International Brotherhood of Electrical Workers Local No. 129 Benefit Fund v. Tucci , 476 Mass. 553 ( 2017 )

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SJC-12137
INTERNATIONAL BROTHERHOOD OF ELECTRICAL WORKERS LOCAL NO. 129
BENEFIT FUND1 vs. JOSEPH M. TUCCI & others2 (and eight
consolidated cases3).
Suffolk. November 7, 2016. - March 6, 2017.
Present: Gants, C.J., Botsford, Lenk, Hines, Gaziano, Lowy, &
Budd, JJ.
Corporation, Stockholder's derivative suit, Merger, Sale of
assets, Valuation of stock, Board of directors. Practice,
Civil, Class action, Dismissal.
1
Individually and on behalf of all others similarly
situated.
2
Joseph M. Tucci, Jose E. Almeida, Michael W. Brown, Donald
J. Carty, Randolph L. Cowen, James S. Distasio, John R. Egan,
William D. Green, Edmund F. Kelly, Jami Miscik, Paul Sagan,
Laura J. Sen, EMC Corporation, Denali Holding Inc., Dell Inc.,
and Universal Acquisition Co.
3
Breffni Barrett vs. Joseph M. Tucci & others; City of
Miami Police Relief and Pension Fund vs. Joseph M. Tucci &
others; Karl Graulich IRA & others vs. Joseph M. Tucci & others;
Lawrence Frank Vassallo vs. EMC Corporation & others; Howard
Lasker vs. EMC Corporation & others; Local Union No. 373 U.A.
Pension Plan vs. EMC Corporation & others; City of Lakeland
Employees' Pension and Retirement Fund vs. Joseph M. Tucci &
others; Su Ma vs. Joseph M. Tucci & others.
2
Civil actions commenced in the Superior Court Department on
October 15, October 16, October 19, October 20, October 23,
October 28, and October 29, 2015.
After consolidation, a motion to dismiss was heard by
Edward P. Leibensperger, J.
The Supreme Judicial Court granted an application for
direct appellate review.
Jason M. Leviton (Michael G. Capeci, of New York, & Joel A.
Fleming also present) for International Brotherhood of
Electrical Workers Local No. 129 Benefit Fund & others.
Thomas J. Dougherty (Kurt Wm. Hemr also present) for Joseph
M. Tucci & others.
John Pagliaro & Martin J. Newhouse, for New England Legal
Foundation, amicus curiae, submitted a brief.
Ian D. Roffman & Matthew J. Connolly, for Associated
Industries of Massachusetts, amicus curiae, submitted a brief.
BOTSFORD, J. In these consolidated cases, shareholders of
a publicly traded corporation claim that a merger transaction
proposed by the board of directors will result in the effective
sale of the corporation for an inadequate price. The question
we consider is whether they may bring that claim directly
against the board members, or must bring it as a derivative
claim on behalf of the corporation. We answer that the claim
must be brought derivatively.4
4
We acknowledge the amicus briefs submitted by Associated
Industries of Massachusetts and New England Legal Foundation.
3
Background. The plaintiffs appeal from the dismissal of
their first amended class action complaint (complaint)5 alleging
breaches of fiduciary duty by the board of directors of EMC
Corporation (EMC) arising from a merger between EMC and Denali
Holding Inc. and Dell Inc. (collectively, Dell). At the time
that they commenced these actions, the plaintiffs were
shareholders of EMC; the proposed merger would result in the
shareholders receiving a cash payment in exchange for their EMC
stock. The plaintiffs' complaint alleges that they bring the
actions on behalf of a class consisting of "all other
shareholders of EMC . . . who are or will be deprived of the
opportunity to maximize the value of their shares of EMC as a
result of the [directors'] breaches of fiduciary duty and other
misconduct." The plaintiffs assert that the members of EMC's
board of directors violated their fiduciary duties, allegedly
owed to both EMC and the shareholders, by "(i) failing to take
steps to maximize the value of EMC stock; and (ii) agreeing to
unreasonably preclusive deal protection provisions, thereby
hindering any potential bid that may have been superior" to the
sale of EMC to Dell.
