McLaughlin v. Schenk

2009 UT 64
220 P.2d 146
This opinion is subject to revision before final
publication in the Pacific Reporter.
IN THE SUPREME COURT OF THE STATE OF UTAH
----oo0oo----
Samuel R. McLaughlin and 	No. 20070688
John Does 1-10,
Plaintiffs and Appellants,
v.
Greg Schenk, Estate of Boyd
Schenk, Anna Schenk, Cookietree,
Inc., a Utah corporation, 	F I L E D
Harold Rosemann, and Gayle Schenk,
Defendants and Appellees. 	October 2, 2009
---
Third District, Salt Lake
The Honorable Robert K. Hilder
No. 040924997
Attorneys: 	Lincoln W. Hobbs, Margaret H. Olson, Salt Lake City,
for plaintiffs
Matthew M. Durham, Justin B. Palmer, George M. Haley,
Richard D. Flint, Salt Lake City, for defendants
---
DURHAM, Chief Justice:
INTRODUCTION
¶1 	In a public corporation, directors and officers owe the
corporation and the shareholders collectively a duty to act in
good faith and in the best interest of the corporation. 	In a
partnership, each partner owes each of the other partners
individually a duty to act with the utmost good faith. 	The
appellant in this case, Samuel R. McLaughlin, a minority
shareholder in a closely held corporation, asks this court to
impose on shareholders in such corporations a duty to individual
shareholders similar to the duty owed in a partnership.
McLaughlin also asks us to reverse the district court’s holding
that waivers of a provision of this closely held corporation’s
shareholder agreement were valid, and reverse its order denying
amendments to McLaughlin’s complaint. 	We hold that the appellee

No. 20070688 	2
Greg Schenk, as a close corporation shareholder, owed McLaughlin
individually a duty to act in the utmost good faith, but that he
did not violate this duty because his actions did not thwart
McLaughlin’s reasonable expectations. 	Additionally, we hold that
waivers executed by the board and the shareholders of the
corporation were contaminated by a conflict of interest, and we
therefore remand for a determination of whether the waivers were
fair. 	Finally, we hold that the district court did not abuse its
discretion in denying McLaughlin’s motion to amend by finding
that the amendment would be futile.
BACKGROUND
¶2 	Because the trial court dismissed this case on summary
judgment, “we review the facts and all reasonable inferences
drawn therefrom in the light most favorable to the nonmoving
party,” in this case, McLaughlin. 	GLFP, Ltd. v. CL Mgmt., Ltd.,
2007 UT App 131, ¶ 5, 163 P.3d 636.
¶3 	Cookietree, Inc. is a privately held Utah corporation
that produces and retails baked goods. 	The company was formed in
1981, with Greg Schenk and his father, Boyd Schenk, among the
original shareholders. 	Greg Schenk was named president at the
corporation’s founding. 	He currently holds the same position.
In 1992, Greg Schenk recruited Sam McLaughlin to work as the
operations leader for Cookietree. 	McLaughlin’s previous
experience at Pillsbury and Quaker Oats made him a valuable
employee, and he was quickly promoted to vice president of
operations and then chief operating officer and vice president of
operations. 	As he invested more of his career in Cookietree,
McLaughlin also invested his personal finances in the corporation
by slowly purchasing increasing amounts of shares in the
corporation.
¶4 	As part of his agreement to join Cookietree as an
employee, McLaughlin and the company agreed to certain terms,
which were memorialized in an employment agreement. 	This
agreement guaranteed McLaughlin a minimum salary that was
supplemented with a bonus formula. 	It also provided him with the
option of acquiring up to 200,000 shares of common stock in the
company. 	Importantly, under the agreement, McLaughlin was an at-
will employee. 	Thus, either party could terminate the employment
relationship at any time so long as six-months notice was given.
¶5 	In 1993, Cookietree and McLaughlin entered into an
Incentive Stock Option Agreement that allowed McLaughlin to
purchase an additional 200,000 shares of the company’s common
stock. 	This agreement also required McLaughlin to agree to a

1 This transaction was not subject to the right of refusal
provisions of the shareholder agreement because it was a transfer
between immediate family members, which was allowed under the
1991 Shareholder Agreement.
2 The parties disagree on whether Boyd’s estate or Anna
transferred the shares to Greg Schenk. 	The district court
indicated in its order that Anna transferred the shares to Greg
Schenk. 	We rely on this implicit factual finding.
3 	No. 20070688
1991 Shareholder Agreement. 	The 1991 Shareholder Agreement
limited the ability of shareholders to sell, assign, or pledge
their common stock. 	Under the agreement, selling shareholders
had to first offer their shares, by written notice, to the
corporation. 	If Cookietree did not elect to purchase any or all
of the shares, the secretary of Cookietree was required to
provide written notice to all shareholders identifying the number
of shares available for purchase. 	Each shareholder was then
entitled to purchase a portion of the shares equal to his or her
ownership percentage of the outstanding common stock. 	If, at the
close of the applicable option periods, not all available shares
had been purchased, the selling shareholder could then sell the
shares elsewhere. 	The agreement also provided that written
consent from either the board of directors or the owners of at
least two-thirds of the shares (excluding the shares owned by the
selling shareholder) could waive the agreement’s restrictions on
share transfers. 	The 1991 Shareholder Agreement was replaced in
1999 with a new shareholder agreement, which contained the same
terms.
¶6 	In 1998, the majority shareholder of Cookietree, Boyd
Schenk, passed away. 	Just before his death he transferred
818,000 shares to Greg Schenk. 1 	Following this transfer Greg
Schenk owned around 49 percent of Cookietree, with Boyd Schenk
retaining around ten percent (545,200) of the company’s shares.
After Boyd’s death, Boyd’s wife, Anna, 2 sold Greg Schenk 545,200
shares, making Greg Schenk the majority shareholder, with about
sixty-five percent of the company’s stock. 	This transfer was not
recorded in Cookietree’s minutes or written records, and a right
of first refusal was not provided to the corporation or the other
shareholders. 	Stock certificates were nonetheless issued. At the
time this transfer was made, it violated the 1991 Shareholder
Agreement.
¶7 	In 2003, Greg Schenk indicated that he was interested
in selling Cookietree. 	McLaughlin wanted to purchase the company
and sent a letter of intent, which conveyed this interest to
Cookietree and its president, Greg Schenk. 	McLaughlin, however,

