Is My Company a “Closely-Held” Corporation?

You may have heard of some corporations being referred to as “close” or “closely-held” corporations.  Under Massachusetts law, this designation is important, because all shareholders of such close corporations – whether they hold a majority or minority interest – owe fiduciary duties of utmost good faith and loyalty not only to the corporation but also to one another.  Such duties are akin to the duties owed by members of partnerships.  Indeed, Massachusetts courts have repeatedly stated that close corporations resemble partnerships.

So how do you know whether the corporation you are a part of qualifies as a close corporation?  Typically, close corporations are corporations that meet the following three criteria: (i) a “small number” of shareholders; (ii) no ready market for the corporate stock; and (iii) substantial majority shareholder participation in the management, direction, and operations of the corporation.

There is no hard and fast rule for how many shareholders is too many to constitute a close corporation.  Generally, however, Massachusetts courts have not found close corporations to exist when the company has more than 21 shareholders.  Therefore, if you are part of a company that has less than twenty shareholders, that does not have publicly-traded stock, and that is run by its majority shareholder, you are likely in a “close” corporation, and it is important to be mindful of the duties you owe to the company and your fellow shareholders.

-By Stephanie Parker