5
The first amended class action complaint (complaint) was
filed by the International Brotherhood of Electrical Workers
Local No. 129 Benefit Fund (IBEW). The actions brought by the
other plaintiffs were consolidated with IBEW's action prior to
the dismissal of the complaint.
4
We recite the pertinent facts alleged in the complaint,
taking as true its factual allegations and drawing all
reasonable inferences in the plaintiffs' favor. Blank v.
Chelmsford Ob/Gyn, P.C., 420 Mass. 404, 407 (1995). EMC is a
Massachusetts corporation providing information technology
products and services in a global market, with its principal
place of business in Hopkinton. Its stock is traded on the
NASDAQ stock exchange.
EMC has a federation structure; that is, it acts as parent
company to numerous related but independently functioning
businesses. The defendant Joseph M. Tucci, the long-time chief
executive officer of EMC and the architect of this federated
structure, wanted to keep the federation of companies together.
This caused EMC's shares to trade at a "conglomerate discount"
because investors valued the large company less than they would
its individual components. In the fall of 2014, an investor in
EMC, Elliott Management (Elliott), began advocating for EMC to
sell off the most valuable subsidiaries of the federation to
provide maximum value to EMC's shareholders; the individual
sales of some or all of EMC's subsidiaries would yield higher
value per share for EMC shareholders than would sale of the
company as a whole. Elliott argued for an alternative to the
conglomerate discount in which VMware, one of EMC's most
valuable subsidiaries, would be sold separately and EMC would
5
inquire into acquisition for the remaining components. Tucci,
fearing that Elliott would prevail in breaking up the EMC
federation, reached an agreement with Elliott in January, 2015,
by which Elliott was permitted to participate in the appointment
of new directors but agreed to a limit on stock it could buy for
a period of time. Tucci and EMC used this period to strategize
the sale of the company to Dell. Tucci had scheduled his
retirement several times, but continually extended the date. He
negotiated the sale of EMC and all its subsidiaries to Dell via
his long-time friend and business associate, Michael Dell, in
order to keep the company's federated structure intact. Tucci
is to receive approximately $27 million in "change-in-control"
benefits as a result of selling the entire company, a sum that
Tucci would not have received if he had retired as planned. The
proposed transaction also permits Dell to shelter significant
tax liability and to retain the value locked in the subsidiaries
through a potential break-up of the EMC federation in the
future.
In October, 2015, Tucci announced that Dell agreed to
acquire all of EMC for approximately $67 billion.6 Tucci used
his influence over the other board members to convince them to
approve the merger. The transaction was unanimously approved by
6
There appears to be a discrepancy in the complaint as to
the exact value of the transaction. Both $67 billion and $64
billion are figures used to describe its value.
6
the board and announced on October 12, 2015. In approving the
proposed merger, the board also agreed to termination fees that
further dissuaded competing companies from placing a higher bid
on EMC than Dell: the merger agreement between EMC and Dell
included a $2 billion termination fee that any higher bidder
would have to pay before it could top the Dell bid.
Under the proposed transaction's terms, EMC shareholders
are to receive $24.05 in cash per share and an estimated 0.111
shares of "tracking stock" of VMware; the tracking stock does
not provide the same rights that shares in VMware common stock
provide. According to Elliott, selling EMC's interest in VMware
separately would have yielded a total value for EMC's
shareholders of over forty dollars per share. In addition, just
before the transaction was announced, VMware announced a new
business venture with an expected revenue of several hundreds of
millions of dollars in 2016. This value would have been
realized by EMC shareholders, but as a result of the transaction
will be realized by Dell.
