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SJC-12222
GEORGE T. KOSHY vs. ANUPAM SACHDEV.
Middlesex. May 2, 2017. - September 14, 2017.
Present: Gants, C.J., Lenk, Hines, Gaziano, Lowy, Budd,
& Cypher, JJ.1
Corporation, Dissolution, Officers and agents. Practice, Civil,
Contempt. Contempt.
Civil action commenced in the Superior Court Department on
June 28, 2012.
The case was heard by Bruce R. Henry, J., and a complaint
for contempt, filed on March 2, 2015, was also heard by him.
The Supreme Judicial Court on its own initiative
transferred the case from the Appeals Court.
Charles M. Waters for the plaintiff.
Maureen Mulligan (Timothy M. Pomarole also present) for the
defendant.
Thomas J. Carey, Jr., for Brian JM Quinn & others, amici
curiae, submitted a brief.
LENK, J. We are called upon in this case to construe for
1
Justice Hines participated in the deliberation on this
case prior to her retirement.
2
the first time G. L. c. 156D, § 14.30, the corporate dissolution
statute. That statute allows a shareholder to petition a judge
of the Superior Court to dissolve a corporation in the event of
a deadlock between its directors. See G. L. c. 156D,
§ 14.30 (2) (i).
George T. Koshy and Anupam Sachdev are the sole
shareholders and directors of Indus Systems, Inc. (Indus).
After years of deepening dissension and acrimony between the
two, Koshy filed a petition in the Superior Court in 2012,
pursuant to the corporate dissolution statute, seeking to
dissolve Indus. Koshy also brought claims against Sachdev for
breach of fiduciary duties and, after a jury-waived trial had
taken place, but prior to the issuance of the judge's decision,
filed a separate claim for contempt of court. The judge
rejected all of Koshy's claims and Sachdev's counterclaims, and
dismissed Koshy's complaint for contempt. Koshy appealed, and
we transferred the matter to this court on our own motion.
We conclude that the utter impasse as to fundamental
matters of corporate governance and operations shown to exist in
these circumstances gave rise to a state of "true deadlock" such
that the remedy of dissolution provided by the statute is
permissible. See comment to G. L. c. 156D, § 14.30, 25A Mass.
Gen. Laws Ann. at 71 (Thomson/West 2005). Since dissolution is
a discretionary remedy, however, we remand the matter to the
3
Superior Court for a determination whether it is the appropriate
remedy in these circumstances. In addition, because a number of
the claims in the complaint for contempt were not raised at
trial, we vacate and set aside the judgment dismissing that
complaint, and remand the matter for consideration of the
allegations in the complaint concerning conduct that occurred
after the trial.2
1. Background. We recite the facts found by the trial
judge,3 supplemented with references to undisputed facts in the
record.
a. Formation and growth of Indus. As one of the motion
judges observed, "[t]his case concerns the demise of a long-
standing business relationship between two men who were once
close friends." The parties formed Indus in April, 1987, after
working together for several years at another company. Indus
provides "computer aided design" (CAD) services, creating and
storing digital renderings of "existing manual drawings,
sketches and other information supplied by client
organizations." Koshy and Sachdev each own fifty per cent of
Indus's shares and serve as its sole directors. They are both
authorized to act on the company's behalf.
2
We acknowledge the amicus brief submitted by Brian JM
Quinn, Niloufar Abae, and Alex Pena.
3
At argument before us, the parties acknowledged that they
do not contest the judge's factual findings.
4
After a few years of growing pains, Indus developed a
steady market for its services. By the end of 1997, the company
was generating revenues of approximately $700,000 annually. In
June, 1999, Indus was awarded a United States Government
Services Administration contract, which allowed it to bid on
projects for agencies of the Federal government. To help meet
the new wave of demand created by this contract, the parties
established eSystems Software Pvt. Ltd. (eSystems), an Indian
corporation, to provide support services to Indus.4
Building upon its success, Indus obtained a Federal
"streamlined technology acquisition resources for services"
contract (STARS contract) in 2004. It allowed government
clients to purchase products and services from Indus without
having to go through a competitive bidding process. The STARS
contract, which was effective through November 30, 2011, gave
Indus access to a new client base and provided approximately
sixty per cent of the company's revenue from 2004 to 2010. By
2007, Indus's revenues exceeded $2 million annually.
b. Parties' dispute. Sometime in the late 2000s, the
relationship between the parties began to fall apart. They
developed a fundamental difference of opinion concerning the
future of Indus. While Koshy wanted the company to focus
4
George T. Koshy and Anupam Sachdev each own 49.9 per cent
of eSystems Software Pvt. Ltd. (eSystems). It is not apparent
from the record who owns the remaining shares.
