Litle v. Waters

Litle (plaintiff) and Waters (defendant) formed two corporations, agreeing that Waters would provide the capital for the companies and Litle would manage them. Waters owned two-thirds of the stock, and Litle owned one-third. Although Litle and Waters elected to treat the companies as Subchapter S corporations, which meant the corporations’ income flowed through to them and made them personally liable for the taxes on the corporations’ earnings, they never formally agreed that the companies would pay dividends to cover the taxes. Subsequently, Waters fired Litle and merged the two companies into a new corporation in which Litle retained a one-third interest. The new company was profitable. Waters, who was the majority shareholder, chief executive officer and board chair, used available corporate funds to start repaying the loan he had made to one of the original companies. The corporation did not declare dividends, forcing Litle to find alternative sources of funds to pay the substantial tax liability he incurred as a result of the Subchapter S corporation election. Litle sued Waters for breach of fiduciary duty, alleging that Waters’s actions favored one group of stockholders at the expense of another. Waters moved to dismiss the complaint, arguing that the decision whether to pay dividends rested in the discretion of the board of directors in the exercise of its business judgment, and that the decision was protected absent a showing that the board oppressively or fraudulently abused its discretion.