No. 20070688 	4
was never able to raise the full amount of the purchase price.
During this period, Greg Schenk began discussions with another
cookie company, Otis Spunkmeyer, which was interested as a
strategic buyer in purchasing Cookietree.
¶8 	At this point, the relationship between McLaughlin and
Greg Schenk, which previously had been not only professional but
also personal and social, began to deteriorate. 	McLaughlin would
not agree to various terms of the Otis Spunkmeyer transaction,
including consent to a noncompete agreement. 	About this same
time, McLaughlin learned of the prior stock transfer between Anna
Schenk and Greg Schenk. 	During the discussions with Otis
Spunkmeyer, McLaughlin insisted on his right of first refusal for
any sold and transferred stock. 	McLaughlin was thereafter
excluded from executive meetings. 	McLaughlin alleges that after
he asserted his right to a bonus on the asset sale of Cookietree
to Otis Spunkmeyer, Greg Schenk and Otis Spunkmeyer officers
negotiated to instead structure the sale as a stock sale.
McLaughlin continued to demand his right of first refusal and
requested documentation regarding Anna Schenk’s stock sale to
Greg Schenk.
¶9 	On August 4, 2004, Harold Rosemann, board member and
chief financial officer for Cookietree, instructed Kim
McLaughlin, McLaughlin’s wife and also an employee of Cookietree,
to tell McLaughlin to withdraw his claims or “there’s going to be
some organizational changes around here.” 	On August 17, 2004, as
a shareholder, McLaughlin made an additional request for
information regarding the Schenk stock transaction. 	That same
day Greg Schenk confronted McLaughlin and fired him. 	His notice
of termination indicated that it was without cause. 	Pursuant to
McLaughlin’s employment agreement, the termination date was not
effective for six months. 	Thus, McLaughlin continued to receive
his salary and bonuses for six months, although this compensation
was paid at his original contract rate rather than his current
salary and bonus rate. 	McLaughlin was immediately relieved of
all duties, blocked from company email, and excluded from the
corporate premises. 	When McLaughlin refused to leave, police
escorted him from the property. 	After McLaughlin’s termination,
Cookietree contacted McLaughlin’s lawyer and indicated that
“everything [was] negotiable; [they] were looking for a global
resolution.” Following his termination McLaughlin continued to
receive dividends from his Cookietree holdings. 	This income,
along with his wife’s stock dividends, comprised half of their
family’s income. 	Kim McLaughlin continued to work at Cookietree
for some time after McLaughlin’s termination.

5 	No. 20070688
¶10 	In November 2004, McLaughlin sued Cookietree and Greg
Schenk for breach of contract and breach of fiduciary duty based
on Greg Schenk’s stock acquisition. 	In March 2005, Mclaughlin
filed another suit against Cookietree and Greg Schenk for breach
of contract and breach of fiduciary duty based on McLaughlin’s
termination. 	McLaughlin also filed a derivative action. 	All
three cases were then consolidated in the district court. 	The
district court referred McLaughlin’s claims relating to his
employment contract to arbitration. 	McLaughlin was awarded
damages for Cookietree’s breach of an implied duty of good faith
and fair dealing for paying the 1992 contract salary rate for
McLaughlin’s severance pay rather than his most recent salary and
bonus rate. 	The arbitrator dismissed all other contract claims
and deferred to the district court to resolve the breach of
fiduciary duty claim relating to the termination.
¶11 	In May 2005 during an unnoticed meeting, Cookietree’s
board of directors--Greg Schenk; his wife, Gayle Schenk; and
Harold Rosemann--ratified the 1999 stock transaction by waiving
the corporation’s right of refusal. 	Around the same time, Greg
Schenk contacted Jerry Smekal, a Cookietree shareholder, and
requested that he also sign a consent and waiver ratifying the
1999 transaction. 	Smekal, who held 529,000 shares, agreed to
sign the form. 	Additionally, Greg Schenk and Harold Rosemann
also signed the shareholder consent and waiver forms,
representing 2,181,200 and 316,000 respectively, or nearly ninety
percent, of Cookietree’s shares.
¶12 	Cookietree moved to dismiss McLaughlin’s claims on
summary judgment. 	The district court granted the motion and
dismissed all pending claims, finding that Greg Schenk did not
owe any fiduciary duty to McLaughlin with respect to the
“dealings related to McLaughlin in his role as an employee” and
that Cookietree, not Greg Schenk, terminated McLaughlin from his
employment. 	Additionally, with respect to the stock transaction,
the district court found that “all of the actions taken by both
Cookietree and Mr. Schenk were within the terms of the [1991
shareholder] agreement and, to the extent certain corporate
actions were not undertaken at the time of the sale, the 2005
waiver and ratification actions were effective as a matter of
law.” 	With these findings, the district court held that it was
“unable to identify any factual claim . . . that would give rise
to a claim for breach of fiduciary duty,” and thus dismissed all
claims, but left McLaughlin with the option to “come forward with
facts and evidence that would support a breach of fiduciary duty
claim that has not already been addressed.” 	Shortly thereafter,
McLaughlin moved for permission to amend his complaint by adding
Gayle Schenk and Harold Rosemann as additional parties. 	The

