An operating agreement or shareholder agreement is the private rulebook for a closely held company, and in Massachusetts it matters more than in many states because the default rules that apply without one can be surprising. The Massachusetts LLC Act lets a member resign on six months’ notice and demand the fair value of his or her interest, and the Supreme Judicial Court has imposed strict fiduciary duties on owners of close corporations for half a century. A Massachusetts operating agreement attorney drafts the document that replaces those defaults with rules the owners actually chose. Holmes Law is the practice of Michael Holmes, an attorney admitted in Massachusetts and five other states, and it prepares and reviews operating agreements and shareholder agreements for Massachusetts businesses remotely.
This page explains the default rules of G.L. c. 156C and c. 156D that a well-drafted agreement overrides, how far Massachusetts lets owners modify fiduciary duties, the management, capital, transfer and deadlock provisions that do most of the work, how owners leave and companies dissolve, and the standard Massachusetts courts use to pierce the corporate veil. It sits under the Massachusetts business law practice page and pairs with the pages on entity formation and buy-sell agreements. It is general information, not advice for a specific company.
The Default Rules You Are Overriding
Most owners never read the statute behind their entity, and many assume the law will do something sensible if a problem arises. The statutory defaults are sensible for the legislature’s purposes, but they rarely match what a particular group of owners would have agreed to.
Massachusetts LLC Defaults Under Chapter 156C
- Management: Under § 24, an LLC is managed by its members unless the operating agreement designates managers, and when there are no managers each member may sign documents and act for the company.
- Profits and losses: Under § 29, profits and losses are allocated by the agreed value of the members’ contributions as shown in the company’s records, not per capita and not by any informal understanding.
- Resignation: Under § 36, even if the operating agreement prohibits resignation, a member may resign on at least six months’ prior written notice. A resignation that violates the operating agreement exposes the member to damages, which the company may offset against amounts owed to him or her.
- Payout on resignation: Under § 32, unless a written operating agreement provides otherwise, a resigning member is entitled to receive, within a reasonable time, the fair value of the interest as of the resignation date.
- Transfers: Under §§ 39 and 41, a member may assign economic rights, but the assignee becomes a member only with the approval of all other members or as a written operating agreement provides.
- Creditors: Under § 40, a member’s judgment creditor may obtain a charging order, and to the extent charged has only the rights of an assignee.
The resignation and payout rules are the ones that most often catch Massachusetts owners off guard. Without a written agreement, a member who resigns can demand fair value, and the company may have to find the cash. A carefully drafted operating agreement can set the price, the payment terms and the conditions under which a departing member is paid.
Massachusetts Corporation Defaults Under Chapter 156D
For corporations, the defaults come from the Business Corporation Act and the company’s bylaws. The board manages the business, shareholders elect directors and approve fundamental changes, shares are freely transferable unless restricted, and the corporation must have a president, treasurer and secretary under § 8.40. Restrictions on transferring shares must comply with § 6.27, and they bind a holder who lacked actual knowledge only if they are noted conspicuously on the certificate or in the information statement for uncertificated shares.
Shareholder Agreements Under § 7.32
Massachusetts adopted the Model Act’s shareholder agreement provision in c. 156D, § 7.32. It allows the shareholders of a corporation whose shares are not publicly traded to depart from the normal corporate structure in ways that would otherwise be invalid. A § 7.32 agreement may eliminate the board of directors or restrict its discretion, govern distributions, establish who will be directors and officers and how they are chosen or removed, allocate voting power, transfer management authority to shareholders, and require dissolution at the request of one or more shareholders or on a specified event.
The price of that flexibility is formality. The agreement must be set out in the articles or bylaws and approved by all persons who are shareholders at the time, or in a written agreement signed by all of them. Its existence must be noted conspicuously on the share certificates or information statements, and it terminates automatically if the shares become listed on a national securities exchange. An agreement signed by most but not all shareholders may still be an enforceable contract among its signers, but it does not have the special statutory effect of § 7.32.