The plaintiff International Brotherhood of Electrical
Workers Local No. 129 Benefit Fund (IBEW) filed a complaint on
October 15, 2015, as a direct action against members of EMC's
board of directors in their individual capacities. The
defendants moved to dismiss the complaint for failure to state a
claim pursuant to Mass. R. Civ. P. 12 (b) (6), 365 Mass. 754
 7
(1974), after which eight other actions were consolidated with
IBEW's action. After a hearing, the judge allowed the motion,
ruling that the board owed no fiduciary duty directly to the
shareholders in this case and that the action was necessarily
derivative because any alleged harm to shareholders was not
distinct from harm to the corporation. He reasoned that there
were no allegations that any EMC shareholder would receive more
per share in this proposed transaction than any other
shareholder, nor were there allegations that any one shareholder
or group of shareholders controlled the company to assure a
positive vote on the transaction. A judgment of dismissal
entered on December 24, 2015. The plaintiffs timely filed an
appeal, and we subsequently granted the plaintiffs' application
for direct appellate review.7
Discussion. The parties agree that EMC is a large,
publicly traded Massachusetts corporation, and that the
corporate statute under which it operates is the Massachusetts
Business Corporation Act, G. L. c. 156D (act). They also agree
that the plaintiffs' legal claim is one for breach of fiduciary
7
The defendants inform us in their brief that at a special
shareholder meeting held on July 19, 2016, ninety-eight per cent
of voting EMC shareholders voted to approve the merger
transaction. See Form 8-K submitted by EMC Corporation to
United States Securities and Exchange Commission (Sept. 9,
2016), available at https://www.sec.gov/Archives/edgar/data/
790070/000119312516706576/d258881d8k.htm [https://perma.cc/8KTL-
XAGW].
8
duty by the members of EMC's board of directors and particularly
by Tucci for failing to take steps to maximize the value of the
shareholders' EMC stock in arranging for the merger transaction.
As indicated at the outset, the principal question raised is
whether the plaintiffs, as shareholders who challenge the
fairness or validity of a proposed merger on the ground that it
will effectively result in the sale of EMC and for them a loss
of personal property -- their EMC stock holdings -- for an
inadequate price, must bring their claim against the directors
as a derivative action on behalf of the corporation, or may
bring it directly on their own behalf. We review the judge's
allowance of the motion to dismiss de novo. Curtis v. Herb
Chambers I-95, Inc., 458 Mass. 674, 676 (2011).
1. Derivative actions and claims. "The derivative form of
action permits an individual shareholder to bring 'suit to
enforce a corporate cause of action against officers, directors,
and third parties.' . . . Devised as a suit in equity, the
purpose of the derivative action was to place in the hands of
the individual shareholder a means to protect the interests of
the corporation from the misfeasance and malfeasance of
'faithless directors and managers'" (emphasis in original;
citations omitted). Kamen v. Kemper Fin. Servs., Inc., 500 U.S.
90, 95 (1991).
"The derivative action seeks, after management has failed
9
or refused to act, to redress a wrong to a corporation or
association (usually by a few of its shareholders or
members) . . . . [T]he wrong underlying a derivative
action is indirect, at least as to the shareholders. It
adversely affects them merely as they are the owners of the
corporate stock; only the corporation itself suffers the
direct wrong . . . . [A] complaint alleging mismanagement
or wrongdoing on the part of corporate officers or
directors normally states a claim of wrong to the
corporation: the action, therefore, is properly
derivative" (emphasis in original; citation omitted).
Jackson v. Stuhlfire, 28 Mass. App. Ct. 924, 925 (1990). See
Bessette v. Bessette, 385 Mass. 806, 809-810 (1982) (plaintiff
minority stockholders' claim that majority stockholder and
director was paid excessive salary qualifies as wrong to
corporation that plaintiffs were required to pursue as
derivative claim; plaintiffs' direct action against majority
stockholder properly dismissed). To determine whether a claim
belongs to the corporation, and is therefore derivative, "a
court must inquire whether the shareholders' injury is distinct
from the injury suffered generally by the shareholders as owners
of corporate stock" (citation omitted). Stegall v. Ladner, 394
F. Supp. 2d 358, 364 (D. Mass. 2005) (applying Massachusetts
law).
2. Direct versus derivative. As the plaintiffs recognize,
whether a claim asserted by stockholders of a Massachusetts
corporation is one that may be pursued directly by them against
the corporation's directors or must be pursued derivatively
depends on whether the harm they claim to have suffered resulted
10
from a breach of duty owed directly to them, or whether the harm
claimed was derivative of a breach of duty owed to the
corporation. See Bessette, 385 Mass. at 809. See also Stegall,
394 F. Supp. 2d at 364, quoting Branch vs. Ernst & Young U.S.,
U.S. Dist. Ct., No. Civ. A. 93-10024-RGS (D. Mass. Dec. 22,
1995). The plaintiffs also recognize that the act's provisions
defining the standards of conduct applicable to corporate
directors governs, or at least has a direct bearing on, the
determination whether corporate directors owe a fiduciary duty
directly to the corporation's shareholders. We turn to the act.
