Wilkes v. Springside Nursing Home, Inc.
370 Mass. 842, 353 N.E.2d 657 (Mass. 1976)
Wilkes, Riche, Quinn, and
Pipkin got together to start up a nursing home. They incorporated, and
each put in an equal amount of money and received and equal number of
They all worked for the
nursing home and were paid a salary.
This type of arrangement is
known as a close corporation. In
many cases, the only incentive for investors to invest in a close
corporation is that it gets them a
job working there.
In this case, the
corporation never declared a dividend, so the only money they investors
made was via their salary as employees.
After a time, Wilkes'
relationship with the other partners deteriorated. At a Board meeting,
they voted to stop paying Wilkes' a salary and remove him from Board and
as an officer of the corporation.
Wilkes had been doing his
job, and there was no accusation of misconduct or neglect. It's just that
the other shareholders didn't like him and didn't want him around
That's known as a freeze-out.
Wilkes sued for breach of
Wilkes argued that the other
shareholders breached the partnership agreement, and they breached their
fiduciary duty to him as a minority shareholder.
The Trial Court found for the
other investors and dismissed Wilkes' claim. Wilkes appealed.
The Appellate Court reversed.
The Appellate Court looked
to Donahue v. Rodd Electrotype Co. of New England, Inc. (328 N.E.2d 505 (1975)) and found that
shareholders in a close corporation owe one other the same
fiduciary duty as partner in a partnership would owe.
The Court found that when a
controlling group in a close corporation takes actions that hurt a minority shareholder, the courts must
ask whether the controlling group has a legitimate business purpose for
its actions. If they can do that, then the minority shareholder must be
given an opportunity to demonstrate that the same business purpose could
have been achieved through a different method that would be less harmful
to the minority's interests.