Fiduciary Duties and How Far They Can Be Modified
The Donahue Duty in Close Corporations
Massachusetts is known for protecting minority owners of closely held businesses. In Donahue v. Rodd Electrotype Co. of New England, 367 Mass. 578 (1975), the Supreme Judicial Court held that shareholders in a close corporation owe one another a duty of utmost good faith and loyalty, similar to the duty partners owe each other. In Wilkes v. Springside Nursing Home, Inc., 370 Mass. 842 (1976), the court refined that rule: a controlling group may show a legitimate business purpose for its action, and the minority may then show that the same objective could have been achieved through a less harmful alternative. These cases are the foundation of Massachusetts “freeze-out” litigation, in which a minority owner claims the majority has cut off salary, dividends, or a role in management to force a sale at a low price.
LLC Fiduciary Duties and § 63(b)
For LLCs, c. 156C, § 63(b) provides that, to the extent members or managers have fiduciary duties at law or in equity, those duties may be expanded or restricted by the operating agreement, and a member or manager is not liable for good faith reliance on the provisions of the operating agreement. In Allison v. Eriksson, 479 Mass. 626 (2018), the Supreme Judicial Court applied fiduciary principles to members of a closely held Massachusetts LLC in a dispute over a merger that eliminated a minority member’s contractual protections, and it upheld equitable relief rather than limiting the minority member to a payout. The lesson for drafters is that Massachusetts courts will look at both the operating agreement and the fiduciary relationship. The statute speaks of expanding or restricting duties rather than eliminating them, and it protects good faith reliance, so an agreement that tries to strip away all duties invites litigation over what remains.
Director Exculpation in Corporations
A corporation’s articles may limit or eliminate a director’s personal liability for monetary damages for breach of fiduciary duty under c. 156D, § 2.02(b)(4), but the statute does not permit elimination of liability for breaches of the duty of loyalty, acts not in good faith or involving intentional misconduct or knowing violations of law, improper distributions, or transactions from which the director derived an improper personal benefit. The Donahue duty that shareholders owe one another is a separate obligation, and a well-drafted shareholder agreement defines expectations about employment, compensation and distributions so the owners’ reasonable expectations are written down rather than argued about later.
Management Structure
The operating agreement or shareholder agreement should state plainly who makes which decisions. In an LLC, the first choice is between member management and manager management. Manager management concentrates authority in one or more managers and is often the better fit when some members are passive investors. Either way, the agreement should list major decisions that require a supermajority or unanimous approval, such as selling substantially all assets, admitting new members, borrowing above a threshold, entering transactions with an owner or an owner’s relatives, changing the business’s line of work, or filing for bankruptcy. Because § 24 lets each member or manager sign for the company by default, the agreement should also limit signing authority where appropriate and state who may sign real estate documents, consistent with the certificate of organization. In a corporation, similar protections are built into the bylaws and the shareholder agreement, including board composition rights for significant holders.
Capital Contributions and Capital Calls
The agreement should record each owner’s initial contribution and its agreed value, since under § 29 those values drive allocations if nothing else is said. It should then address what happens when the business needs more money. A capital call provision states who can call for additional capital, how much notice is given, and what happens if an owner does not contribute. The common remedies are dilution of the non-contributing owner, treating another owner’s advance as a loan with priority repayment, or a reduction in the non-contributor’s share of distributions. Each has tax and fairness implications, and Massachusetts courts will scrutinize a capital call that looks designed to squeeze out a minority owner under the Donahue and Wilkes framework, so the mechanism should be neutral on its face and applied consistently.
Transfer Restrictions
Closely held owners almost always want to control who their co-owners will be. The agreement should require consent for transfers, give the company or the other owners a right of first refusal or first offer, allow permitted transfers to family members and estate planning trusts, and bind any transferee to the agreement. For LLCs, the statute already prevents an assignee from becoming a member without approval under § 41, but a clear contractual restriction avoids disputes over what an assignee receives. For corporations, restrictions must meet § 6.27 and be legended on the certificates. Transfer restrictions dovetail with the buyout triggers covered on the buy-sell agreements page, and owners who hold interests through a revocable trust should make sure that transfer is expressly permitted.
Deadlock
Two equal owners who disagree can paralyze a business, and the statutes offer only blunt remedies. For corporations, c. 156D, § 14.30 allows shareholders holding at least 40 percent of the voting power to seek judicial dissolution where the directors are deadlocked, the shareholders cannot break the deadlock and irreparable injury is threatened or occurring, or where the shareholders are deadlocked and have failed for a period including at least two consecutive annual meeting dates to elect successor directors, again with irreparable injury. For LLCs, c. 156C, § 44 allows the Superior Court to decree dissolution whenever it is not reasonably practicable to carry on the business in conformity with the certificate or the operating agreement.