3. The act. Section 8.30 of the act defines the standards
of conduct a director of a Massachusetts corporation is required
to follow. The section provides in relevant part:
"(a) A director shall discharge his duties as a
director, including his duties as a member of a committee:
"(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. In
determining what the director reasonably believes to be in
the best interests of the corporation, a director may
consider the interests of the corporation's employees,
suppliers, creditors and customers, the economy of the
state, the region and the nation, community and societal
considerations, and the long-term and short-term interests
of the corporation and its shareholders, including the
possibility that these interests may be best served by the
continued independence of the corporation.
11
". . .
"(c) A director is not liable for any action taken as
a director, or any failure to take any action, if he
performed the duties of his office in compliance with this
section."
G. L. c. 156D, § 8.30.
The plaintiffs argue that the provisions of § 8.30 (a)
demonstrate that corporate directors owe a fiduciary duty to
shareholders, but the logic and thread of their argument are
difficult to follow. They claim that the standards set out in
§ 8.30 (a) (1)-(3) are "conjunctive," and directors are required
to "satisfy all three prongs," but then assert that in fact the
three "prongs" are separate. They reason that although § 8.30
(a) (3) speaks directly about a duty owed by a director to the
corporation, § 8.30 (a) (1) as well as § 8.30 (a) (2) --
presumably by not explicitly referencing a duty owed to the
corporation -- "delineate duties owed to both the corporation
and its shareholders" (emphasis in original).
The plain words of the statute contradict the plaintiffs'
interpretation. By its terms, § 8.30 (a) sets forth the three
components of a unitary standard that is to govern a corporate
director in performing all the duties and actions he or she
performs as a director.8 That is, the plaintiffs' statement that
8
The comment to G. L. c. 156D, § 8.30, supports our
reading. The comment states in relevant part: "[Section 8.30]
sets forth the standard by focusing on the manner in which the
12
§ 8.30 (a) (1) through (a) (3) are to be read conjunctively is
correct: every duty and action by a director as director is to
be undertaken (1) in good faith, (2) with an appropriate level
of care, and (3) "in a manner the director reasonably believes
to be in the best interests of the corporation." Moreover,
although § 8.30 (a) (3) makes clear that a director may
consider, among other interests, "the long-term and short-term
interests of the corporation and its shareholders" (emphasis
added), it first specifies that the director may do so only in
the context of "determining what the director reasonably
believes to be in the best interests of the corporation."
Particularly in light of this specification, the plaintiffs'
proposed interpretation of § 8.30 (a) as implicitly imposing or
recognizing a fiduciary duty owed by a corporate director
directly to the shareholders must fail. Rather, both the
language and structure of § 8.30 (a) persuade us that if the
Legislature had wished to impose or recognize such a duty owed
director performs his duties, not the correctness of his
decisions, and by emphasizing the decision-making process, not
the decision itself. Section 8.30 (a) thus requires a director
to perform his duties in good faith, with the care that a person
in a like position would reasonably believe appropriate under
similar circumstances and in a manner he believes to be in the
best interests of the corporation." "The comments to [c. 156D]
were prepared by the attorneys who drafted the [a]ct and were
intended to be a valuable tool in interpreting the [a]ct."
Halebian v. Berv, 457 Mass. 620, 625 (2010).
