3.4.3.4.4 Relationship to the fiduciary duty standard

The reasonable expectations standard introduced from the UK has been a breakthrough in the last two decades. Cases are judged mainly by this standard.

Fiduciary duty and reasonable expectations standards overlap to some extent, in both concepts and results, but they also arise from different perspectives.1

In a close company, these two interpretation standards are correlated. Their purposes and effects are sufficiently similar.2 Both of them stress the concept of fairness. If certain conduct of the majority breaches fiduciary duty, it more often than not also defeats the minority's reasonable expectations. Under Massachusetts law, "the (defeat of) expectations and understandings of the shareholders are relevant to a breach of fiduciary duty determination"3 As Thompson summarizes in his eminent book: "These standards for determining oppression are not contradictory...Breach of a majority shareholder's fiduciary duty, for instance, is likely to be considered a departure from standards of fair dealing and also conduct which frustrates a reasonable shareholder's expectations."4

The fiduciary duty standard attempts to regulate oppressive conduct on the part of the majority. From the minority shareholders' perspective, when their reasonable expectations are frustrated, an attempt is made to identify the explicit and implicit terms based on which parties come together to set up a business, and the development of such terras over times.5 The focus has shifted to consideration of the minority shareholders instead of egregious conduct by those in contro1.6 It is difficult to determine which standard has a broader scope, but the fiduciary duty standard is more complicated in application.

In applying the fiduciary duty standard, courts must first clarify their positions on what kind of fiduciary duties they require. These range from partnership-like fiduciary duties to corporate-standard fiduciary duties.7 The Massachusetts courts stand at one end of the spectrum by advancing the partnership-like fiduciary duties, namely, "all shareholders in a close corporation owe enhanced fiduciary duties to each other".8 These duties are strict, more stringent than fiduciary duties to which directors and stockholders of all corporations must adhere in the discharge of their corporate responsibilities. The Delaware courts stand at the other end: "all (disputes in) corporations are to be governed by corporate, not partnership, principles".9 For example, their test for fiduciary duties in close companies is the entire faimess rule rather than a partnership-like fiduciary duty standard. The entire faimess rule has two basic aspects: fair dealing and fair price.10 There are also states standing in between. Massachusetts courts add burdens to the majority while Delaware makes them feel most assured. In general, cases judged by the majority rule are hailed by judges and scholars mainly because of their sympathy for the plight of minority shareholders in a close corporation.

On the other hand, courts do not need to take the above debate into consideration in applying the reasonable expectations standard. So "by focusing on the reasonable expectations of the participants, courts have a clearer, more specific standard to apply in resolving disputes in closely held enterprises."11

Regarding fiduciary duties, the court has devised a two tier solution to identify oppressive actions. First, it allows the majority to rely on legitimate business purpose to justify its actions.12 It then leaves it up to the minority shareholders to demonstrate that the desired goals could have been achieved by a less harmful action.13 In contrast, defeat of reasonable expectations is not subject to the business judgement rule or business purpose. The court will surely take certain elements into account, for instance that the minority has committed fraud or wrongdoing or the business is undergoing a huge slump, but it will not accept reliance on a general concept of the business judgement rule by the majority without supporting details. In Re Topper, the court stated that it was irrelevant whether the controlling shareholders dismissed the petitioner for cause or in their good business judgement when no misconduct of the minority could be ascertained.14 The court believed that "the undisputed understanding of the parties was such at the time of the formation of the corporations that the respondents' actions have severely damaged petitioner's reasonable expectations and constitute a freeze out of the petitioner's interest; consequently, they are deemed to be "oppressive" within the statutory framework."15 In Bonavita v. Corbo, the court found that the no-dividend policy only benefited the majority shareholder, and was not a short term measure adopted to meet some pressing financial necessity. Consequently, regardless of the defendant's contention that "the refusal to pay dividends is merely an application of the "business judgement rule" and is amply justified by sound business reasons", the court ruled that "as all of the above authorities make clear, defendants' reliance on the "business judgement rule" cannot change that conclusion that the defendant has destroyed any reasonable expectation that plaintiff may have enjoyed."16 It is clear from these judgements that when frustration of reasonable expectations is put forth, the business judgement rule is no longer a safe harbour for the controlling shareholders to protect themselves from the judicial scrutiny, 17 especially when the decisions are in their best interests but ignore the wishes, needs, and best interests of their co-shareholders.18