5
primarily on its existing services for government agencies,
Sachdev believed that it should explore new markets. Both
parties viewed their counterpart's vision of Indus's future as
gravely flawed. Koshy saw Sachdev's efforts to develop new
markets as quixotic and costly, while Sachdev considered Koshy's
focus on existing clients myopic and shortsighted. This
difference in viewpoints bred growing distrust as well, as is
evident from a dispute arising around 2010 in connection with
payments made from Indus to eSystems. While Sachdev preferred
to make prepayments to eSystems for services to be performed,
Koshy favored payments only for services rendered. Koshy
believed that prepayments, which could not easily be recovered
due to jurisdictional obstacles, provided Sachdev with a means
clandestinely to direct company resources into new projects.
Notwithstanding Koshy's stated concerns, Sachdev routinely made
prepayments to eSystems without consulting with Koshy.
As these disagreements strained the parties' relationship,
an incident in the fall of 2011 furthered its disintegration.
At that time, Indus had approximately $1.4 million in retained
earnings. Koshy wanted this money to be paid out to himself and
Sachdev as a distribution, while Sachdev did not. In
November, 2011, Koshy wrote himself a check from Indus's
corporate account, in the amount of $690,000, as a distribution,
without Sachdev's consent. Koshy encouraged Sachdev, who was in
6
India at the time, to take a matching distribution. Sachdev
instead reacted by effectively locking Koshy out of the company.
He initiated a lawsuit against Koshy on behalf of Indus, seeking
a return of the distribution; stopped payment of Koshy's salary;
terminated his company credit cards; and changed the locks on
the door of Indus's offices. He also refused to consent to a
tax distribution to the parties, as had been the practice in
prior years. Koshy subsequently placed the $690,000 in an
escrow account.
As this dispute was ongoing, each party offered to buy out
the other, based on evaluations of Indus's worth created by
consultants that each had hired. Sachdev offered to purchase
Koshy's shares for $480,000. Koshy rejected that offer and
tendered his own offer to purchase Sachdev's shares for
approximately $2.8 million; Sachdev rejected that proposal.
Ultimately, the $690,000 was returned to Indus, and in
June, 2012, the complaint was dismissed. Koshy's salary,
company credit cards, and access to his office were restored.
The relationship between the parties however, continued to
spiral downward.
The parties' welling antipathy for and toxic distrust of
each other inevitably began to impinge upon the day-to-day
operations of Indus. In December, 2011, without consulting
Koshy, Sachdev hired Michael Xifaras to help with the company's
7
sales. Xifaras replaced Roger Geilen, a long-time Indus
salesperson, who had worked largely with Koshy. Koshy and
Xifaras did not get along, as Koshy believed that Sachdev had
hired Xifaras, in effect, as his replacement. The hostility
between the two broke out into open conflict when Xifaras sent
an extremely critical electronic mail message to Koshy, with a
copy to Sachdev, which included a variety of insults.5 In
response, Koshy informed Sachdev that he would be firing
Xifaras, and provided Xifaras notice of the termination.
Sachdev responded by saying that he agreed with Xifaras's
criticisms and that Koshy had no authority to fire employees
without Sachdev's consent; Xifaras retained his position at
Indus. A few months later, Koshy again attempted to terminate
Xifaras, with the same result. At the time of trial in October,
2013, Xifaras still worked for Indus.
Finally, in June, 2012, Koshy commenced in the Superior
Court the underlying action in this case. The complaint
asserted that Sachdev had committed a breach of his fiduciary
duty to Koshy, as well as the implied covenant of good faith and
fair dealing; the complaint also asserted that the parties were
deadlocked and sought corporate dissolution on that ground.
5
Among other things, Xifaras called Koshy "the greatest
impediment for the company achieving its potential" and
"dishonest and self serving." He also said that Koshy did "not
have the experience and knowledge to lead."
8
Sachdev filed counterclaims alleging breach of fiduciary duties
by Koshy and abuse of process.