13
to shareholders, it would have inserted into the statute an
explicit provision to that effect.9
The plaintiffs argue that our interpretation of the statute
is flawed, or in any event not dispositive of their claim,
because in Chokel v. Genzyme Corp., 449 Mass. 272, 278 (2007),
we stated that "[d]irectors owe a fiduciary duty to their
shareholders." Chokel, however, was a very different case --
even though it involved a corporation that, like EMC, was
publicly traded. The plaintiff in Chokel owned shares of the
company's biosurgery division tracking stock (biosurgery stock)
and challenged a decision of the board of directors to exchange
the biosurgery stock for the company's general division stock as
provided for in the company's articles of organization. See id.
at 273. The plaintiff claimed that the directors' decision
constituted a breach of the covenant of good faith and fair
dealing implied in those articles, and also of the fiduciary
duty owed by the directors to the shareholders. Id. In
affirming a Superior Court judge's decision allowing the
defendant directors' motion to dismiss, we concluded that,
accepting as true the allegations in the plaintiff's complaint,
9
It goes without saying that our interpretation of G. L.
c. 156D, § 8.30 (a) (1)-(3), as not imposing or reflecting a
duty owed by a corporate director to the company's shareholders
does not mean that the section authorizes a corporate director
to act in bad faith or with a lack of care that a person in a
like position would reasonably believe appropriate with respect
to the corporation's shareholders.
14
no provable set of facts presented a viable claim of breach of
the contractual implied covenant. Id. at 278. And although, as
the plaintiffs here point out, we stated that directors owe
their shareholders a fiduciary duty, we concluded that "[w]hen a
director's contested action falls entirely within the scope of a
contract between the director and the shareholders, it is not
subject to question under fiduciary duty principles." Id. But
more to the point is that, in Chokel itself, the only cases we
cited in support of the statement that corporate directors owe
their stockholders a fiduciary duty were cases that involved
close corporations. See id., citing Demoulas v. Demoulas Super
Mkts., Inc., 424 Mass. 501, 528-529 (1997), and Blank, 420 Mass.
at 408. As next discussed, although directors of close
corporations owe a fiduciary duty to the shareholders of such
corporations, that is not the rule in Massachusetts for
corporations generally. The statement in Chokel, 449 Mass. at
278, that "[d]irectors owe a fiduciary duty to their
shareholders" was not necessary to the resolution of that case,
and we think it was too broad. The statement does not apply
here.
4. Massachusetts corporate law principles. As reflected
in § 8.30 (a), its antecedent statute, G. L. c. 156B, § 65,10 and
10
General Laws c. 156B, § 65, provides in pertinent part:
15
decisions reflecting our common-law principles,11 the general
rule of Massachusetts corporate law is that a director of a
Massachusetts corporation owes a fiduciary duty to the
corporation itself, and not its shareholders -- although, as
indicated in the previous paragraph and as the motion judge
recognized, there are at least two exceptions. First, there is
a special rule for close corporations: "[i]n the case of a
close corporation, which resembles a partnership, duties of
loyalty extend to shareholders, who owe one another
substantially the same duty of utmost good faith and loyalty in
"A director, officer or incorporator of a corporation
shall perform his duties as such, including, in the case of
a director, his duties as a member of a committee of the
board upon which he may serve, in good faith and in a
manner he reasonably believes to be in the best interests
of the corporation, and with such care as an ordinarily
prudent person in a like position would use under similar
circumstances. . . . The fact that a director, officer or
incorporator so performed his duties shall be a complete
defense to any claim asserted against him . . . ."
(Emphasis added.)
11
See, e.g., Leventhal v. Atlantic Fin. Corp., 316 Mass.
194, 199 (1944) ("a stockholder does not stand in any fiduciary
relation with the other stockholders or with the directors of
the company"); Spiegel v. Beacon Participations, Inc., 297 Mass.
398, 410 (1937) ("The directors of an ordinary business
corporation often have been called trustees and their relation
to the corporation is at least fiduciary. They are bound to act
with absolute fidelity and must place their duties to the
corporation above every other financial or business
obligation"); Jernberg v. Mann, 358 F.3d 131, 137 (1st Cir.
2004) ("the same duty of trust and strict good faith owed by
directors and officers to the corporation itself did not extend
from them to the individual stockholders," discussing Goodwin v.
Agassiz, 283 Mass. 358, 360-361 [1933]).
16
the operation of the enterprise that partners owe to one
another, a duty that is even stricter than that required of
directors and shareholders in corporations generally" (footnote
omitted). Demoulas, 424 Mass. at 528-529. See Donahue v. Rodd
Electrotype Co. of New England, 367 Mass. 578, 593-594 (1975)
("stockholders in the close corporation owe one another
substantially the same fiduciary duty in the operation of the
enterprise that partners owe to one another" and direct cause of
action against directors could be maintained in this context).
