Rights of Minority Shareholders and Employees in Close Corporations

In Massachusetts, rights of minority shareholders who are also employees in a close corporation, are significantly greater than rights of employees at will.  What is a “closely held corporation?”   A closely held corporation is one that (1) has few stockholders, (2) no ready market for the stock and (3) the majority stockholder is substantially involved in management decisions and in operating the company.

While employees of a small closely held company may think of and refer to the majority shareholder as “the owner,” and think that “the owner” can make whatever decisions he or she deems necessary, this isn’t necessarily true.  Majority shareholders owe a fiduciary duty to minority shareholders and this can limit the majority shareholder’s ability to fire a minority shareholder/ employee.  Massachusetts law treats shareholders in a close corporation like partners in a partnership and they owe each other a fiduciary duty of “utmost good faith and loyalty.”

The majority shareholder(s) who terminate the employment of a minority shareholder must have a legitimate business purpose for doing so.  This gives the minority stockholder/employee more rights in Massachusetts than an employee at will.    Courts will look at whether firing the minority shareholder was the least harmful alternative of actions that could have been taken.  The court may consider whether the company should have pursued alternatives to firing the employee such as providing more training, supervision or changing the employee’s duties.

The courts have broad discretion to fashion remedies for minority shareholders where the majority shareholders have breached their fiduciary duty by firing the minority shareholder/employee.  The remedies may include payment for lost wages, severance pay or other remedies that would restore the minority shareholder as nearly as possible to the position that he or she would have been in without the termination.

For questions about this post, or a consultation, please call labor and employment attorney Maura Greene at 617-936-1580.