Brief Fact Summary. Plaintiff, Stanley Wilkes, brought this action to recover lost wages due to his termination by Defendants, Springside Nursing Home, Inc. et al., which violated either the partnership agreement between the parties or the fiduciary duty that Defendants owed to Plaintiff.
Synopsis of Rule of Law. Shareholders in a close corporation owe each other a duty of acting in good faith, and they are in breach of their duty when they terminate another shareholder’s salaried position, when the shareholder was competent in that position, in an attempt to gain leverage against that shareholder.
The first is that stockholders in the close corporation owe one another substantially the same fiduciary duty in the operation of the enterprise that partners owe to one another.View Full Point of Law
Issue. The issue is whether Defendants violated a fiduciary duty when they removed Plaintiff from his position after a falling-out between the parties.
Held. Shareholders have a duty of loyalty to other shareholders in a close corporation, and in this case the duty owed to Plaintiff by Defendants was violated. Therefore Plaintiff is entitled to lost wages. In close corporations, a minority shareholder can be easily frozen out (depriving the minority of a position in the company) by the majority since there is not a readily available market for their shares. Although this is traditionally an issue of management, the test for close corporations, should be whether the management decision that severely frustrates a minority owner has a legitimate business purpose. In the case at issue, Defendants’ decision would assure that Plaintiff would never receive a return on the investment while offering no justification.
Discussion. The court is reversing a prior line of thought that management decisions are not within the scope of review of the courts. The court notes at the negative effects that the prior line of reasoning had wrought, such as the freezing out or the oppression of minority shareholders.