## Facts

- Douglas A. Donahue and Thomas F. Draper ended separate wool businesses and formed Donahue–Draper Corporation (DDC) in 1967 as equal shareholders, with an understanding of equal efforts and equal benefits.
- Draper ran operations as president; Donahue handled finances as treasurer. The board consisted of Draper, Donahue, and Draper’s wife, giving Draper effective voting control.
- By 1978 DDC was highly profitable, but the relationship between the co-owners deteriorated.
- Using his practical control, Draper removed Donahue from corporate positions, including treasurer and pension-trust trustee, and removed him as a director/officer of a DDC-controlled affiliate.
- Draper reduced Donahue’s salary to $25,000 while paying himself $65,000 and obtaining additional unequal benefits.
- The conduct functioned as a freeze-out that excluded Donahue from management, compensation, and other corporate advantages.
- Evidence supported findings that Draper then moved to liquidate DDC and revive his prior company, using DDC’s space, staff, phone number, and former customers.
- Donahue sued for breach of fiduciary duty among close-corporation shareholders and related contractual violations, seeking damages including unequal compensation/benefits, pension-related losses, and misappropriated corporate goodwill.
- Donahue introduced expert valuation testimony on goodwill; the jury found DDC goodwill of $536,750 and awarded Donahue one-half of that amount.

## Issues

1. Whether a shareholder with de facto control in a close corporation breached fiduciary duties by freezing out an equal shareholder from offices, salary, and benefits and by diverting corporate opportunities.
2. Whether the business’s goodwill could be treated as a corporate asset, rather than purely personal to Draper, and whether Draper wrongfully appropriated it.
3. Whether the evidence, including expert valuation testimony, supported the goodwill finding and related damages.

## Decision

- The Massachusetts Appeals Court largely affirmed the amended judgment entered after a jury trial and the judge’s supplemental findings.
- The court upheld findings that Draper breached close-corporation fiduciary duties by orchestrating a freeze-out and securing unequal economic benefits through his practical voting control.
- The court upheld the conclusion that DDC possessed compensable corporate goodwill and that Draper appropriated it by liquidating DDC and restarting his business using DDC resources and customers.
- The court held the goodwill valuation was supported by admissible expert evidence and permissible jury factfinding, even though the jury selected a figure far below the expert’s base estimate.
- Any modifications were limited and did not disturb the core liability findings or major damage components, including goodwill-related recovery.

## Legal Principles

- Shareholders in a close corporation owe one another fiduciary duties comparable to those among partners, requiring utmost good faith and loyalty.
- A shareholder who exercises controlling power may not use that power to freeze out a co-owner from employment, management participation, or corporate benefits for personal advantage.
- Corporate goodwill may be an asset of the enterprise even when closely associated with one participant’s personal relationships or skills; a controlling participant may not appropriate that goodwill without compensating the co-owner(s).
- Goodwill may be valued through recognized earnings-based methods; a jury may credit, discount, or partially reject expert valuations so long as the resulting figure has evidentiary support.
- Damages for freeze-out and diversion may include lost compensation and benefits and the value of diverted corporate assets or opportunities, including goodwill.

## Conclusion

The court upheld liability and substantial damages where an equal owner with de facto control in a close corporation excluded his co-owner from corporate benefits and diverted the corporation’s going-concern value and goodwill to a restarted personal enterprise.


Donahue v. Draper, 491 N.E.2d 260 (Mass. App. Ct. 1986)