No. 20070688 	6
basis for his breach of fiduciary duty claims largely remained
the same. 	The district court denied this motion holding that an
amendment would be futile because McLaughlin failed to identify
any evidence that was not addressed by the summary judgment.
McLaughlin appealed the district court’s final order. 	We have
jurisdiction pursuant to Utah Code section 78A-3-102(3)(j)
(2008).
ISSUES AND STANDARD OF REVIEW
¶13 	McLaughlin asks this court to review the district
court’s grant of summary judgment to the defendants on three
grounds. 	First, McLaughlin asks the court to determine whether
Cookietree shareholders owed McLaughlin fiduciary duties
individually, and if so whether any such duty was violated.
Second, McLaughlin requests that we review whether the board’s
and shareholders’ 2005 ratifications were “valid and effective.”
Finally, McLaughlin argues the district court abused its
discretion in denying McLaughlin’s motion to amend his complaint.
¶14 	Summary judgment “is appropriate only in the absence of
any genuine issue of material fact and where the moving party is
entitled to judgment as a matter of law.” 	S. Utah Wilderness
Alliance v. Automated Geographic Reference Ctr., 2008 UT 88,
¶ 12, 200 P.3d 643. 	Accordingly, when “reviewing a district
court’s grant of summary judgment, we review the facts and all
reasonable inferences in the light most favorable to the
nonmoving party.” 	Id. 	As to the underlying determinations, we
review legal questions, such as the scope of a shareholder’s
fiduciary duty and the validity of share transfers under the
shareholder agreement, for correctness. 	We review a district
court’s decision to deny a plaintiff’s motion to amend its
complaint for abuse of discretion. 	See Swan Creek Vill.
Homeowners Ass’n v. Warne, 2006 UT 22, ¶ 15, 134 P.2d 1122. 	We
note, however, that this discretion is not unlimited. 	Aurora
Credit Servs., Inc. v. Liberty W. Dev., Inc., 970 P.2d 1273,
1281-82 (Utah 1998).

7 	No. 20070688
ANALYSIS
I. 	SHAREHOLDERS IN CLOSELY HELD CORPORATIONS OWE
EACH OTHER ENHANCED FIDUCIARY DUTIES,
BUT Schenk DID NOT VIOLATE ANY DUTY OWED TO MCLAUGHLIN

3 In Utah, we consider a closely held corporation to be a
company in which there is “‘(1) a small number of shareholders;
(2) no ready market for corporate stock; and (3) active
shareholder participation in the business.’” 	Angel Investors,
LLC v. Garrity, 2009 UT 40, ¶ 21 __ P.3d __ (quoting Dansie v.
City of Herriman, 2006 UT 23, ¶ 17, 134 P.3d 1139).
No. 20070688 	8
¶15 	This case presents the question of whether shareholders
of closely held corporations 3--also commonly known as close
corporations--should be treated differently than shareholders of
publicly traded corporations when applying the provisions of the
Utah Revised Business Corporation Act (the Corporation Act), Utah
Code Ann. §§ 16-10a-101 to -1705 (2005 & Supp. 2008), and the
accompanying interpretive and common law case law. 	We previously
acknowledged that in close corporations it is “unlikely that
there is a disinterested board,” Aurora Credit Servs., Inc. v.
Liberty W. Dev., Inc., 970 P.2d 1273, 1280 (Utah 1998), and that
such corporations are more vulnerable to malfeasance because of
the overlapping identity of board members and majority
shareholders. 	Angel Investors, LLC v. Garrity, 2009 UT 40, ¶ 21,
__ P.3d ___. 	For these reasons, we have treated close
corporations differently by allowing shareholders in these
corporations to proceed as a class of one in derivative actions.
Id. ¶ 22. 	We also have allowed close corporation shareholders to
proceed both derivatively and directly against corporate officers
for breaches of duties owed to the corporation and to minority
shareholders. 	Aurora Credit Servs., Inc., 970 P.2d at 1280-81.
In this case we now consider whether the duties owed by
shareholders differ in closely held corporations and publicly
traded corporations, and if so, whether these duties were
breached on those facts.
A. 	The Fiduciary Duty of Shareholders in Closely Held
Corporations Is Similar to the Duty of Partners
in a Partnership
¶16 	Under the revised business code, directors and officers
are required to carry out their corporate duties in good faith,
with prudent care, and in the best interest of the corporation.
Utah Code Ann. § 16-10a-840 (2005). 	These corporate duties have
been interpreted to coincide with the common law understanding
that officers and directors owe these duties to the corporation
and shareholders collectively, not individually. 	Aurora Credit
Servs., 970 P.2d at 1280 (indicating that actions for breach of a
fiduciary duty generally belong to the corporation). 	In this
case, however, McLaughlin urges us to apply a different standard-
-the partnership standard. 	In contrast to the general standard
for corporate duties, the statutory partnership standard of care

9 	No. 20070688
has been interpreted to require the utmost good faith between
individual partners. 	Ong, Int’l (U.S.A.), Inc. v. 11th Ave.
Corp., 850 P.2d 447, 453-54 (Utah 1993) (“Normally partners
‘occupy a fiduciary relationship and must deal with each other in
the utmost good faith.’” (quoting Burke v. Farrell, 656 P.2d
1015, 1017 (Utah 1982)); Nelson v. Matsch, 110 P. 865, 868 (Utah
1910) (“[P]artners stand in a fiduciary relation to each other,
and that[]is the duty of each partner to observe the utmost good
faith towards his copartners in all dealings and transactions
that come within the scope of the partnership business.”); Utah
Code Ann. § 48-1-18 (2007).
¶17 	Whether to modify the fiduciary duty standard in
closely held corporations is an issue of first impression for
this court. 	Numerous other states have considered the question,
and; we look to their analyses and to the Corporation Act’s
language and structure to guide our determination. 	See Arndt v.
First Interstate Bank of Utah, N.A., 1999 UT 91, ¶ 17, 991 P.2d
584 (indicating that in the absence of Utah precedent, the court
looks to Utah statutes and “case law from other jurisdictions for
guidance”).
¶18 	McLaughlin urges us to follow the partnership-like duty
standard originally articulated by Massachusetts courts and
subsequently adopted by several other states. 	Beginning with
Donahue v. Rodd Electrotype Co. of New England, 328 N.E.2d 505
(Mass. 1975), Massachusetts changed the landscape of duties owed
by shareholders in close corporations. 	Relying on (1) the
resemblance between close corporations and partnerships, (2) the
need for trust and confidence in such companies, and (3) the
inherent risk of loss due to shareholders’ inability to recoup
their investments, the Massachusetts court imposed on close
corporation shareholders the same duties owed by partners--utmost
good faith and loyalty to all shareholders of the corporation.
Id. at 515. 	Compared to the fiduciary duty owed by directors and
stockholders of public corporations, the court found this duty to
be “more rigorous” than the “somewhat less stringent” corporate
duty of “good faith and inherent fairness.” 	Id. at 515-16. 	The
Donahue court explained, “stockholders in close corporations must
discharge their management and stockholder responsibilities in
conformity with this strict good faith standard. 	They may not
act out of avarice, expediency or self-interest in derogation of
their duty of loyalty to the other stockholders and to the
corporation.” 	Id. at 515. 	The Massachusetts courts have
repeatedly upheld and applied this standard. 	See O’Brien v.
Pearson, 868 N.E.2d 118, 124 (Mass. 2007); Zimmerman v. Bogoff,
524 N.E.2d 849, 853 (Mass. 1988); Wilkes v. Springside Nursing
Home, Inc., 353 N.E.2d 657, 663 (Mass. 1976). 	The Donahue

