367 Mass. 578, 328 N.E.2d 505 (Mass. 1975)
Donahue v. Rodd Electrotype is a landmark decision in corporate law that reshaped the fiduciary landscape for closely held corporations.
Do shareholders and directors in a closely held corporation breach their fiduciary duties by causing the corporation to repurchase shares from a controlling shareholder on favorable terms without offering minority shareholders an equal opportunity to sell their shares on the same terms?
In a close corporation, shareholders (particularly those in control) owe one another fiduciary duties of the utmost good faith and loyalty, akin to the duties partners owe each other. When those in control use corporate mechanisms in a manner that provides a special advantage to themselves or other insiders at corporate expense, their conduct is subject to strict judicial scrutiny for inherent or intrinsic fairness. As applied to corporate stock repurchases in close corporations, this duty requires that if the corporation purchases shares from any shareholder—especially a controlling shareholder—it must offer every other shareholder an equal opportunity to sell a proportionate number of shares on identical terms. The business judgment rule does not insulate self-interested, control-driven transactions from this heightened fiduciary review.
Yes. The controlling shareholders and directors breached their fiduciary duty of utmost good faith and loyalty by causing the corporation to purchase shares from a controlling insider without providing the minority shareholder an equal opportunity to sell her shares on the same terms. The appropriate remedy is either rescission of the insider purchase or extension to the minority of an equal opportunity to sell a ratable portion of her shares at the same price and on the same conditions.
Donahue is foundational for close corporation law. It establishes that controlling shareholders in close corporations owe each other the duty of utmost good faith and loyalty and that corporate actions conferring special benefits on insiders must meet a strict fairness standard. The decision also articulates a clear, administrable rule for stock repurchases—the equal-opportunity requirement—frequently invoked in minority oppression and freeze-out litigation. In Massachusetts, Donahue set the stage for Wilkes v. Springside Nursing Home, which added a "legitimate business purpose" balancing framework for employment and operational decisions, and later for Brodie v. Jordan, which refined remedies to restore the status quo ante of the injured minority. For students, Donahue is essential to understanding how fiduciary duties adapt to the realities of closely held firms, how the business judgment rule yields when controllers self-deal, and how courts craft equitable remedies to protect vulnerable minority owners.