Shareholders, officers and directors of Massachusetts corporations, as well as their lawyers, will be guided by a recent decision of the Supreme Judicial Court for years to come. Justice Margot Botsford, in one of her last and finest written opinions, neatly clarified the law on suits for breach of corporate fiduciary duty in Massachusetts, distinguishing it from that of Delaware and other jurisdictions.
The case arose from disputes about the sufficiency of shareholder compensation in the wake of a merger between EMC, Dell Inc., and Denali Holding Inc. The plaintiffs, in a series of companion cases, alleged that EMC CEO Joseph M. Tucci and EMC’s board of directors engineered a deal that discouraged bidders other than Dell from coming forward, and shut down discussion of more lucrative types of sell-off transactions by means of a $2 billion termination fee imposed on any competitive bidder.
Justice Botsford’s 21-page decision in International Brotherhood of Electrical Workers Local No. 129 Benefit Fund vs. Tucci, et al. rejected the plaintiffs’ attempt to sue Tucci and the directors directly for damages, rather than suing them derivatively on behalf of the corporation, which would have required a formal demand and 90-day response time prior to suit.
The decision clearly affirmed the rule of Massachusetts law that a corporate director “owes a fiduciary duty to the corporation itself, and not to its shareholders,” except in cases involving closely held corporations, which operate more like partnerships, and those cases where a controlling shareholder-director implements a self-interested transaction.
The court also rejected the plaintiffs’ plea to conform Massachusetts law with that of other jurisdictions, including Delaware, which “treat the plaintiffs’ type of claim – a challenge to the fairness of a merger transaction on the ground that consideration is inadequate – as a direct rather than a derivative claim.” The court held that the result should hinge solely on whether the alleged breach of duty was one owed to the corporation or to the shareholders directly.
According to the plaintiffs, following the statutory procedures for a derivative claim would have proved ineffective because the defendants could have concluded the merger within the 90-day response time after demand for relief, extinguishing the shareholder status of the plaintiffs. But the court countered that “if the plaintiffs had filed suit after having made such a demand… and it appeared that the proposed merger might be completed while the suit was pending, the plaintiffs could have sought preliminary injunctive relief.”
The court also rejected the plaintiffs’ claim that Massachusetts law is predicated on the assumption of a director’s fiduciary duty to shareholders just because it prohibits any bylaw limitation of a director’s liability for breach of fiduciary duty. “We interpret the section to mean that if a director owes a fiduciary duty… liability for a breach of that duty may not be eliminated through the vehicle of a bylaw,” the court concluded.
This decision amplifies the management-friendly nature of Massachusetts corporate law from a corporate governance perspective, and it will force dissenting shareholders to seek early injunctive relief in prospective merger transactions.