No. 20070688 	10
standard has also been adopted by other jurisdictions. 	Hollis v.
Hill, 232 F.3d 460, 468 (5th Cir. 2000) (noting that Donahue’s
“recognition of special rules of fiduciary duty applicable to
close corporations has gained widespread acceptance.”); Orchard
v. Covelli, 590 F. Supp. 1548, 1559 (W.D. Pa. 1984). 	(“The duty
of utmost good faith and loyalty in the context of closely[]held
corporations has been recognized by a number of courts
confronting similar fact situations.”).
¶19 	The defendants, however, urge this court to follow the
minority position, which has been adopted by Delaware and Texas.
The minority position narrowly construes the duties of
shareholders in a closely held corporation and differentiates
between a person’s status as employee and shareholder. 	In Riblet
Products Corp. v. Nagy, for example, the Delaware Supreme Court
noted that Delaware had not adopted Massachusetts’ approach to
fiduciary duties, but instead imposed identical duties on
shareholders of closely held corporations and public
corporations. 	683 A.2d 39 n.2 (Del. 1996); accord Hoggett v.
Brown, 971 S.W.2d 472, 488 (Tex. App. 1997) (“[A] co-shareholder
in a closely held corporation does not as a matter of law owe a
fiduciary duty to his co-shareholder.”). 	Additionally, the
Delaware Supreme Court distinguished between the plaintiff’s
rights as a stockholder and his contractual rights as an
employee. 	Riblet Prods. Corp., 683 A.2d at 40. 	While the court
noted the Riblet plaintiff had not alleged that his termination
amounted to a wrongful freeze-out of his stock interest, in
subsequent cases where the plaintiff has made such allegations,
other courts following Delaware’s approach have determined that
any injury caused by a termination decision would only be an
injury to an individual’s employment interests and not to his
interests as a stockholder. 	Berman v. Physical Med. Assocs.,
Ltd., 225 F.3d 429, 433 (4th Cir. 2000). 	At least one court has
described this approach as being more predictable because it
treats all corporations the same way. 	Bagdon v.
Bridgestone/Firestone, Inc., 916 F.2d 379, 383-84 (7th Cir. 1990)
(comparing Ohio’s Donahue fiduciary duty standard for close
corporations to Delaware’s traditional standard). 	The Delaware
approach thus stands in sharp contrast to the fiduciary duty
standard followed by the majority of states.
¶20 	Presented with two divergent approaches, we must assess
which approach best suits Utah’s corporate law scheme. 	Our
Corporation Act does not provide explicit guidance, as it does
not directly address close corporations or duties between
shareholders. 	However, considering the Act as a whole and its
specific provisions together, such as the duties imposed on
directors and the dissolution remedy explicitly outlined, Utah

11 	No. 20070688
Code Ann. §§ 16-10a-840, -1430(b), we believe it is apparent that
the legislature intended to protect shareholders from oppression
and misconduct by those in control. 	To construe the Act’s
provisions to require the same fiduciary duties for publicly held
and closely held corporate shareholders would not adequately
protect close corporation shareholders. 	This is because the
Model Business Code, on which the Utah Corporation Act was based,
was developed largely in the context of publicly held
corporations and the common law surrounding their governance.
See Model Bus. Corp. Act Ann. Introduction (2009) (“[T]he Model
Act does not geenerally distinguish between publicly held and
privately held corporations.” 	Additionally, the Model Act “was
amended in 1990 and 2006 “to provide greater certainty and more
flexibility to non-public corporations.); See also F. Hodge
O’Neal, Robert B. Thompson, & Blake Thompson, O’Neal & Thompson’s
Close Corporations and LLCs: Law and Practice § 9:21 (3d ed.
2004) (“Courts recognize that the usual default rules of
corporate law affect close corporations differently from large
publicly held corporations . . . .”). 	Close corporations differ,
however, in significant ways, and when these differences result
in undesired outcomes, we have interpreted the Corporation Act in
a way that achieves the intent and goal of the Act as a whole.
This is a trend followed by many courts. 	See Melrose v. Capital
City Motor Lodge, Inc., 705 N.E.2d 985, 990 (Ind. 1998) (“Courts
have traditionally interpreted fiduciary duties differently for
closely[]held corporations as opposed to publicly held
corporations for which most of the statutory norms were
established.”).
¶21 	As discussed in Angel Investors and Aurora, the form of
closely held corporations subjects shareholders to distinct
challenges in protecting their investment. 	These core
characteristics, and other common elements, lead to what has been
referred to as the close corporation trap. James M. Van Vliet,
Jr. & Mark D. Snider, The Evolving Fiduciary Duty Solution for
Shareholders Caught in a Closely Held Corporation Trap, 18 N.
Ill. U. L. Rev. 239, 242 (1998); see also F. Hodge O’Neil, Robert
B. Thompson, & Blake Thompson, O’Neal and Thompson’s Close
Corporations and LLCs: Law and Practice § 9:2 (3d ed. 2004)
(noting that a close corporation shareholder “does not have a
partner’s power to dissolve the enterprise and get out” and
similarly does not have the “exit option” of selling her shares
in a securities market available to shareholders of publicly held
corporations). 	Shareholders in close corporations lack a ready
market for their shares. 	This means that closely held
corporation shareholders have no liquidity in their shares, see
Donahue, 328 N.E.2d at 515 (“No outsider would knowingly assume
the position of the disadvantaged minority.”), and have no avenue