Koshy also sought a preliminary injunction enjoining
Sachdev from taking certain actions purportedly intended to
freeze out Koshy. A Superior Court judge (who was not the trial
judge) granted the motion in part, enjoining Sachdev from
(1) blocking or impeding regular tax distributions to Koshy;
(2) making any non-payroll-related disbursement or expenditure
in excess of $5,000 on behalf of Indus without providing written
notice to Koshy in advance; (3) hiring or firing any employee
without providing written notice to Koshy in advance; (4) making
any payments on behalf of Indus to eSystems for services not yet
performed without Koshy's prior written consent; and (5) taking
any action for the purpose of "forcing or pressuring [Koshy] to
sell his shares for less than fair market value." Shortly
thereafter, Sachdev approved a tax distribution to the parties.
In September, 2012, Sachdev sought to have the preliminary
injunction dissolved. The judge denied the motion, and instead
modified the order such that the same provisions also were
applicable to Koshy.
In March, 2015, nearly one and one-half years after the
trial in October, 2013, and while a decision on the issues
raised at trial was still pending, Koshy filed a complaint
seeking a judgment of contempt against Sachdev for asserted
9
repeated violations of the preliminary injunction. The trial
judge ultimately dismissed the complaint for contempt when he
issued his ruling in August, 2015, on the claims litigated at
trial.
c. Trial proceedings. Following an eight-day, jury-waived
trial, the judge denied all of Koshy's claims and Sachdev's
counterclaims. He rejected Koshy's claim that the parties were
deadlocked such that dissolution was appropriate. He also
concluded that Sachdev had not committed a breach of his
fiduciary duty to Koshy, because Sachdev had had a "legitimate
business purpose" for all of the conduct Koshy challenged. For
similar reasons, the judge denied Koshy's claim for breach of
the covenant of good faith and fair dealing. The judge also
dismissed Koshy's complaint for contempt on the ground that it
"rehash[ed]" issues that had been litigated at trial.
Concluding that Koshy had neither committed a breach of his
fiduciary duty to Sachdev nor brought his claims for an ulterior
or illegitimate purpose, the judge also denied Sachdev's
counterclaims.
Koshy appealed from the judgment,6 and we transferred the
case to this court on our own motion.
6
Sachdev initially cross-appealed from the trial judge's
dismissal of his claims against Koshy for breach of fiduciary
duties and abuse of process. He ultimately decided not to
pursue the appeal.
10
2. Discussion. On appeal, Koshy raises three arguments.
He contends that the trial judge erred in concluding that the
parties were not deadlocked; in denying Koshy's claim for breach
of fiduciary duty; and in dismissing the complaint for contempt.
We address each in turn.
a. True deadlock. i. Statutory overview. The corporate
dissolution statute, G. L. c. 156D, § 14.30, provides "grounds
for the judicial dissolution of corporations at the request of
the [C]ommonwealth, a shareholder, a creditor, or a corporation
which has commenced voluntary dissolution." See comment to
G. L. c. 156D, § 14.30, 25A Mass. Gen. Laws Ann. at 70.7 The
statute allows any shareholder or group of shareholders who hold
forty per cent of "the total combined voting power of all the
shares of [a] corporation's stock outstanding" and are "entitled
to vote on the question of dissolution" to petition the Superior
Court for dissolution of the corporation on the basis of
director or shareholder deadlock. See G. L. c. 156D,
§ 14.30 (2).
A judge may allow a petition for dissolution due to
deadlock between a corporation's directors only in cases of
7
The corporate dissolution statute, G. L. c. 156D, is part
of the Massachusetts Business Corporation Act. In interpreting
the statute, we are guided by the "comments prepared by the task
force . . . that drafted the act, 'which included more than
fifty experienced Massachusetts corporate lawyers.'" See
Chitwood v. Vertex Pharms., Inc., 476 Mass. 667, 669 (2017),
quoting Halebian v. Berv, 457 Mass. 620, 625 (2010).
11
"true deadlock." See comment to G. L. c. 156D, § 14.30, 25A
Mass. Gen. Laws Ann. at 71 ("the general policy of Massachusetts
corporation law [is] that involuntary dissolution should be
available as a mechanism for resolving internal corporate
disputes only in the case of true deadlock"). To establish the
existence of a "true deadlock" between directors, the
petitioning party must prove that (1) "the directors are
deadlocked in the management of the corporate affairs"; (2) "the
shareholders are unable to break the deadlock"; and (3)
"irreparable injury to the corporation is threatened or being
suffered." See G. L. c. 156D, § 14.30 (2) (i)
(§ 14.30 [2] [i]).8 If the petitioning party can establish a
"true deadlock," then the statute vests the judge with the
discretion to order dissolution as a remedy. G. L. c. 156D,
§ 14.30.
