Maz Partners LP v. Shear (In Re PHC, Inc. S'holder Litig.) ( 2018 )

United States Court of Appeals
For the First Circuit
Nos. 17-1821, 17-1904
IN RE: PHC, INC. SHAREHOLDER LITIGATION
MAZ PARTNERS LP, on behalf of itself and
all others similarly situated,
Plaintiff, Appellee/Cross-Appellant,
v.
BRUCE A. SHEAR,
Defendant, Appellant/Cross-Appellee.
APPEALS FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Patti B. Saris, U.S. District Judge]
Before
Torruella, Selya and Lynch,
Circuit Judges.
James H. Hulme, with whom Matthew Wright, Nadia A. Patel,
Arent Fox LLP, Richard M. Zielinski, Leonard H. Freiman, and
Goulston & Storrs, were on brief, for defendant.
Chet B. Waldman, with whom Jeffrey W. Chambers, Patricia I.
Avery, Adam J. Blander, Wolf Popper LLP, Norman Berman,
Nathaniel L. Orenstein, and Berman Tabacco were on brief, for
plaintiff.
July 2, 2018
SELYA, Circuit Judge. The briefs in this case read like
a law school examination covering a curriculum that ranges from
corporate law to the law of equitable remedies. The questions
presented are intricate, entangled, and in some instances novel.
The most important of them implicate Massachusetts law and include
whether a non-majority shareholder who also serves as a director
can, under certain circumstances, be deemed a controlling
shareholder; what effect, if any, shareholder ratification may
have with respect to a self-interested transaction; and whether —
in the absence of economic loss — equitable disgorgement can be
ordered as a remedy for a breach of fiduciary duty. Concluding,
as we do, that the able district judge handled the profusion of
issues appropriately, we leave the parties where we found them,
affirming both the district court's multi-million-dollar
disgorgement order in favor of the plaintiff class and the jury's
take-nothing verdict in the favor of the defendant. The tale
follows.
I. BACKGROUND
We limn the facts and travel of the case, reserving some
details for our subsequent discussions of specific issues. For
efficiency's sake, we assume the reader's familiarity with our
opinion regarding an earlier phase of this litigation. See In re
PHC, Inc. S'holder Litig. (MAZ I), 762 F.3d 138 (1st Cir. 2014).
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Until the fall of 2011, PHC, Inc. (PHC) functioned as a
publicly traded corporation focusing on behavioral healthcare.
Defendant Bruce A. Shear was a co-founder of PHC, serving as its
board chairman and chief executive officer. The company was
organized under the laws of Massachusetts, and its capital
structure featured two classes of stock: Class A shares and Class
B shares. Class A shares were publicly traded and were entitled
to one vote per share. Those shares, collectively, had the right
to elect two out of six board members. Class B shares were not
publicly traded and were entitled to five votes per share. Those
shares, collectively, had the right to elect the remaining four
board members. At the times relevant hereto, Shear held
approximately 8% of the Class A shares and approximately 93% of
the Class B shares. Given the proportion of Class B shares owned
by Shear, he had the power, practically speaking, to name a
majority of the board of directors (four out of six board members).
After PHC's stock price remained relatively flat for a
protracted period of time, the PHC board grew restless and began
to mull a variety of strategic transactions designed to enhance
shareholder equity. To this end, Shear initiated discussions about
a possible merger with Acadia Healthcare, Inc. (Acadia) in early
2011. Based on conversations with Shear — who was acting as the
de facto lead negotiator on behalf of PHC — Acadia's chief
executive officer transmitted a letter of intent, dated March 22,
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2011, to the PHC board. The letter delineated the material terms
of a proposed merger.
The merger proposal contemplated that Acadia would be
the surviving company. PHC shareholders would own 22.5% of the
merged entity and Acadia shareholders would own the remainder. To
achieve this ratio, holders of both Class A and Class B shares of
PHC would receive one-quarter share of the stock of the merged
entity in exchange for each PHC share, and the difference between
the two classes of PHC stock would evaporate. In order to
compensate Class B shareholders for relinquishing their enhanced
voting rights, they would receive an additional $5,000,000 as a
premium. Shear's ownership of approximately 93% of the Class B
shares put him in line to receive most of this premium — roughly
$4,700,000.
The letter of intent spelled out a variety of other
salient features of the proposed transaction (including Acadia's
plan to pay a special dividend to its own shareholders so as to
achieve the desired equity split). Under another provision of the
letter of intent, Shear would get to select two directors of the
merged entity — and those two directors would be the PHC
shareholders' sole designees to the new Acadia board. Finally,
the letter of intent contained a prohibition against shopping
Acadia's offer to other potential merger partners and specified
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that a termination fee would be payable if PHC backed out of the
merger.
Following receipt of Acadia's letter of intent, Shear
asked William Grieco (a PHC director) to serve as the PHC
shareholders' principal merger negotiator. Despite naming Grieco
as the point man, Shear continued to play a leading role in
negotiations. Shear's choice of Grieco was not mere happenstance.
The two men had enjoyed a lengthy professional relationship, and
Shear had previously named Grieco to the PHC board. Moreover,
Shear had arranged that, once the merger was consummated, he and
Grieco would be the two PHC designees on the new Acadia board.