4 At the time Donahue was decided, Massachusetts did not
have a statutory remedy for oppression. 	Many of the states that
have followed suit have enacted minority oppression statutory
remedies--usually dissolution--but allow distinct actions for
breaches of the Donahue duties. 	See e.g., Walta v. Gallegos Law
Firm, P.C., 40 P.3d 449, 457 (N.M. Ct. App. 2001) (“[D]rawing on
our partnership case law, we hold that breach of this fiduciary
duty can be asserted as an individual claim separate from the
remedies available under our statutory corporate law for
oppressive conduct.”); Balvik v. Sylvester, 411 N.W.2d 383, 388-
89 (N.D. 1987) (holding that statute governing corporations
allowed “alternative equitable remedies not specifically stated
in the statute”); Baker v. Commercial Body Builders, Inc., 507
P.2d 387, 395 (Or. 1973) (“[C]ourts are not limited to the remedy
of dissolution, but may, as an alternative, consider other
appropriate equitable relief.”).
No. 20070688 	12
for price discovery other than the costly process of acquiring an
independent valuation for the company. 	Without an available
market in which to sell their interest in a company, minority
shareholders who disagree with the direction or governance of the
close corporation must rely on contractual or statutory remedies,
which are often nonexistent, impractical, or inadequate. 	Id.
This, in effect, leaves the shareholder with no remedy for the
abuses and oppression that may result due to the small number of
shareholders, the frequency of familial and other personal
relationships, and the likelihood that majority shareholders
control the board in close corporations. 	Though the Act provides
for dissolution, this is often a drastic remedy that may not
serve the interest of the complaining shareholder and certainly
not the corporation of which he is a part owner.
¶22 	Without a market remedy, shareholders in close
corporations are easily subjected to freeze outs, squeeze outs,
and other forms of oppression, which the Corporation Act aims to
prevent. 	Thus, the Massachusetts approach of recognizing broader
fiduciary duties in closely held corporations better achieves the
goals of the Act by stemming shareholder oppression and is the
appropriate standard for evaluating fiduciary relationships among
shareholders in a closely held corporation. 	Our adoption of the
Massachusetts standard is a logical extension of our existing
case law regarding close corporations, which acknowledges the
unique nature of such corporations and seeks to protect their
shareholders by interpreting the Corporation Act with different
corporate circumstances in mind. 	By adopting this broader
fiduciary obligation for close corporation shareholders,
alternative remedies exist for oppressed shareholders, 4 such as

13 	No. 20070688
an equitable claim for dissolution or a claim for breach of
fiduciary duty.
¶23 	Having concluded that shareholders in closely held
corporations owe their coshareholders fiduciary obligations, we
now consider whether the Defendants breached these duties in this
case.
B. 	A Shareholder Violates His Duty of Utmost Good Faith
When He Thwarts Another Shareholder’s Reasonable
Expectations of Benefits Derived From
Ownership in the Corporation
¶24 	Breaches of the fiduciary duty owed by close
corporation shareholders arise in several circumstances, the
facts of which commonly overlap. 	These circumstances have been
identified as unequal treatment, frustration of reasonable
expectations of involvement, and a freezeout or squeezeout.
James M. Van Vliet, Jr. & Mark D. Snider, The Evolving Fiduciary
Duty Solution for Shareholders Caught in a Closely Held
Corporation Trap, 18 N. Ill. U. L. Rev. 239, 252 (1998). 	In all
cases there is a common element--a shareholder’s investment
expectation in a close corporation is frustrated by another
shareholder’s actions. 	Brodie v. Jordan, 857 N.E.2d 1076, 1079-
80 (Mass. 2006) (noting that examples of breaches of duty share
the common element of majority shareholders frustrating minority
shareholders’ reasonable expectation of benefit from their
ownership of shares); Douglas K. Moll, Shareholder Oppression v.
Employment At Will in the Close Corporation: The Investment Model
Solution, 1999 U. Ill. L. Rev. 517, 520-21 (1999) (arguing that
investment model “reconciles the doctrines of shareholder
oppression and employment at will”); James M. Van Vliet, Jr. &
Mark D. Snider, The Evolving Fiduciary Duty Solution for
Shareholders Caught in a Closely Held Corporation Trap, 18 N.
Ill. U. L. Rev. 239, 252 (1998).
¶25 	Analyzing breach of fiduciary claims in this light,
courts have narrowed the potentially broad duty espoused by
Donahue to a more investment-based analysis. 	Brodie, 857 N.E.2d
at 1079 (Mass. 2006) (“A number of other jurisdictions . . . also
look to shareholders’ ‘reasonable expectations’ in determining
whether to grant relief to an aggrieved minority shareholder in a
close corporation.”). 	For example, beginning again with
Massachusetts, in Wilkes v. Springside Nursing Homes, Inc., the
Massachusetts Supreme Court described the termination of an
officer from the close corporation as a squeezeout that
“effectively frustrate[d] the minority stockholder’s purpose in
entering on the corporate venture and also den[ied] him an equal