A judge's determination whether a true deadlock exists is a
matter of law, reviewed de novo. Cf. Merola v. Exergen Corp.,
423 Mass. 461, 463 (1996) (determination whether actions
constituted breach of fiduciary duties was matter of law).
Whether such deadlock warrants dissolution is a matter of
discretion. See comment to G. L. c. 156D, § 14.30, 25A Mass.
Gen. Laws Ann. at 70 ("This section states that a court 'may'
order dissolution if a ground for dissolution exists. Thus
8
The statute does not define any of these terms.
12
there is discretion on the part of the court as to whether
dissolution is appropriate even though grounds exist under the
specific circumstances").
ii. Analysis. We have not previously had occasion to
address the corporate dissolution statute. As with all
statutes, "[o]ur primary duty in interpreting [it] is 'to
effectuate the intent of the Legislature in enacting it.'"
MacLaurin v. Holyoke, 475 Mass. 231, 238 (2016), quoting
Wheatley v. Massachusetts Insurers Insolvency Fund, 456 Mass.
594, 601 (2010), S.C., 465 Mass. 297 (2013).
A. Deadlock. The first part of the test for "true
deadlock" concerns whether the "directors are deadlocked in the
management of the corporate affairs." G. L. c. 156D,
§ 14.30 (2) (i). Since neither the statute nor the drafters'
comment defines the term "deadlock," we look to its ordinary
meaning. See International Fid. Ins. Co. v. Wilson, 387 Mass.
841, 853 (1983) ("We begin with the canon of statutory
construction that the primary source of insight into the intent
of the Legislature is the language of the statute"). The plain
meaning of "deadlock" is "a state in which progress is
impossible, as in a dispute, produced by the counteraction of
opposing forces." Webster's New Universal Unabridged Dictionary
512 (2003). Other courts to have considered the matter have
reached a comparable understanding of the term. See Donovan v.
13
Quade, 830 F. Supp. 2d 460, 489 (N.D. Ill. 2011) (deadlock
existed due to directors' mutual distrust, lack of
communication, and inability harmoniously to manage affairs of
corporation); Belio v. Panorama Optics, Inc., 33 Cal. App. 4th
1096, 1103-1104 (1995) (deadlock exists when board has even
number of directors who are equally divided or incapable of
electing successor board); Black v. Graham, 266 Ga. 154, 155
(1996) (deadlock occurs when corporation has two shareholders
who are "wholly unable to agree on the management of the
business").
Based on this common definition, we conclude that at least
four factors are relevant in determining whether a deadlock
exists. The first factor is whether irreconcilable differences
between the directors of a corporation have resulted in
"corporate paralysis." See Laskey v. L. & L. Manchester Drive-
In, Inc., 216 A.2d 310, 314-315 (Me. 1966); Petition of Collins-
Doan Co., 3 N.J. 382, 395 (1949); Kim, The Provisional Director
Remedy for Corporate Deadlock: A Proposed Model Statute, 60
Wash. & Lee L. Rev. 111, 119 (2003) (Kim) ("Deadlock generally
refers to 'an impasse in corporate decisional processes'"
[citation omitted]). By "corporate paralysis," we refer to a
stalemate between the directors concerning "one of the primary
functions of management." See Laskey, supra at 314. Examples
of such primary functions include payroll, client services,
14
hiring and retention of employees, and corporate strategy.
A second factor in discerning whether a deadlock exists is
the size of the corporation at issue. A deadlock is more likely
to occur in a small or closely held corporation, particularly
one where ownership is divided on an even basis between two
shareholder-directors. See comment to G. L. c. 156D, § 14.30,
25A Mass. Gen. Laws Ann. at 72 (dissolution remedy "particularly
important in small or family-held corporations in which share
ownership may be divided on a [fifty-fifty] basis"); Kim, supra
at 121 ("The distinguishing features of close corporations make
them particularly vulnerable to deadlock"). Moreover, in
closely held corporations, the lack of a ready market for a
shareholder's stock, and the greater likelihood that a
shareholder is reliant on the corporation for a salary, tends to
increase the potential for deadlock and accompanying oppressive
tactics. See Donahue v. Rodd Electrotype Co. of New England,
367 Mass. 578, 588-589 (1975) (structure of close corporation
can lend itself to oppressive conduct); Kim, supra at 121-122.9
A third relevant factor in determining whether deadlock has
occurred is an indication that a party has manufactured a
9
A claim of oppressive shareholder conduct of the sort
described in Donahue v. Rodd Electrotype Co. of New England, 367
Mass. 578, 580-584 (1975), however, is not a necessary
prerequisite to a finding of deadlock. While a breach of the
directors' fiduciary duties would be relevant to whether a
deadlock exists between them, a deadlock could result even in
instances where the directors are acting in good faith.
