Remedies Frozen Out Shareholders
Brodie v. Jordan: Restricting remedies to the “frozen out” shareholder
After a trial court ordered that majority stockholders purchase the stake of a minority stockholder whom the court found was frozen out (receiving no financial benefit or rights to participate in or manage the company), the defendant majority stockholder appealed.
On appeal, the Supreme Judicial Court found that, indeed, the Superior Court had overstepped its authority in granting a remedy which had heretofore not existed in Massachusetts. The Court reasoned that the plaintiff should have been placed in the same position in which she would have been, had the defendants not breached their duty of utmost good faith and loyalty, but not in a better position. The Court stated that, by ordering stock to be repurchased at an appraised value, where there was no ready market for the corporate stock to start with, the trial court was creating an artificial market. Thus, the Court determined that “the remedy had the perverse effect of placing the plaintiff in a position superior to that which she would have enjoyed had there been no wrongdoing.” In effect, the Court refused to enlarge remedies of minority shareholders by creating a ready market for the sale of their stock where one did not exist.
The Court specifically suggested the remedies that were available including damages and injunctive relief to make sure that the plaintiff “is allowed to participate in company governance, and to enjoy financial or other benefits of the business, to the extent that her ownership interest justifies.”
Accordingly, the law remains the same, and with respect, at least, to the frozen out shareholder, he has no right to force a purchase to redress any harm he may have suffered.
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Barry S. Scheer is a partner and co-founder of Parker Scheer LLP, and serves as director of the firm's Business Law and Litigation Group. With more than twenty-five years of experience in the area of business litigation and corporate law, Mr. Scheer is widely regarded as among Massachusetts' leading business litigation attorneys.