## Facts

- Four investors formed a closely held corporation to operate a nursing home; each contributed equal capital, held equal shares, served as a director, and expected to participate in management for equal compensation while active.
- The corporation became profitable and paid salaries to the shareholder-directors; one original shareholder later sold his shares to Connor, who joined management and received equal pay.
- After interpersonal conflict, Wilkes informed the others he intended to sell his shares.
- The board increased Quinn’s salary, left others unchanged, and did not consider Wilkes for compensation.
- Wilkes was then not reelected as a director or officer, removed from management, and cut off from the corporate payroll.
- Wilkes had performed his duties diligently and competently, and no misconduct was shown.
- Because there was no ready market for shares, Wilkes claimed the majority’s actions functioned as a freeze-out designed to deprive him of return on investment and force a discounted sale.

## Issues

1. Whether Wilkes could recover damages based on an alleged pre-incorporation partnership agreement.
2. Whether the majority shareholders of a close corporation breached fiduciary duties to a minority shareholder by excluding him from employment, salary, and management without a legitimate business purpose.

## Decision

- The court rejected recovery on the alleged pre-incorporation agreement and upheld dismissal of that contract-based theory.
- The court reversed the judgment dismissing the action on the merits and held Wilkes was entitled to relief on a fiduciary-duty theory.
- The court held the majority breached fiduciary duties by cutting off Wilkes’s salary and role despite his competent performance and without showing a legitimate business reason.
- The case was remanded for entry of judgment granting relief substantially consistent with Wilkes’s request, including damages for lost salary after his removal.

## Legal Principles

- Shareholders in a close corporation owe each other fiduciary duties comparable to those owed among partners, requiring strict good faith and loyalty in exercising control.
- Majority shareholders may not use corporate control to secure personal advantages at the expense of a minority shareholder through freeze-out tactics (including termination of employment and exclusion from corporate compensation) when the minority’s expected return is tied to continued participation.
- In evaluating challenged majority action in a close corporation:
  - The majority must show a legitimate business purpose for conduct that substantially harms a minority shareholder’s interests.
  - If a legitimate business purpose is shown, the minority may prevail by demonstrating an alternative means to achieve that purpose with less harm to the minority’s rights.
- Formal compliance with corporate bylaws does not, by itself, defeat a claim when the substance of the action reflects disloyalty or bad faith in a close corporation.

## Conclusion

The court held that majority shareholders in a closely held corporation owe one another partner-like fiduciary duties and may not freeze out a minority shareholder by terminating employment and compensation absent a legitimate business purpose; because the majority failed to justify Wilkes’s exclusion, he was entitled to damages and related relief on remand.


Wilkes v. Springside Nursing Home, Inc., 370 Mass. 842, 353 N.E.2d 657 (Mass. 1976)