15
dispute in order to engineer a deadlock. In such circumstances,
a court should view the party's claim with skepticism. See
comment to G. L. c. 156D, § 14.30, 25A Mass. Gen. Laws Ann. at
71 (corporate dissolution statute not intended to permit
dissolution in instances of "gamesmanship in the negotiation of
internal corporate disputes"); Smith-Shrader Co. v. Smith, 136
Ill. App. 3d 571, 582 (1985) (rejecting claim of shareholder who
committed breach of fiduciary duty to company to force its
dissolution); Lien v. Lien, 2004 S.D. 8, ¶¶ 10, 23 (rejecting
claim of director who boycotted directors' election meeting and
then claimed deadlock due to failure of corporation to elect
directors).
A fourth factor in determining whether a deadlock exists is
the degree and extent of distrust and antipathy between the
directors. See, e.g., Shawe v. Elting, 157 A.3d 152, 158 (Del.
2017) (distrust between directors of corporation contributed to
deadlock); Black, 266 Ga. at 155 ("hostile and static situation"
constituted deadlock). Mutual antipathy can transform what may
begin as a run of the mill disagreement into irreconcilable
conflict and stalemate where hostility precludes compromise.
See Misita v. Distillers Corp., 54 Cal. App. 2d 244, 250 (1942)
(dispute between parties calcified into deadlock meriting
dissolution as result of "ill-feeling, dissension, hatred,
mutual hostility and distrust" between board members).
16
Given the undisputed evidence, the conclusion that the
conflict between the parties constitutes a deadlock is
inescapable. Applying the first factor, the acknowledged facts
underscore corporate paralysis with respect to a number of key
matters. The parties have profoundly different opinions
regarding both Indus's daily operations and its future. They
disagree on such basic matters as staffing needs, as well as
dividend and tax distributions, and even more fundamentally,
hold diametrically opposed views as to long-term corporate
strategies and goals. The areas of disagreement between the
parties appear to far outweigh the few areas of agreement. Over
the past few years, the parties appear to have agreed only on
the matter of employee raises and the need to hire a new
salesperson. As the Xifaras incident demonstrates, their
agreement on the latter issue was superficial at best. The
parties are diametrically opposed on nearly every issue of
importance concerning Indus's current operations and its future.
The second factor also argues in favor of deadlock. Since
the parties each own fifty per cent of Indus, each has the
ability to prevent the other from enacting any policy with which
he disagrees, on any subject; their stalemate thereby
effectively paralyzes Indus on all of the issues on which the
two disagree. As to the third factor, we discern no indication
in the judge's findings that either party engineered the dispute
17
in bad faith. Rather, the facts reflect a genuine disagreement
between the parties concerning the most basic aspects of company
policy.
Looking to the final factor, the parties do not contest the
trial judge's finding that they operate based on a relationship
of mutual distrust and antipathy. The judge was well warranted
in concluding that Koshy "views all of Sachdev's actions as an
attempt to freeze him out of the management of the company" and
that "Sachdev questions all of Koshy's actions." The record is
replete with personal insults, questioning of motives, and
general acrimony between the parties. This mutual antipathy in
a two-director corporation has prevented the parties from
compromising and has inspired increasing levels of
brinksmanship. Accordingly, we conclude that Koshy has met his
burden to show that the parties are deadlocked within the
meaning of § 14.30 (2) (i).
B. Irreconcilability of the deadlock. The second part of
the test for "true deadlock" under § 14.30 (2) (i) requires that
the "shareholders are unable to break the deadlock." The
critical inquiry with respect to this part of the test is
whether the shareholders are able to work around the deadlocked
directors. See, e.g., Goldstein v. Studley, 452 S.W.2d 75, 80
(Mo. 1970) (shareholders unable to break deadlock where shares
evenly divided and board contained four directors). If the
18
shareholders are able to do so, then there is no need for a
court to dissolve the company in order to break the deadlock.
