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.