Being part of a family-owned business or a company with a small number of investors can be a great experience – these types of companies embody the spirit of entrepreneurship and form the bedrock of our economy.
These companies – known as “close corporations” – are typically run by a tight-knit group of family members or individuals. Some close corporations are multi-generational family businesses, others are new enterprises, often started with little more than a great idea, an opportunity in the marketplace, and some capital.
When things are going smoothly, and the company’s owners are making a return on their investment, there’s no cause for complaint. As with any business venture, however, internal conflicts can arise. Shareholder disputes in close corporations can take many forms. For example, it is not uncommon for a shareholder or group of shareholders to want a co-owner to leave the company. Differences in management styles or personality conflicts can drive a wedge between business partners. Tensions can also develop between majority and minority ownership interests.
The very thing that can make a close corporation successful – a small group of investors who decide among themselves how to operate the venture – can also make resolution of internal disputes difficult. Because when the small group of owners disagree about how to run the company or who should be in charge, the path to a resolution is not always clear. When tempers flare, shareholder agreements and by-laws are not always helpful for resolving management deadlock.
It can be tricky to find the right solution for parties who are involved in a close corporation dispute. Sometimes, a collaborative process can yield positive results. Other times, it is necessary to resort to litigation. The type of solution is heavily dependent on the nature of the dispute and the dynamics of the owners.
In most cases, obtaining the advice of an attorney who has experience untangling the thicket of ownership interests and legal obligations is the critical first step toward reaching a resolution. Beck Reed Riden LLP’s attorneys frequently handle these types of disputes – both in and out of court. The guide below provides some further background about the nature of close corporation disputes. If you have any questions or if you are involved in a close corporation dispute, please contact us to discuss your situation. Attorneys Russell Beck and Stephen Riden have years of experience in this area and they can be reached via email (firstname.lastname@example.org) or telephone (617-500-8660).
What is a close corporation?
A close corporation is a corporation for which no ready market exists for the trading of its shares. Thus, the shares are neither publicly traded on a stock exchange nor can they be sold to members of the public. The shares of a close corporation are held by a small number of shareholders or investors, who are usually heavily involved in the management and day-to-day operations of the business.
Typically a close corporation is a family business or one that is owned by a small group of investors. It can range from a mom-and-pop restaurant to an IT consulting company.
Shareholders’ duties in a close corporation
Stockholders of a close corporation owe each other a duty of utmost good faith and loyalty. A controlling shareholder cannot pursue any course of conduct if there are alternatives that would be less harmful to minority shareholders. Massachusetts law protects minority shareholders because they cannot sell their stock to avoid oppressive behavior by controlling shareholders.
When disputes might arise between owners of a small business
Disagreement can lead to disastrous results if the shareholders are caught unprepared. For example, a shareholder might decide she no longer wants to remain involved in the business and start a competing venture, taking clients with her. Siblings in a family business might become embroiled in a family feud and cannot reach an amicable resolution because one sibling has taken the assets. Or a couple that owns a restaurant might decide to go their separate ways.
A court’s resolution of disputes between small business owners
Resorting to the courts does not necessarily lead to optimal results. In some cases, the only recourse in a close corporation dispute is the dissolution of the corporate entity, a solution that many shareholders find unsatisfactory.
The case of Graham v. Fish, a Massachusetts Superior Court case decided on May 4, 2011, illustrates how one court’s resolution of such business disputes can lead to harsh results. In that case, Gordon Graham and David Fish were the sole shareholders of Tennis Camps at Harvard, Inc., a children’s summer camp. Both Graham and Fish held contract positions as Harvard tennis coaches, which allowed them to access Harvard’s facilities during the summer. When Graham lost his contract position, Fish became uninterested in continuing the business relationship and formed a competing camp, the Tennis Academy.
Graham sued Fish for breach of fiduciary duty. Although shareholders of a close corporation owe each other the duty of utmost good faith and loyalty, the court ruled that it would impose no liability on Fish unless Graham could show that there was a less harmful and reasonably practicable alternative to achieve the legitimate business purpose. Thus, the court found that Fish was free to seek dissolution and establish a new camp, because he was under no obligation to continue the business. According to the court, when Graham lost his access to the Harvard facilities, Fish had a legitimate business purpose for discontinuing the camp he owned with Graham.
The Graham case illustrates that an aggrieved shareholder may not be able to recover in court unless he can affirmatively show one of two things: either that the alleged wrongdoer has no legitimate business purpose for his action, or that there was a legitimate business purpose but that objective could have been achieved through a less harmful alternative means. In practice, these can be difficult standards to meet.
In essence, to prevail in a dispute over a party’s alleged breach of fiduciary duties, courts want to see evidence that one of the parties acted in a clandestine manner, stole corporate assets for his exclusive use, or misused corporate assets in launching a competing entity. In the court’s view, the only remaining solution is to dissolve the corporation. For most shareholders, dissolution of the corporation is not a satisfactory answer.
Beck Reed Riden LLP Excels In Close Corporation Dispute Resolution
With years of experience representing partners, owners, and family members in a variety of corporate disputes, Russell Beck, Stephen Riden, and their commercial litigation colleagues provide thoughtful guidance to business owners involved in shareholder disputes.
Beck Reed Riden LLP is committed to developing custom-fit, appropriate solutions for the complex relationships that are inherent in these types of conflicts. Beck Reed Riden LLP can be reached now for a free consultation via email (email@example.com) or telephone (617-500-8660).
Beck Reed Riden LLP is Boston’s innovative litigation boutique. Our lawyers have years of experience working with clients ranging from Fortune 500 companies to start-ups and individuals. We focus on business litigation and employment. We are experienced litigators and counselors, helping our clients as business partners to resolve issues and develop strategies that best meet our clients’ legal and business needs – before, during, and after litigation. We’re ready to roll up our sleeves and help you. Read more about us, the types of matters we handle, and what we can do for you here.