In making this determination, a reviewing court must decide
whether there is a mechanism by which the deadlock can be
broken. In closely held corporations, two of the more common
such mechanisms are buy-sell agreements and agreements providing
for methods of alternative dispute resolution such as third-
party mediation of disputes. A buy-sell agreement is a contract
or other legal mechanism that provides for "the mandatory or
optional repurchase of a stockholder's shares by the corporation
or by the other stockholders upon the occurrence of a certain
event," such as a deadlock. See Stephenson v. Drever, 16 Cal.
4th 1167, 1173 (1997). See also Hoberman, Practical
Considerations for Drafting and Utilizing Deadlock Solutions for
Non-Corporate Business Entities, 2001 Colum. Bus. L. Rev. 231,
232 (2001) (Hoberman) ("Perhaps the most common deadlock
solution . . . is the 'buy-sell agreement' . . ."). An
agreement requiring alternative dispute resolution in instances
of deadlock also may provide shareholders with a mechanism to
break it. See Hoberman, supra at 233.
The record contains no indication that such a mechanism
exists in this case. Sachdev points to section five of the
articles as a potential means by which the deadlock could be
19
broken.10 That provision, however, requires the parties to agree
upon an arbitrator who then will value the selling shareholder's
stock. We discern no indication in the record that the parties
would agree upon such an arbitrator, particularly given their
previously demonstrated inability to agree on the price for a
buyout of each other's shares. In light of this, Koshy has met
his burden of establishing that the shareholders are unable to
break the deadlock.
C. Irreparable injury. The final part of the "true
deadlock" test requires that "irreparable injury to the
corporation is threatened or being suffered." Since the term
"irreparable injury" is not defined in the statute, but has a
long-standing meaning at common law, we assume that the
Legislature intended to incorporate the common-law meaning. See
Commonwealth v. Wynton W., 459 Mass. 745, 747 (2011) ("Where the
Legislature does not define a term, we presume that its intent
is to incorporate the common-law definition of that term,
'unless the intent to alter it is clearly expressed'" [citation
10
Under section five of the articles, a shareholder who
desires to divest himself of his shares first must notify the
directors of the price at which he is willing to sell and
provide the name of an arbitrator. Within thirty days, the
directors either must accept the offer or notify the shareholder
of the name of another arbitrator. The two arbitrators then
select a third; after this panel of arbitrators is constituted,
it may ascertain the value of the stock. Following the
evaluation, the directors have thirty days in which to purchase
the stock at the set price; if they do not, the shareholder may
dispose of the stock as he sees fit.
20
omitted]).
At common law, an irreparable injury is a harm which cannot
be vindicated by litigation on the merits. See Packaging Indus.
Group, Inc. v. Cheney, 380 Mass. 609, 616 (1980) (irreparable
injury occurs when party "suffer[s] a loss of rights that cannot
be vindicated should it prevail after a full hearing on the
merits"). An irreparable injury need not be financial in
nature. See Mordka v. Mordka Enterprises, Inc., 143 Ariz. 298,
305 (Ct. App. 1984) (profitability not sole criterion in
considering irreparable injury); comment to G. L. c. 156D,
§ 14.30, 25A Mass. Gen. Laws Ann. at 72 (irreparable injury
standard "may be met in a corporation that is operating at a
profit"). A corporation may suffer irreparable injury due to
severe corporate dysfunction or a frustration of the company's
purpose, or by placing the company's business in jeopardy. See
Shawe, 157 A.3d at 159 (profitable company subject to
irreparable harm due to "irretrievably dysfunctional" management
structure); Fernandez v. Yates, 145 So. 3d 141, 146 (Fla. Dist.
Ct. App. 2014) (deadlock preventing effective use of company's
sole asset created irreparable injury); Black, 266 Ga. at 155
(inability of sole and equal shareholders to agree on management
of business presented threat of irreparable injury). A court
may also consider "harm to a corporation's reputation, goodwill,
customer relationships, and employee morale" (citation omitted).
21
See Shawe, 157 A.3d at 161.
The plain meaning of the term "threatened" implicates an
assessment of the substantial likelihood that irreparable harm
will occur. See Webster's New Universal Unabridged Dictionary
1975 (2003) (defining "threaten" as "to be a menace or source of
danger to"). In this respect, the term is analogous to the
concept of "substantial risk" in our jurisprudence on
preliminary injunctions. See Packaging Indus. Group, Inc., 380
Mass. at 617 (preliminary injunction requires showing of
"substantial risk of irreparable harm").
