Wilkes

1951
Wilkes acquired an option to purchase a building and lot located on the corner of Springside,
previously used as hospital
- Though engaged in roofing and siding business, he gained reputation for profitable
dealings in real estate

Riche
- Friend of Wilkes, learned of the option and interested:
- Quinn, who was known to Wilkes
- Pipkin, friend of Wilkes and Riche
- In joining the investment

The 4 men decided to participate jointly in the purchase of the building as real estate
investment which they believe had good profitable potential on resale or rental
- Later determined best potential was as nursing home
- Established a corporation under Massachusetts law

Each man invested 1k and subscribed to 10 shares of $100 par value stock
- Each would be director and participate actively in the management and decision making
- Each would receive money from the corporation in equal amounts as long as each
assumed an active an ongoing responsibility for carrying a portion of the burdens
necessary to operate the business

Work for nursing home was roughly apportioned and each undertook his respective tasks

Riche was elected president

- Wilkes Treasurer
- Quinn Clerk
- Each of the 4 was listed in articles of incorporation as a director

1952
Sufficient cash flow to allow men to draw money from corporation on regular basis
- Each initially received 35 a week
- Eventually increased to 100 in 1955

1959
Pipkin sold his shares to Connor who was known to Wilkes, Riche, and Quinn though past
transactions when he was president of Bank
- Connor received weekly stipend equal to everyone
- Elected a director but never held any other office
- Assigned no specific area of responsibility in the operation
- But did participate in business discussions and decisions as director

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 - Served additionally as financial director

1965
Stockholders decided to sell a portion of the corporation property to Quinn, who in addition to
being a stockholder, possess an interest in another corporation which desired to operate on the
property
- Wilkes successful on securing a higher sale price for this property than Quinn
anticipated paying
- After the sale their relationship fell apart

Feud of Wilkes and Quinn affected the attitudes of Riche and Connor
- Wilkes gave notice of his intention to sell his shares based off an appraisal value

1967
Directors meeting was held and board exercised its right to establish the salaries of its officers
and employees
- Quinn received substantial increase
- Riche and Connor stayed the same $100
- Wilkes left off the list

At annual meeting in March, Wilkes was not reelected as director nor as on officer
- Informed his services or presence at nursing home was wanted

Meeting were used as vehicle to force Wilkes out of active participation in the management
and operation of the corporation and to cut off all corporate payments to him
- Though they had the power to, no indication in minutes that failure to establish salary
for Wilkes was based on misconduct or neglect of duties
- Severance was because of personal desire of Quinn, Riche and Connor to prevent him
from continuing to receive money

Wilkes had consistently carried out his responsibilities in same manner and competence he
previously had shown
- At all times will to carry on his responsibilities and participation provided he received his
pay

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 1. Damages based on breach of fiduciary duty owed to Wilkes

Donahue
- Stockholders in the close corporation owe one another substantially the same fiduciary
duty in the operation of the enterprise that partners owe one another
- Utmost good faith and loyalty
- May not act out of avarice, expediency or self interest in derogation of their duty of
loyalty to other stockholders and corporation

Freeze Out
i. Donahue
- Majority refused the minority an equal opportunity to sell a ratable number of shares to
the corporation at the same price available to the majority
- Result was minority could be forced to sell out at less than fair value since there is no
ready market for minority stock in close corporation

Freezeouts may be accomplished by other methods:

A. Majority deprives minority stockholders of corporate offices and employment the
corporation
- This has been successful because courts declined to interfere in those facets of internal
corporate operation such as selection, retention, dismissal of officers, directors and
employees which involve management decisions

Denial of employment to minority is especially pernicious in some instances

- Guaranty of employment with corporation may have been on of the reasons why a
minority owner has invested capital

Minority stockholder typically depends on his salary as the principal return on his investment
since the earnings of a close corporation are distributed in major part in salaries, bonuses, and
retirement benefits
- Non-economic interest and affected like restricting management participation
- Frustrates his purpose for entering corporate venture and also denies him equal return

When minority stockholders in a close corporation bring suit against the majority alleging
breach of the good faith duty owed, we must carefully analyze the action taken by the
controlling stockholders in the individual case
1. Whether controlling group can demonstrate a legitimate business purpose for its action
- Must have large measures of discretion however
2. When asserted business purpose for their action is advanced by the majority, we think
the minority must demonstrate the same legitimate objective could have been achieved
through alternative course of action less harmful to minority interest

Court must weight legitimate business purpose if any, against the practicality of a less
harmful alternative

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Majority have not shown a legitimate business purpose for severing Wilkes from the payroll
or for refusing to reelect him as salaried officer or director
- No showing of misconduct on Wilkes part as director, officer, or employee that would
lead us to approve majority action as legitimate response
- It appears Wilkes had always accomplished his assigned share of the duties competently
and never indicated unwillingness to continue to do so

Majority designed a freeze out for which no legitimate purpose has been suggested
- Design to pressure Wilkes to sell his shares to the corporation at a price below their
value may have been at heart of majority’s plan

Several Factors bear on duty owed to Wilkes by his associates

1. Duty of utmost good faith and loyalty would demand majority consider their action was
in disregard of long-standing policy of stockholders that each would be a director and
that employment would go hand in hand with stock ownership
2. Wilkes was 1 of 4 originators in nursing home venture
3. Wilkes invested his capital and time for more than 15 years with expectation he would
continue to participate in corporate decision
4. Cutting of Wilkes salary together with fact corporation never declared a dividend
assured Wilkes would never receive any return at all

Wilkes original complaint sought $100 a week he believed he was entitled to from time his
salary was terminated until this action was commenced
- However after Wilkes severed, salaries and payments made to other stockholders varied
from time to time
- Duties assumed by others appear to have changed significantly

Resolution requires whether the corporation was dissolved during pendency of this litigation