## Facts

- Nyman Manufacturing Co. (NMC) was a closely held family corporation with nonvoting Class A shares held by minority family members and all voting Class B shares held by brothers Robert and Kenneth Nyman, who also managed and controlled NMC.
- NMC had financial difficulties in the early 1990s; in 1994, the Nymans hired Keith Johnson as CFO/treasurer, after which NMC’s profitability and equity value increased markedly by 1996.
- On May 8, 1996, Johnson sent minority Class A shareholders a redemption offer of $200 per share; the price was not based on an independent appraisal and the communication did not explain how it was determined.
- The offer conveyed that lenders required the redemption to close by May 22, 1996, but evidence showed one lender imposed no deadline and another set a later deadline (July 29); the district court found the May 22 date was used to force a quick decision before audited financial statements were available.
- Management provided lenders with updated unaudited financial information reflecting improving 1996 performance, but did not provide comparable information to the minority shareholders considering the redemption.
- Around the same period, NMC retained a consultant and explored a possible sale to outside buyers; this was not disclosed to the minority shareholders.
- On May 10, 1996, the minority shareholders accepted the offer and sold their shares back to NMC, leaving the Nymans and Johnson with complete control of NMC’s equity and voting power.
- In September 1997, the Nymans and Johnson sold their interests to Van Leer Corporation at approximately $1,667 per Class A share and $2,167 per Class B share.
- Minority shareholders sued in federal district court under Massachusetts law for breach of fiduciary duty and related claims; after a bench trial, the court found for plaintiffs and awarded damages based on the difference between $200 per share and a higher fair value supported by the later sale.
- Defendants appealed, disputing liability, causation, and the damages methodology.

## Issues

1. Whether controlling shareholders and managers of a closely held corporation breached fiduciary duties to minority shareholders by using misrepresentations and material omissions to obtain a minority-share redemption at an unfair price.
2. Whether the district court clearly erred in finding that the misstatements and nondisclosures were a substantial factor causing the minority shareholders to sell in 1996.
3. Whether the damages award, informed by the later arm’s-length sale of the company, was legally permissible and supported by the evidentiary record.

## Decision

- The First Circuit affirmed the judgment for the minority shareholders.
- The court upheld findings that defendants, as controlling shareholders/officers/directors, owed strict fiduciary duties and breached a duty of candor in connection with the self-interested redemption.
- The court upheld the district court’s causation findings, concluding the misleading deadline and withheld information supported an inference that plaintiffs would have delayed, demanded more, or refused to sell if fully informed.
- The court upheld damages measured by the gap between the redemption price and fair value, treating the later Van Leer sale as strong evidence of value and accepting the trial court’s evaluation of discounting and expert testimony.

## Legal Principles

- Under Massachusetts law, controlling shareholders in a closely held corporation owe minority shareholders a duty of “utmost good faith and loyalty,” comparable in rigor to partnership duties.
- When fiduciaries stand on both sides of a transaction affecting minority ownership (including a controller-driven redemption), they must disclose material information a reasonable shareholder would consider important to an informed decision.
- Material misrepresentations and omissions concerning transaction timing constraints, company financial condition, and sale prospects can constitute a breach of fiduciary duty in the close-corporation context.
- In valuing harm from a tainted redemption, courts may use a subsequent arm’s-length sale occurring within a reasonable time as probative evidence of fair value, with equitable adjustments as supported by the record.
- Appellate review of trial-court findings on causation and valuation is deferential, and reversal requires clear error.

## Conclusion

The First Circuit held that NMC’s controlling insiders breached close-corporation fiduciary duties by pressuring a minority redemption through a false deadline and nondisclosure of material financial and sale-related information, and it affirmed damages based on the minority’s lost share value as reflected by a later arm’s-length sale.


Lawton v. Nyman, 327 F.3d 30 (1st Cir. 2003)