In determining whether a corporation is "threatened" with
irreparable injury, a court must look beyond its current, short-
term status. While a presently declining revenue stream, the
departure of employees, or the depletion of clients may signal a
threat of irreparable injury, the present well-being of a
corporation does not preclude such a threat. A deadlock that
prevents corporate management from effectively addressing the
vital functions of the corporation creates a threat of
irreparable injury even if the company appears financially
profitable. Accordingly, a court must examine the nature and
impact of a deadlock to determine if the company can remain
viable in the long term. If not, then the corporation is
threatened with irreparable injury.
In the circumstances here, we conclude that the fundamental
22
nature of the deadlock between the parties threatens irreparable
injury to Indus, because the parties' mutual antipathy renders
them unable effectively to manage the company. Their impasse
regarding nearly every major corporate decision has cast a cloud
on Indus's future. The parties cannot agree on anything of
substance and, as the Xifaras situation demonstrates, the
palpably corrosive acrimony between them prevents them from
functioning even in areas of theoretical agreement. Meanwhile,
as their dysfunctional relationship continues to deteriorate,
the parties repeatedly have resorted to costly litigation, in
efforts to outmaneuver each other and gain the upper hand in
steering the corporation. Resort to management by litigation is
neither a viable means of corporate governance nor an adequate
substitute for functional management and planning. On the
record before us, the trajectory of Indus plainly points south
and a threat of irreparable injury has been shown. We therefore
conclude that the parties' dispute constitutes a "true deadlock"
within the meaning of § 14.30 (2) (i).
D. Remedy. The corporate dissolution statute provides
that a Superior Court judge "may dissolve a corporation" if the
three-part test for "true deadlock" set forth in § 14.30 (2) (i)
is met. Given that the statute authorizes the "extreme" remedy
of dissolution, see comment to G. L. c. 156D, § 14.30, 25A Mass.
Gen. Laws Ann. at 71-72, we conclude that it also authorizes
23
lesser remedies, such as a buyout or the sale of the company as
an ongoing entity. See Brodie v. Jordan, 447 Mass. 866, 873 n.7
(2006) ("In most of these States, statutes authorize the more
drastic remedy of involuntary dissolution, and thus courts have
understandably inferred the power to order the lesser remedy of
a buyout"); Shawe, 157 A.3d at 160 (affirming Court of
Chancery's decision to appoint custodian to hold public auction
of company in light of director deadlock); Sauer v. Moffitt, 363
N.W.2d 269, 275 (Iowa Ct. App. 1984) (statute which provided for
dissolution allowed for other equitable relief); 21 West, Inc.
v. Meadowgreen Trails, Inc., 913 S.W.2d 858, 867 (Mo. Ct. App.
1995) ("Courts are not limited to the remedy of dissolution and
may, in equity, consider appropriate alternative forms of
relief, including ordering the corporation to pay the
petitioning shareholders their proportionate share in money").
The appropriate remedy should be decided in the first
instance by the trial judge, and we remand the matter for such a
determination.
b. Breach of fiduciary duties. Koshy contends that
Sachdev committed a breach his fiduciary duty to Koshy by
refusing to consent to tax and dividend distributions in late
2011 and early 2012, and by making an unreasonably low offer for
Koshy's shares in early 2012.
Shareholders in a close corporation owe fiduciary duties to
24
both their fellow shareholders and the corporation itself. See
Demoulas v. Demoulas Super Mkts., Inc., 424 Mass. 501, 528-529
(1997); Donahue, 367 Mass. at 593. Like partners, they owe to
one another a duty of "utmost good faith and loyalty." Donahue,
supra. Accordingly, they may not "act out of avarice,
expediency or self-interest" towards their fellow shareholders.
Id. If a shareholder is able to demonstrate a "legitimate
business purpose" for a challenged action, however, he or she
will not be liable "unless the wronged shareholder succeeds in
showing that the proffered legitimate objective could have been
achieved through a less harmful, reasonably practicable,
alternative mode of action." Zimmerman v. Bogoff, 402 Mass.
650, 657 (1988).
The trial judge concluded that Sachdev had a legitimate
business purpose for the actions that Koshy challenged. In his
findings of fact, the judge credited Sachdev's reasons for
declining to agree to tax and dividend distributions and
rejected Koshy's assertion that those reasons were a pretext to
freeze him out of the company. The judge also found that
Sachdev's buy-out offer was a "low-ball" offer, but that it was
not advanced in bad faith. We review the judge's factual
determinations for clear error, but we review de novo his
determination that Sachdev did not commit a breach of his
fiduciary duties to Koshy. See Merola, 423 Mass. at 464.
