Smith v. Atlantic Properties, Inc.
12 Mass.App.Ct. 201, 422 N.E.2d 798 (Mass.App.Ct. 1981)
Four investors incorporated
They gave themselves 25% of
the stock each.
They passed a by-law saying
that no resolution by the Board was effective unless 80% of the
shareholders voted for it.
Effectively giving each of
the four investors a veto over any Board decision.
As Atlantic began to make
money, three of the four investors wanted to take some of the profits out
as dividends. The fourth investor, Wolfson, kept vetoing the dividend and
wanted the money reinvested into the property owned by Atlantic.
The lack of dividends caused
Atlantic to pay more taxes.
There was some evidence that
Wolfson didn't want the dividends because he didn't want to pay personal
taxes on them.
The other three investors (led
by Smith) sued to force Atlantic to pay dividends, and to make Wolfson
reimburse the company for the extra taxes they'd paid.
The Trial Court found for
Smith. Wolfson appealed.
The Trial Court found that
Wolfson's veto was caused more by his dislike of the other investors and
his desire to avoid additional personal taxes, than by any genuine desire
to improve Atlantic's properties.
The Appellate Court reversed
The Appellate Court found
that having a high voting requirement
such as Atlantic had was legal.
However, the Court found
that Wolfson had breached his fiduciary duty in exercising his veto, and
held him personally liable for the extra taxes Atlantic had paid.
The Court sent it back to
the Trial Court to determine what dividend would be appropriate.
Basically, this case said that
setting up a corporation to give minority shareholders the ability to veto
Board decisions is legal. However, those minority shareholders still
retain a fiduciary duty to do what is best for the corporation.