Recent Massachusetts decision addresses shareholder remedies

Issue May/June 2017 May 2017 By David A. Parke

On March 6, 2017, the Massachusetts Supreme Judicial Court issued a decision that illustrates the limited remedies available to shareholders challenging the merger of a Massachusetts corporation. In Local No. 129 Benefit Fund v. Joseph M. Tucci et al., 476 Mass. 553 (Mass. 2017), shareholders of a publicly traded Massachusetts corporation claimed that the directors breached their fiduciary duties by failure to take actions to maximize the value of the corporation's stock and by agreeing to unreasonable deal protection provisions that discouraged the possibility of better bids.

This action began as a direct suit against the corporation's board of directors. The SJC held that the shareholders' claim should have been pursued as a derivative claim on behalf of the corporation, and not as a direct claim, against the directors. The court based its decision largely on the language of M.G.L. c. 156D, Section 8.30(a). Section 8.30(a) which says that a director must discharge the director's duties "(1) in good faith; (2) with the care that a person in a like position would reasonably believe appropriate under similar circumstances; and (3) in a manner the director reasonably believes to be in the best interests of the corporation." The court indicated that because these clauses are conjunctive and conclude by requiring that the director's actions must be in a manner reasonably believed to be in the best interests of the corporation, the directors' duties run to the corporation, and not the shareholders.

The court also indicated that a statement in a 2007 SJC decision (Chokel v. Genzyme Corp.), that directors owe a fiduciary duty to shareholders, was too broad. The court acknowledged that there are certain circumstances, not present in this case, where a director may have a direct duty to a shareholder. One involves close corporations, where Massachusetts common law recognizes that directors' duties of loyalty run to shareholders. Another situation involves where a controlling shareholder/director causes a self-interested transaction to the detriment of minority shareholders.

The result was that the SJC approved dismissal of the plaintiffs' complaint, because the challenge to the directors' actions was not brought as a derivative action on behalf of the corporation. While the corporation may arguably have suffered damage if the directors' actions exposed the corporation to unreasonably restrictive agreements, the loss from an unreasonably low merger price more directly harms the shareholders. Under the court's decision, a shareholders' lost value may not be directly recoverable in many situations.

This outcome contrasts with how a similar loss to shareholders of a Delaware corporation would be treated under Delaware law. In Tooley et al. v. Donaldson, Lufkin & Jenrette, Inc. et al., 845 A.2d 1023 (Del. 2004), the Delaware Supreme Court addressed a claim of loss by shareholders resulting from the directors' action to delay a merger of the corporation. The Delaware court had to determine if the shareholders' claim could only be made derivatively on behalf of the corporation, or could be made directly against the directors. The Delaware court held that the analysis must be based on the nature of the wrong and whether the relief should go to the shareholders or to the corporation. In the Delaware case, because there was no claim of injury to the corporation, the court found no basis to require shareholders to assert a derivative, rather than a direct, claim against the directors.

It is interesting also to note that the Massachusetts Business Corporation Act differs from the Model Business Corporation Act with respect to some provisions relating to directors' duties. The Model Act has language that indicates that directors have duties to both the corporation and its shareholders in sections dealing with standards of liability for directors and with the corporation's right to have exculpatory provisions in its charter that limit the liability of directors. Such language in the Model Act, referring specifically to directors' liability to shareholders, is missing from the Massachusetts Business Corporation Act. In addition, Section 8.30(a) of the Massachusetts Business Corporation Act has the unusual language, carried over from Chapter 156B, the older Massachusetts Business Corporation Law, which says that in determining what is in the corporation's best interest, the directors may consider constituencies and factors other than the shareholders.

It thus appears that some non-standard language in the Massachusetts Business Corporation Act led the court to limit the recourse of shareholders where, in other states, the shareholders would likely have direct claims arising from merger transactions.