Dissolution is rarely what either owner wants. A well-drafted agreement provides escalating alternatives: a cooling-off and negotiation period, mediation, a neutral tie-breaking director or adviser for defined issues, and, as a last resort, a buy-sell mechanism such as a “shotgun” clause in which one owner names a price and the other must either buy or sell at that price. Shotgun clauses work best between owners with similar financial resources; where one owner is wealthier, an appraisal-based buyout or a put right may be fairer.
Dissociation, Resignation and Dissolution
The agreement should say what happens when an owner leaves, whether voluntarily, through retirement, disability or death, or because of misconduct. For LLCs, § 36’s six-month notice right means that a flat prohibition on resignation does not prevent a member from leaving; what the agreement can do is define the consequences. Under § 32, the written operating agreement can set what a resigning member receives, including a formula price, installment payments, or a reduced price for resignation in breach. Under § 43, an LLC dissolves at a time or on an event specified in the operating agreement, on the written consent of all members, or on a judicial decree, so the agreement should also say whether and how the business continues if a key member dies. Section 42 addresses the powers of a deceased or incompetent member’s representative, and the agreement should coordinate those powers with the buy-sell terms. For corporations, dissolution requires board and shareholder action under c. 156D, and a § 7.32 agreement may allow a shareholder to require dissolution on specified events.
Veil Piercing in Massachusetts
A well-drafted agreement also supports the liability shield. Massachusetts courts disregard the corporate form only in rare situations. The Supreme Judicial Court’s approach traces to My Bread Baking Co. v. Cumberland Farms, Inc., 353 Mass. 614 (1968), and in Attorney General v. M.C.K., Inc., 432 Mass. 546 (2000), the court identified twelve factors, including common ownership, pervasive control, confused intermingling of business activity and assets, thin capitalization, nonobservance of corporate formalities, absence of corporate records, no payment of dividends, insolvency at the time of the transaction, siphoning of funds by the dominant shareholder, nonfunctioning officers and directors, use of the corporation for transactions of the dominant shareholders, and use of the corporation to promote fraud. In Scott v. NG U.S. 1, Inc., 450 Mass. 760 (2008), the court reiterated that piercing is permitted only in rare situations. Courts apply similar reasoning to LLCs. Separate bank accounts, adequate capitalization, written documentation of owner transactions and an agreement that is actually followed are the practical defenses.
Frequently Asked Questions
Is an operating agreement required in Massachusetts?
The statute does not require an LLC to have a written operating agreement, but several of the most important defaults, including the resigning member’s right to fair value under § 32 and the procedures for admitting assignees under § 41, can be changed only by a written agreement. In practice every multi-member LLC should have one, and single-member LLCs benefit from one as well.
Can a member leave a Massachusetts LLC even if the agreement says no?
Yes. Section 36 allows a member to resign on at least six months’ written notice regardless of a prohibition in the operating agreement, but if the resignation breaches the agreement, the company may recover damages and offset them against amounts owed to the departing member.
Can a Massachusetts operating agreement eliminate fiduciary duties?
Section 63(b) allows duties to be expanded or restricted and protects good faith reliance on the agreement. Whether an attempt at total elimination would be enforced is uncertain, and Massachusetts courts take minority protection seriously, so tailored modification is more reliable than blanket waiver.
What is a freeze-out claim?
It is a claim by a minority owner that the majority has used its control to deprive the minority of the benefits of ownership, such as employment, compensation, dividends or information, often to force a sale. It is based on the Donahue and Wilkes line of cases and has been applied in the LLC context.
Does a § 7.32 shareholder agreement need every shareholder’s signature?
Yes, to have the statute’s special effect, the agreement must be approved by all shareholders at the time it is made, either in the articles or bylaws or in a written agreement signed by all of them.
Speak With a Massachusetts Operating Agreement Attorney
The best time to write the rules is while the owners still agree. Michael Holmes drafts and reviews Massachusetts operating agreements and shareholder agreements, explains how the statutory defaults would apply to your business, and tailors management, capital, transfer and exit terms to your situation. Holmes Law also represents owners reviewing an existing agreement before a dispute or a sale. To schedule a consultation, contact Holmes Law.