Minority Shareholders Owe a Fiduciary Duty to One Another and the Corporation

In the matter of Empire Dealer Services, Inc., et. al. v. Kimberly A. Guerin, et. al, a Massachusetts Court recently granted a preliminary injunction to a corporation enjoining a minority shareholder/former employee from directly competing. Kimberly Guerin (“Guerin”) was vice president and a minority shareholder of Empire Dealer Services, Inc. (“Empire”). In March of 2022, Guerin was promoted to vice president and received 20% ownership in Empire. Guerin, as employee, officer and shareholder of Empire, played an integral role in its daily operations, and had access to its customer information, financial information and business plans.

On November 1, 2022, Guerin’s attorney unexpectedly e-mailed the majority owner, John Kane (“Kane”), a five-page, single spaced letter (“Letter”) accusing him of a number of wrongs against Empire. Pursuant to the Letter, Guerin “relinquish[ed] any and all rights she [had] as a stockholder in Empire” and resigned as vice president. Guerin did not take any steps to discuss these alleged issues with Kane prior to sending the Letter. Over the next three days, all but one of Empire’s clients left Empire and obtained the same services from Guerin’s new company, Driver Dealer Performance, Inc.

A preliminary injunction is an extraordinary measure, and generally requires a showing of: (i) a likelihood of success on the merits of the claims; (ii) that irreparable harm will result from the denial of the injunction; and (iii) that, in light of the moving party’s likelihood of success on the merits, the risk of irreparable harm to the moving party outweighs the potential harm to the nonmoving party in granting the injunction. Economic harm alone generally will not suffice.

The Court held that shareholders in close corporations, including minority shareholders, owe a fiduciary duty not only to one another, but to the corporation as well. Guerin claimed that, through the Letter, she resigned as Empire’s vice president and “renounced” her shares in Empire, but the Court strongly disagreed. The Court held that Guerin “…plainly elevated her personal interests over those of Empire and its majority shareholder” and found that Empire and Kane had a likelihood of success on the merits. The Court granted the injunction and ordered Guerin to facilitate the return of customers to Empire, holding that unless Guerin was enjoined from servicing Empire’s customers, Empire had no hope of recovering that business and would in fact go out of business.

This case exemplifies the importance of understanding one’s duties as both an officer and shareholder of a close corporation prior to making material decisions. Consultation with a business attorney well-versed in the laws regarding the fiduciary duties of minority shareholders is highly recommended before making decisions like those made by Guerin.