No. 20070688 	14
return on his investment.” 	353 N.E.2d 657, 663 (Mass. 1976).
The Wilkes court then explained the importance of balancing a
shareholder’s expectations with the reasonable and legitimate
business interests of the other shareholders. 	Id. 	“Therefore,
when minority stockholders in a close corporation bring suit
. . . alleging a breach of the strict good faith duty,” courts
“must carefully analyze the action taken by the controlling
stockholders in the individual case” and ask “whether the
controlling group can demonstrate a legitimate business purpose
for its action.” 	Id.
¶26 	Under this standard for fiduciary duty protection, the
termination of an employee is not always a breach of fiduciary
duty. 	See Merola v. Exergen Corp., 668 N.E.2d 351, 354-55 (Mass.
1996). 	In Merola the court found the plaintiff’s termination was
not a breach of fiduciary duty because the plaintiff’s investment
in the corporation was not tied to employment in any formal way.
Id. 	Comparing the facts in Merola to the facts in Wilkes, the
court noted that in Wilkes the policy and practice of the
corporation was to divide the profits of the corporation equally
by way of salaries to the shareholders who participated in the
operation of the corporation. 	This distribution of the company’s
resources was based on the fact that under the corporation’s
long-standing policy, employment with the corporation went “hand
in hand with stock ownership.” Id. at 354. 	The corporation in
Merola, on the other hand, had no such policy. 	And, while the
plaintiff may have expected continued employment, the value of
his shares were independent of his employment status. 	Id. 	This
was evidenced by the fact of the increase in the value of his
stock and a lack of indication that he was required to purchase
stock to keep his job. 	Id. 	The court also noted the plaintiff
was not a founding member of the corporation, a fact considered
by other courts as well. 	Id.
¶27 	“Not every discharge of an at-will employee of a close
corporation who happens to own stock in the corporation gives
rise to a successful breach of fiduciary duty claim.” 	Id. at
355. 	Instead, the court must consider the formal policies and
practices of the close corporation, and how these policies and
practices are interpreted by and impact all shareholders to
determine whether or not a shareholder’s reasonable expectations
were thwarted. 	As the North Dakota Supreme Court has explained,
when considering an allegation of oppressive conduct, a court
should review
what the majority shareholders knew, or
should have known, to be the petitioner’s
expectations in entering the particular

5 The district court found that Cookietree, not Schenk,
terminated McLaughlin’s employment, and therefore, Schenk was not
liable for any damages caused by terminating McLaughlin. 	This
was incorrect. 	Schenk terminated McLaughlin as the president of
Cookietree and is liable if in doing so he breached a fiduciary
duty, including his duty to discharge both his “management and
stockholder responsibilities in conformity with this strict good
(continued...)
15 	No. 20070688
enterprise. 	Majority conduct should not be
deemed oppressive simply because the
petitioner’s subjective hopes and desires in
joining the venture are not fulfilled.
Disappointment alone should not necessarily
be equated with oppression.
Balvik v. Sylvester, 411 N.W.2d 383, 387 (N.D. 1987) (quoting
Matter of Kemp & Beatley, Inc., 473 N.E.2d 1173, 1179 (N.Y. App.
Div. 1984)); see also Fox v. 7L Bar Ranch Co., 645 P.2d 929, 933
(Mont. 1982). 	This close consideration of shareholders’
expectations is necessary to ensure that corporations are not
crippled and kept from efficiently operating their business; it
is well accepted that corporate officers “must have a large
measure of discretion . . . in declaring or withholding
dividends, deciding whether to merge or consolidate, establishing
the salaries of corporate officers, dismissing directors with or
without cause, and hiring and firing corporate employees.”
Wilkes, 353 N.E.2d at 663.
¶28 	Applying the foregoing principles to this case, we
conclude that Cookietree did not thwart McLaughlin’s investment
expectation. 	McLaughlin was not a founding member who created
the company with the expectation of employment. 	Instead, after
the corporation was well established, McLaughlin was recruited
for his specialized experience in similar industries. 	His
primary reason for joining Cookietree was employment. 	This
employment allowed him to purchase stock in Cookietree, but he
was not required to do so. 	And, while it is likely that his
initial stock purchase allowance and the later stock purchase
agreement were offered as an incentive or reward for McLaughlin’s
work performance, the purchase allowances were not inextricably
tied to his employment; they were a separate investment in the
company. 	In addition to his stock purchases, and unlike the
plaintiff in Wilkes, McLaughlin was paid a competitive salary for
his contributions to the company. 	His investment in the company
was separately rewarded through the payment of dividends, which
he continued to receive after his termination. 	Therefore, in
terminating McLaughlin, Schenk 5 did not thwart McLaughlin’s

5 (...continued)
faith standard.” 	Wilkes, 353 N.E.2d 657, 662 	(Mass. 1976)
(quoting Donahue, 328 N.E.2d at 515)); see also Armed Forces Ins.
Exch. v. Harrison, 2003 UT 14, ¶ 19, 70 P.3d 35 (“[A]n officer or
director of a corporation is not personally liable for torts of
the corporation or of its other officers and agents merely by
virtue of holding corporate office, but can only incur personal
liability by participating in the wrongful activity.”) (quoting
3A William Meade Fletcher, Fletcher Cyclopedia of the Law of
Private Corporations § 1137, at 209 (rev. ed. 2002)).
No. 20070688 	16
investment expectations in the company and therefore did not
violate any duty owed to McLaughlin.
¶29 	McLaughlin also argues that Rosemann and Schenk
breached the fiduciary duty they owed to McLaughlin by
transferring and later ratifying the stock transaction between
Anna Schenk and Greg Schenk. 	This allegation is dependent,
however, on McLaughlin’s claim that the transfer was unlawful;
all stock transactions promote the parties’ interests, and
therefore only breach a duty when they are accomplished in an
unfair or unlawful manner. 	Therefore, we next consider whether
the stock transaction violated Cookietree’s corporate charter or
the Corporation Act.
II. 	THE Schenk TRANSACTION DID NOT VIOLATE THE CORPORATE CHARTER
OR THE CORPORATION ACT, BUT THE WAIVERS WERE
TAINTED BY A CONFLICT OF INTEREST
¶30 	The 1991 and 1999 shareholder agreements limit the
transfer of shares by imposing first rights of refusal on any
share transfer. 	If a shareholder wishes to sell or otherwise
transfer his shares, the shareholder must first offer Cookietree
the opportunity to purchase the shares. 	If Cookietree declines
to purchase the stock, then the corporation’s shareholders have a
right to purchase a portion of the offered shares equal to the
percentage of the company’s shares they already own. 	Under the
agreements, “[a]ny sale or transfer . . . shall be null and void
unless the terms, conditions, and provisions of this Agreement
are strictly observed and followed.” 	The limitation on share
transfers may be waived by a “duly authorized action of
[Cookietree’s] Board of Directors, or by the Shareholders, upon
the express written consent of the owners of at least two-thirds
of the Shares . . . (excluding those Shares owned by the selling
shareholder).”
¶31 	The transfer of shares from Anna Schenk to Greg Schenk
did not conform to the first right of refusal provision;

