Closely-held corporations and business disputes in Massachusetts

Closely-held businesses often include family businesses and those with close personal relationships. As a result, disputes can be particularly difficult.

Legal issues abound in the business world. Matters such as putting together employment contracts, determining classification of a worker as an employee or independent contractor, management issues and the purchase of assets for the business can all lead to disputes.

Disputes can be frustrating, but these disputes can be particularly complicated when they involve a closely-held business.

What is a closely-held corporation?

Part of the difficulty that arises when disputes involve closely-held businesses involves the definition itself. The intricate nature of these disputes was recently discussed in a publication by the Massachusetts Law Review. In this piece, the authors discuss the definition of a "close corporation." More specifically, the piece delves into the definition as applied by case law through Donahue v. Rodd Electrotype Co. of New England, Inc.

This case provides a definition for "close corporation" that includes three elements. The business must have: "(1) a small number of shareholders, (2) no ready market for the corporate stock; and (3) substantial majority stockholder participation in management, direction and operation of the corporation." It is important to clarify that these three elements were provided by the court as a guideline and are not intended to create a rigid test to establish what is and is not a close corporation.

The close corporation structure is similar to that of a partnership. Thus, like a partnership, stockholders must have a relationship of trust and loyalty. This leads to a fiduciary duty between all stockholders, a duty built with the intention of reducing the risk of majority stockholders taking advantage of minority stockholders. However, before a minority holder can move forward with a claim against majority holders the court must look into whether or not the alleged issue served a legitimate business purpose.

Disputes can become even more complicated as these stockholders are often connected either through familial bonds or other personal relationships. This, as noted by the American Bar Association, often translates into an expectation not only of employment, but also of a meaningful management role within the business regardless of the percentage of shares one holds. This expectation can translate to allegations of a breach of fiduciary duty - allegations which generally must be balanced by a legitimate business interest in order to survive a legal challenge.

What should a business do if faced with a legal challenge?

Businesses facing legal challenges, such as those involving accusations of a breach of fiduciary duty within a closely-held corporation, are wise to seek legal counsel. Your lawyer can review the accusations and build a case to help better ensure your business interests are protected.