Second, where a controlling shareholder who also is a director
proposes and implements a self-interested transaction that is to
the detriment of minority shareholders, a direct action by the
adversely affected shareholders may proceed. Coggins v. New
England Patriots Football Club, Inc., 397 Mass. 525, 532-533
(1986), S.C., 406 Mass. 666 (1990). Neither of these
exceptions, however, applies in this case.12 EMC is a very
12
We also consider and reject the plaintiffs' claim that
G. L. c. 156D, § 2.02 (b) (4), assumes a fiduciary duty between
directors and shareholders always exists. Section 2.02 (b) (4)
provides that a corporation may include a provision in its
bylaws limiting the liability of a director, but if it chooses
to include such a provision, it may not limit the liability of a
director for a breach of fiduciary duties owed to the
corporation or its shareholders. Id. Although this section
recognizes that a fiduciary duty may be owed by corporate
directors to the corporation's shareholders and, if so, it may
not be eliminated or limited through adoption of an exculpatory
bylaw, we interpret the section to mean that if a director owes
a fiduciary duty to the corporation's shareholders -- which we
recognize to be the case in at least the two circumstances
17
large, publicly traded corporation with over 1.9 billion shares
of stock outstanding, and there is no differential between any
class of stock or group of shareholders. This is also not a
transaction proposed by a director-majority shareholder that
affects minority shareholders adversely as compared to the
majority shareholders. As the motion judge noted, the wrong
alleged by the plaintiffs, undervaluing EMC to secure the merger
and sale of the federation of companies, qualifies as a direct
injury to the corporation, the entity to which the directors
clearly owed a fiduciary duty of good faith and loyalty.
Flowing from that alleged injury is a claimed derivative injury
to each shareholder, whose individual shares, as a consequence
of the asserted undervaluing of EMC itself, are consequently
undervalued as well. We agree with the motion judge that the
injury posited by the plaintiffs, and the alleged wrong causing
it, fit squarely within the framework of a derivative action.
Because the plaintiffs did not bring their claim as a derivative
action, their complaint was properly dismissed.13
described here in the text -- liability for a breach of that
duty may not be eliminated through the vehicle of a bylaw.
13
Derivative proceedings brought on behalf of a
Massachusetts corporation are governed by the act. Halebian,
457 Mass. at 623. See G. L. c. 156D, §§ 7.40–7.47. There is no
dispute that the plaintiffs did not follow the pertinent
requirements of the act, including the requirement of making "a
written demand . . . upon [EMC] to take suitable action." G. L.
c. 156D, § 7.42 (1).
18
5. Delaware law. In reaching this result, we necessarily
have rejected the plaintiffs' argument that shareholders
claiming the loss of their stock at an unfair price on account
of allegedly improper actions by the board of directors is a
direct rather than a derivative claim. The plaintiffs have a
response, however, which is that we should change our approach
and follow those corporate law jurisdictions, including in
particular Delaware, that treat the plaintiffs' type of claim --
a challenge to the fairness of a merger transaction on the
ground that the consideration is inadequate -- as a direct
rather than a derivative claim. See Parnes v. Bally
Entertainment Corp., 722 A.2d 1243, 1245 (Del. 1999) ("A
stockholder who directly attacks the fairness or validity of a
merger alleges an injury to the stockholders, not the
corporation . . ."). See also Tooley v. Donaldson, Lufkin, &
Jenrette, Inc., 845 A.2d 1031, 1033, 1037-1039 (Del. 2004).14 We
14
As a general matter, the plaintiffs urge us to adopt the
approach of the Delaware Supreme Court to the determination
whether a particular shareholder claim is direct or derivative.
