In 1975, the Supreme Judicial Court of Massachusetts held, in Donahue v. Rodd Electrotype, that a heightened fiduciary duty exists among shareholders of a close corporation. In so holding, the court recognized that the structure of a close corporation presents challenges to minority shareholders, and identified a common-law cause of action to remedy the harms caused by a majority acting contrary to the interests of all shareholders. Since Donahue, other states have recognized similar causes of action for aggrieved minority shareholders in close corporations. Moreover, many states have provided additional, statutory causes of action for dissolution in the event of shareholder “oppression.” Because Massachusetts has not added oppression to the enumerated grounds for corporate dissolution, aggrieved minority shareholders must continue to rely on the common-law action for breach of fiduciary duty.
As a remedy for both statutory oppression and common-law breach of fiduciary duty, courts often order the corporation or majority shareholder to buyout the minority’s shares. Determining the value of shares in a close corporation, however, is no simple task. Because shares in close corporations are not publicly traded, a party valuing a close corporation cannot discern their value simply by examining an active trading price on an accessible market. Courts must therefore apply other methods of valuation.
One important question that arises in the valuation of a minority interest in a close corporation is whether the value of the shares should be discounted to compensate for certain characteristics unattractive to investors. For example, unlike shares in a publicly traded stock, there is no ready market for shares in a close corporation. Therefore, sellers might have a more difficult time finding willing buyers in the event that they want to liquidate their shares. Additionally, minority shareholders, by definition, lack a controlling stake in the corporation, which investors prefer. The two major types of discounts applicable to close corporations are marketability discounts, accounting for the illiquid nature of the stock, and minority discounts, accounting for the shares’ lack of controlling status. . . .