17 	No. 20070688
therefore it was void unless the waivers by the Board and three
of Cookietree’s shareholders were valid. 	McLaughlin argues that
the ratification of the Schenk transaction was invalid because
the waivers were based on an expired Shareholder Agreement, were
untimely, violated Cookietree’s bylaws, and, in the case of the
Board waiver, was a conflicting interest transaction under the
Corporation Act. 	We disagree that the waivers were enacted
without authority, were untimely, or were in violation of
Coookietree’s bylaws or of statutory conflict of interest
provisions. 	However, we acknowledge the waivers were tainted by
a conflict of interest and thereby remand for a determination of
whether they were fair.
¶32 	First, the stock transaction between Anna and Greg
Schenk is subject to the 1991 Shareholder Agreement. 	McLaughlin
argues that the waivers were invalid because the initial
transaction occurred when the 1991 Shareholder Agreement was in
effect but the waiver occurred after the Agreement was superseded
by the 1999 Agreement. 	Where there was no lapse between the two
agreements, there was no such contractual no-mans land. 	The
share transfer and waiver were part of the same transaction and
are governed by either the 1991 Agreement or the 1999 Agreement,
both of which provide for a waiver of the agreement’s limitations
on share transfers. 	In this case, the transaction occurred in
August 1999 and the 1999 Shareholder Agreement became effective
in November 1999. 	Therefore, the 1991 Agreement is the
controlling document. 	Whether the waiver was invalid because it
was acquired so long after the share transfer is an issue of
timeliness, not authority.
¶33 	Pursuant to the Corporation Act, the waiver was timely.
McLaughlin argues the waivers, obtained over six years after the
stock transfer, could not have been timely as a matter of law,
and therefore the issue should have been submitted to a jury.
McLaughlin is correct that whether or not ratification actually
occurred is a question of fact. 	However, he fails to cite any
disputed issues of fact that would have prevented the district
court from determining the question as a matter of law on summary
judgment. 	There is no dispute that the waivers were obtained,
nor is there a challenge to the date of the waivers or the
involved parties. 	Under the Corporation Act, the waivers are
effective as of the date indicated by the board of directors in
the waiver and consent. 	Utah Code Ann. § 16-10a-821(2); see also
2A William Meade Fletcher, Cyclopedia of the Law of Private
Corporations § 782 (rev. ed 2009). 	McLaughlin relies on agency
law to argue that the Board should not be allowed to execute the
waiver and consent after so much time had elapsed because it
would be unfair and disadvantageous to him. 	To persuade this

No. 20070688 	18
court to adopt such an equitable principle, McLaughlin must
present a developed common law principle or a strong policy
reason to support its adoption. 	He has not argued either.
Therefore, we rely on the plain language of the Corporation Act,
which allows the board to act retroactively by assigning ex post-
facto effective dates to their actions. 	As presented to the
district court, McLaughlin did not present any disputed fact that
would foreclose the district court from determining as a matter
of law that the waivers were timely.
¶34 	Additionally, the waivers did not violate Cookietree’s
bylaws. 	McLaughlin argues the shareholder waiver violated
Cookietree’s bylaws because the shareholders signed the waivers
without a noticed shareholder meeting, and that an action taken
without a meeting must be signed by all the shareholders entitled
to vote, whereas he and his wife were not asked to sign. 	The
shareholder waiver, however, is governed by the 1991 Shareholder
Agreement, which does not require the votes of all shareholders
entitled to vote, but instead only two-thirds of the
shareholders. 	While this may conflict with the bylaws, the
Corporation Act allows a corporation to enter a separate
shareholder agreement that governs the management and affairs of
the corporation and the relationships among the shareholders
despite a conflict with the bylaws so long as it does not violate
public policy. 	Utah Code Ann. § 16-10a-732. 	Therefore, because
the shareholder agreement allowed two-thirds of Cookietree’s
shareholders to waive provisions of the shareholder agreement
without a shareholder meeting, the waivers did not violate
Cookietree’s bylaws.
¶35 	Turning to the Corporation Act, we hold the waivers
were not statutory conflict of interest transactions within its
terms. 	McLaughlin argues the waivers were conflict of interest
transactions because each of the board members that signed the
waiver had a conflict of interest. 	We agree with Greg Schenk’s
argument that the statute does not apply. 	Under the Corporation
Act, a person is considered to have a conflict of interest if he
has an interest in “a transaction effected or proposed to be
effected by the corporation or by any entity in which the
corporation has a controlling interest.” 	Id. § 16-10a-850(1)
(emphasis added). 	In this case, the statute does not apply to
the waiver because it was not itself a transaction. 	As explained
by the comments to the Model Business Corporation Act, which the
Utah Revised Business Corporation Act adopted, a transaction is a
two-sided deal, not a unilateral action by the corporation.
Model Bus. Corp. Act Ann. ch. 8-F, introductory cmt. (2009). 	The
waiver, as enacted by the board of directors, was a unilateral