The Delaware court has concluded that the determination in each
case must "turn solely on the following questions: (1) who
suffered the alleged harm (the corporation or the suing
stockholders, individually); and (2) who would receive the
benefit of any recovery or other remedy (the corporation or the
stockholders, individually)?" Tooley v. Donaldson, Lufkin, &
Jenrette, Inc., 845 A.2d 1031, 1033 (Del. 2004). The court in
Tooley rejected the concept that a suit must be maintained
derivatively if, as here, the claimed injury is one suffered
equally by all shareholders, concluding that the concept was
confusing and inaccurate. Id. at 1037. As we indicate in the
19
decline to do so. Delaware's General Corporation Law, Del.
Code. Ann. tit. 8, c. 1, differs from the act, and has no
equivalent of § 8.30. Delaware also has a history of asserting
that directors stand in a fiduciary relation to stockholders of
the company, in contrast to our own precedent. See In re MONY
Group, Inc. Shareholder Litig., 853 A.2d 661, 676 (Del. Ch.
2004) (board of directors "owes its fiduciary duties to
corporation and its stockholders"); Crescent/Mach I Partners,
L.P. v. Turner, 846 A.2d 963, 979 (Del. Ch. 2000) ("Directors
have an unyielding fiduciary duty to protect the interests of
the corporation and the stockholders alike").
6. Equitable relief. The plaintiffs claim that the result
we reach is unjust because even if they had sought to follow the
statutory procedures governing derivative claims, see G. L.
c. 156D, §§ 7.40–7.47, it was likely that the defendants would
have taken steps to assure that the merger occurred before any
derivative suit could be concluded, and, under our law, once the
plaintiffs were no longer shareholders, they could not have
continued to seek derivative relief because their ownership
rights in EMC would have been extinguished. We agree that if a
text, Delaware corporate law principles and those of
Massachusetts are not always congruent. We continue to adhere
to the view that whether a claim is direct or derivative is
governed by whether the harm alleged derives from the breach of
a duty owed by the alleged wrongdoer -- here the directors -- to
the shareholders or the corporation. See Bessette v. Bessette,
385 Mass. 806, 809 (1982).
20
shareholder no longer owns shares in a corporation, as a general
rule, the shareholder would no longer have standing to pursue a
derivative claim on behalf of the corporation. See Billings v.
GTFM, LLC, 449 Mass. 281, 296 (2007). But we disagree that this
means it is unfair or inequitable to require the plaintiffs and
similarly situated shareholders to pursue derivative relief in a
case such as this one.
The act clearly illustrates the procedures to follow to
bring a derivative claim. A shareholder must make a demand
pursuant to G. L. c. 156D, § 7.42. The corporation then must
determine whether it would be in the best interests of the
corporation to take over the shareholder's claim, and the
statute specifies alternative ways that the corporation may
undertake to make this determination. G. L. c. 156D,
§ 7.44 (b). If the demand is rejected, the shareholder may
commence suit, in accordance with the time requirements in
§ 7.42 (2). In this case, at any time between the time the
proposed merger transaction was announced on October 12, 2015,
and the date the merger transaction was completed, September 7,
2016, the plaintiffs could have made a derivative demand on EMC.
They did not do so.15 We find nothing in the statutory
15
Moreover, if the plaintiffs had filed suit after having
made such a demand that was rejected, and it appeared that the
proposed merger might likely be completed while the suit was
21
provisions governing derivative proceedings to indicate or
suggest that it offered the plaintiffs here, and other
shareholders in the plaintiffs' position, a hollow or inadequate
form of relief.16
Conclusion. For the foregoing reasons, the Superior
Court's order dismissing the plaintiffs' complaint is affirmed.
So ordered.
pending, the plaintiffs could have sought preliminary injunctive
relief.
16
In that regard, it is important to keep in mind that a
stockholder's derivative action is equitable in nature, and
"[e]quitable considerations are relevant." Martin v. F.S. Payne
Co., 409 Mass. 753, 760 (1991). See Samia v. Central Oil Co. of
Worcester, 339 Mass. 101, 123-124 (1959). See also Marquis
Theatre Corp. v. Condado Mini Cinema, 846 F.2d 86, 92 n.5 (1st
Cir. 1988) ("Generally speaking, any recovery in a stockholder's
derivative action suit belongs to the corporation. . . . Under
some circumstances, however, the courts have allowed the direct
compensation of minority shareholders on a pro rata basis . . ."
[emphasis in original; citation omitted]).