At-Will Rules May not Apply to Employee/Shareholder in Closely Held Corporations

A recent Massachusetts Superior Court case, O’Connor v. U.S. Art Co. Inc., held that the firing a minority shareholder by the majority shareholders in a closely held corporation was a dereliction of fiduciary duty, calling into question the applicability of at-will employment rules in this context.

O’Connor and Lank formed an art transportation company, with O’Connor owning 37.5% and Lank owning 52%. Disagreements between the two festered and Lank terminated O’Connor. O’Connor complained that Lank couldn’t fire a fellow shareholder and sued Lank on a theory of breach of fiduciary duties owed to him by the majority shareholders.

The Superior Court found that the company was a closely held corporation, which required a higher standard of fiduciary duty among the shareholders and between the majority and minority shareholders. Rather than analyzing O’Connor’s status as an at-will employee, the Court looked to determine whether the defendant shareholders had a legitimate business interest in terminating him and if there were less harmful alternatives. Lank argued that the company had a legitimate business purpose for firing O’Connor, but the Court disagreed. It found that the majority shareholders, reacted with “much more an act of pique or anger on Lank’s behalf, or perhaps some clumsy effort to gain leverage in any negotiations that might thereafter occur.”

The Court held for O’Connor, awarding both lost wages from the termination as well as the reasonable value of his shares in the corporation – an amount equal to $218,000.