6 The statutory conflict of interest provisions address the
same concerns presented by nontransaction conflicts of interest.
Nontransaction conflicts of interest, however, are much less
common in publicly held corporations and therefore because the
Corporation Act was drafted in the context of such corporations,
see supra ¶ 20, it fails to address such situations.
19 	No. 20070688
action by Cookietree, not a “deal”; therefore, it is not subject
to the conflict of interest statute. 	Id.
¶36 	This conclusion, however, does not end our analysis.
“Many situations arise in which a director’s [or shareholder’s]
personal economic interest is or may be adverse to the economic
interest of the corporation, but which do not entail a
‘transaction’ by or with the corporation.” 	Id. 	These situations
are no less concerning because on the surface they appear to
suffer from the same lack of probity and fair dealing as
statutory conflict of interest transactions. 	The law does not
ignore such troubling circumstances, but instead leaves the
treatment of such situations “for development under the common
law.” 	Id. 	The Model Act suggests the procedures designed to
deal with statutory conflicts of interest provide a useful
strategy for dealing with such situations as a matter of common
law. 	Id. 	We agree. 6
¶37 	The procedures provided in the conflict of interest
statute most appropriately address nontransaction-related
conflict situations because they do not automatically invalidate
conflict of interest transactions but instead require the party
with a conflict to show the transaction was fair, or require the
vote of disinterested board members or disinterested shareholders
to ratify the transaction. 	Utah Code Ann. § 16-10a-851 (2005).
In adopting these procedures for nontransaction-related
conflicts, we recognize that many aspects of corporate governance
are unfair. 	However, as close corporation case law repeatedly
notes, close corporations are ripe for abuse and oppression of
minority shareholders, especially when majority shareholders are
commonly both directors and board members. 	The conflict of
interest statute protects against such abuse, but still preserves
the ability of close corporations to operate by not invalidating
every transaction with a conflict of interest.
¶38 	Applying this standard, we conclude the waivers
ratifying the 1999 share transfer were tainted by a conflict of
interest because they were both executed by Greg Schenk, who
clearly had an economic interest in waiving the share transfer
restrictions of the shareholder agreement that were ignored when
he received the shares by which he gained majority control of

No. 20070688 	20
Cookietree. 	By waiving the restrictions on the share transfers,
Schenk and the other board members and voting shareholders
deprived the company and the nonvoting shareholders of the
economic opportunity to increase their investment in the
corporation. 	Corporate law is wary of such self-dealing.
Cookietree’s shareholder agreement also was wary of such
activities and excluded sellers from voting on waiving the
restrictions on share transfers. 	The agreement failed, however,
to foresee the possible conflicts presented when a buyer is
already a corporate shareholder and votes to waive the
restrictions on share transfers. 	We therefore remand for a
determination of whether the waivers were fair within the meaning
of Utah Code section 16-10a-851, which is a fact-intensive
inquiry focusing on whether the waivers were beneficial to the
corporation and the shareholders and whether they satisfied the
standard of fair dealing. 	See Model Bus. Corp. Act Ann. ch.8-F,
§ 8.60.
III. 	A TRIAL COURT MAY DENY A MOTION FOR LEAVE
TO AMEND WHEN THE AMENDMENT WAS FUTILE
¶39 	In its Ruling and Order, the district court did not
dismiss McLaughlin’s fiduciary duty claim but rejected the
grounds on which he pled the claim, leaving open the opportunity
to amend the complaint so long as he met the burden of alleging
new facts and evidence that would support a claim of breach of
fiduciary duty that had not already been addressed by the court.
When McLaughlin submitted an amended complaint that added two
additional parties but relied on largely the same facts, the
district court denied this motion.
¶40 	When considering a motion to amend, the district court
should primarily consider whether the motion would cause
unavoidable prejudice to the opposing party. 	Aurora Credit
Servs., Inc. v. Liberty W. Dev., Inc., 970 P.2d 1273, 1282 (Utah
1998). 	In addition, the district court may also consider “delay,
bad faith, or futility of the amendment.” 	Id. 	In this case, the
district court correctly held that McLaughlin’s proposed amended
complaint would have been futile as the court already determined
that interparty contracts barred the existence of any duty owed
to McLaughlin in relation to the complained of acts. 	A party
cannot obtain a different outcome by adding to the parties or
rephrasing claims.
¶41 	McLaughlin argues the district court had only ruled on
fiduciary duties arising out of existing contracts and that his
amended complaint raised tort-based theories of fiduciary duties.
This is an inaccurate characterization of the district court’s

21 	No. 20070688
determination and, moreover, a distinction without a difference.
Regardless of how McLaughlin phrases his claims, they are the
same theory: Cookietree shareholders breached their fiduciary
duty to McLaughlin by waiving the right of refusal for the 1999
stock transaction and by terminating his employment. 	Whether
this theory is characterized as arising out of contract or tort,
it is the same theory--a tort for breach of duty. 	Thus, we hold
the district court did not abuse its discretion because
McLaughlin’s amendment failed to state new facts or a new theory
that had not already been addressed by the court; an amendment
would have been futile.
CONCLUSION
¶42 	We agree with McLaughlin that shareholders in close
corporations stand in fiduciary positions to one another and are
required to act with the utmost good faith. 	However, we also
note this duty is not unlimited but instead must be balanced with
the legitimate business interest of the corporation and the
reasonable expectations of individual shareholders. 	In this
case, however, we hold that McLaughlin’s reasonable expectations
were not thwarted when he was terminated from Cookietree, and
therefore, the defendants did not breach any fiduciary duties
owed him. 	The district court’s decision on this issue is
affirmed. 	Additionally, we affirm the district court’s decision
to deny McLaughlin’s attempt to amend his complaint to add
additional parties as futile because he could not prove his legal
theory by adding individuals to the litigation. 	Finally, we
conclude that the waivers ratifying the 1999 share transfer were
contaminated by a conflict of interest and remand for a
determination of whether the waivers were fair.
---
¶43 	Associate Chief Justice Durrant, Justice Wilkins,
Justice Parrish, and District Judge Hadfield concur in Chief
Justice Durham’s opinion.
¶44 	Having disqualified himself, Justice Nehring does not
participate herein; District Judge Ben H. Hadfield sat.