin’s allegations against Kane, none of them authorized Guerin to walk away from her duties to Empire and Kane, and certainly do not permit her to actively undermine those duties by competing with the company.
Judge Ricciuti ruled that the plaintiffs had shown a likelihood of success on the merits of the breach-of-fiduciary-duty claim. He also ruled that “[w]hile an injunction plainly has negative consequences for Guerin . . ., those harms are heavily outweighed by the threat of irreparable harm to Empire and Kane.” Judge Ricciuti then issued an injunction that, among other things, prohibited the defendants “from directly or indirectly competing with or working for any competitor of Empire” or “calling upon, soliciting, diverting, servicing, deriving revenue from, and taking away Empire s customers, business or prospective customers, except as necessary to comply with [the Court’s] Order.”
You can review Judge Ricciuti’s decision here.
The Business Litigation Session of Superior Court:
Docket Number: 2284CV02596
Case Name: Empire Dealer Services, Inc., et al. v. Guerin, et al.
Date of Decision: November 30, 2022
Judge: Michael D. Ricciuti, Justice of the Superior Court
Andrew E. Farrington is an associate in Nutter’s Litigation Department. Andrew advises clients in all stages of litigation, including initial fact investigation, discovery, deposition preparation, and motion practice.
Eric P. Magnuson co-chairs Nutter’s Business Litigation practice group. Blending practicality with tenacity and strategic thinking, Eric helps clients solve legal challenges so that his clients can focus on what they do ...
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- Senior Editor, Co-Chair, Business Litigation Practice Group