25
At trial, Sachdev testified that he had refused to agree to
dividend distributions in 2012 because of his concern over the
loss of revenue following the expiration of the STARS contract
in 2011. Sachdev also testified that he would not agree to a
tax distribution because of the fiscal uncertainty caused by
Koshy's unilateral $690,000 distribution to himself. We discern
no error in the trial judge's rulings of law that these actions
did not constitute a breach of fiduciary duty, because Sachdev
had a "legitimate business purpose" for his conduct. See
Zimmerman, 402 Mass. at 657. Sachdev's objection to a dividend
distribution on the eve of the expiration of one of Indus's
chief contracts was not unreasonable, and Koshy does not suggest
a plausible "alternative mode of action" given these
circumstances. See id. The same holds true for Sachdev's
reluctance to sign off on a tax distribution when nearly three-
quarters million dollars of Indus's retained cash was in escrow.
There is no indication that Sachdev acted out of the "avarice,
expediency or self-interest" that undergirds a breach of
fiduciary duty in taking these actions. See Donahue, 367 Mass.
at 593.
With regard to Sachdev's "low-ball" offer, the judge found
that it was not made in bad faith. Absent an agreement
establishing such obligations, a shareholder in a close
corporation does not owe a fiduciary duty to a fellow
26
shareholder in purchasing the other's shares in the corporation.
See Goode v. Ryan, 397 Mass. 85, 90-91 (1986) (no obligation for
shareholders to purchase other shareholders' stock in
corporation in absence of agreement to the contrary). No such
obligation is contained in Indus's articles of incorporation,
nor do these circumstances suggest any compelling reason to
extend to the present case the duty set out in Donahue.
Accordingly, we conclude that Sachdev did not commit a breach of
his fiduciary duties to Koshy.
c. Contempt. Koshy maintains also that the judge erred in
dismissing his complaint for contempt. In that complaint, Koshy
asserted that Sachdev repeatedly had violated the terms of the
preliminary injunction, both before and after the trial.
The "purpose of civil contempt proceedings is remedial."
Demoulas, 424 Mass. at 571. A complaint for contempt "is
'intended to achieve compliance with the court's orders for the
benefit of the complainant.'" Mahoney v. Mahoney, 65 Mass. App.
Ct. 537, 540 (2006), quoting Furtado v. Furtado, 380 Mass. 137,
141 (1980). We review the decision to dismiss the complaint for
abuse of discretion. See Massachusetts Comm'n Against
Discrimination v. Wattendorf, 353 Mass. 315, 317 (1967).
The judge dismissed the complaint, determining that it
"rehash[ed] many of the issues and arguments made during the
trial of the underlying claims" in the case, and discerning "no
27
reason to revisit those matters by way of a trial on the
complaint for contempt." While some of the claims indeed
reiterated issues litigated at trial, several others asserted
violations that took place between the end of the trial in
October, 2013, and the expiration of the preliminary injunction,
which remained in effect through the entry of judgment in
August, 2015. Among these are assertions that, in
January, 2014, Sachdev canceled checks that Koshy had written to
a subcontractor; in March, 2014, Sachdev made a payment in
excess of the limits in the injunction; in December, 2014,
Sachdev executed a contract with a third-party vendor without
Koshy's consent; during all of 2014, Sachdev refused to
authorize a tax distribution; and, in February, 2015, Sachdev
denied Koshy access to payroll.
While claims duplicative of a prior action are subject to
dismissal as improper claim splitting, see Mass. R. Civ.
P. 12 (b) (9), as amended, 450 Mass. 1403 (2008), this
proscription extends only to claims which raise the same issues
as did the prior action. See M.J. Flaherty Co. v. United States
Fid. & Guar. Co., 61 Mass. App. Ct. 337, 339 (2004) ("Rule
12 [b] [9] provides for the dismissal of a second action in
which the parties and the issues are the same as those in a
prior action still pending in a court of this Commonwealth").
Given that the complaint for contempt asserted a number of
28
violations of the preliminary injunction that occurred after the
trial, the judge should not have dismissed the complaint on the
ground that it merely rehashed issues raised at trial. On
remand, the trial judge should consider separately those issues
involving conduct after the end of trial but during the pendency
of the proceedings.
3. Conclusion. The judgment is vacated and set aside.
The matter is remanded to the Superior Court for entry of a
judgment that the parties have reached a "true deadlock" within
the meaning of G. L. c. 156D, § 14.30, and for further
proceedings consistent with this opinion.
So ordered.