As part of his new role as principal negotiator, Grieco
assumed responsibility for selecting a financial advisor to
analyze the merger and to handle stockholder communications. To
that end, the PHC board retained Stout Risius Ross, Inc. (SRR) —
a firm that proceeded to evaluate the proposed merger and provide
a fairness opinion. SRR reported that the aggregate consideration
offered to Class A and Class B shareholders, as a combined group,
was fair. Separately, it concluded that the consideration offered
to the Class A shareholders was fair. SRR was not asked to analyze
(and did not analyze) whether the $5,000,000 Class B premium was
fair to the Class A shareholders. The PHC board considered the
transaction in light of SRR's truncated fairness opinion and voted
— with Shear abstaining — to recommend the proposed merger to PHC's
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shareholders. None of the five directors who voted for this
recommendation owned any Class B shares.
On May 23, 2011, Acadia and PHC signed a merger
agreement, contingent upon shareholder approval. In anticipation
of a shareholder vote, PHC disseminated a proxy statement
chronicling the details of the anticipated merger. Among other
things, the proxy statement disclosed the $5,000,000 premium to be
paid to the Class B shareholders, noting that Shear would receive
the bulk of that payment. It also disclosed that the PHC board
had opted not to form an independent committee to evaluate the
merger proposal. Finally, it disclosed that Shear and Grieco would
serve as directors of Acadia following the merger. SRR's fairness
opinion was distributed to the shareholders along with the proxy
statement.
For the merger to be approved, at least a two-thirds
majority of Class A shares, a two-thirds majority of Class B
shares, and a two-thirds majority of Class A and Class B shares
combined had to vote in favor. On October 26, 2011, PHC
shareholders approved the merger: 88.7% of the Class A shares and
99.9% of the Class B shares voted in the affirmative. MAZ Partners
LP (MAZ), the owner of over 100,000 Class A shares, voted its
shares against the proposed merger. On November 1, the merger was
consummated, resulting in the conversion of all PHC stock into
Acadia stock. The market reacted favorably to the merger: Acadia
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stock began a long upward climb. The per-share price of Acadia
stock rose from $8 at the time of the merger to over $80 in less
than four years. MAZ did not stay aboard but, rather, sold all of
its Acadia stock in January of 2012 (at a profit).
Well before the merger took effect, MAZ repaired to a
Massachusetts state court and sued the PHC directors, seeking to
block the merger. Invoking diversity jurisdiction, the defendants
removed the action to the federal district court. See 28 U.S.C.
§§ 1332(a), 1441(b). MAZ was unsuccessful in attempting to halt
the transaction: the district court refused to enjoin the merger.
Nevertheless, MAZ continued to press its breach-of-fiduciary-duty
claims, seeking both a remedy at law (money damages) and equitable
relief.
In due course, the district court (O'Toole, J.) granted
summary judgment in favor of the defendants. MAZ appealed and
succeeded in snatching a partial victory from the jaws of defeat:
it persuaded a panel of this court to vacate the summary judgment.
See MAZ I, 762 F.3d at 145. On remand, the case was reassigned to
Chief Judge Saris. See D. Mass. R. 40.1(k). After some further
skirmishing, the district court certified a class of former Class
A shareholders who had voted against the merger, abstained from
voting, or failed to vote. MAZ was designated as the class
representative and alleged that the PHC directors, jointly and
severally, had breached their fiduciary duties by orchestrating
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the merger transaction through an unfair process and, of particular
pertinence here, by facilitating the payment of the (allegedly
inflated) $5,000,000 premium to the Class B shareholders.
The legal claims were tried to a jury (the parties
reserving the resolution of the equitable claims). During the
course of the trial, the Massachusetts Supreme Judicial Court (SJC)
decided International Brotherhood of Electrical Workers Local No.
129 Benefit Fund v. Tucci, 70 N.E.3d 918 (Mass. 2017). Premised
on their reading of this decision, the defendants moved for
judgment as a matter of law, see Fed. R. Civ. P. 50(a), arguing,
inter alia, that MAZ should have brought its claims derivatively.
The district court granted this motion in part and entered judgment
in favor of all the directors save Shear. As to the latter, the
court refused to enter judgment as a matter of law, ruling that
there was a jury question as to whether Shear was a controlling
shareholder and, thus, came within one of the Tucci exceptions.
Accordingly, the court submitted the case to the jury on the legal
claims asserted against Shear.
The jury made a series of special findings. See Fed. R.
Civ. P. 49. It found, inter alia, that Shear controlled the
board's decision to enter into the merger and that the process
undertaken to negotiate the merger was not entirely fair to the
Class A shareholders. The jury went on to find, though, that the
proof was insufficient to establish that the Class A shareholders
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had suffered any economic loss. Predicated on this finding, the
jury determined that the plaintiff class was not entitled to money
damages and returned a take-nothing verdict.
After the jury returned its verdict, MAZ (on behalf of
the plaintiff class) moved for equitable relief. Specifically,
MAZ sought disgorgement of the Class B premium based largely on
the jury's findings that Shear was not only a director but also a
controlling shareholder, that he therefore owed the shareholders
a fiduciary duty, and that he had breached that duty by arranging
the merger through a process that was not entirely fair to the
Class A shareholders. Following a hearing, the district court
agreed with MAZ, adopted the relevant jury findings, ruled that
Shear had breached his fiduciary duty, and determined that the
class was entitled to equitable relief. See MAZ Partners LP v.
Shear (MAZ II), 265 F. Supp. 3d 109, 118-21 (D. Mass. 2017).
Concluding that disgorgement was an available and
appropriate equitable remedy, the court proceeded to make a series
of calculations. First, it determined that $1,820,000 of the
$5,000,000 Class B premium represented fair compensation for the
enhanced voting rights carried by the Class B shares. See id. at
119. The remainder of the Class B premium ($3,180,000), the court
stated, was unjustified. See id. Next, the court determined that
— based on Shear's percentage ownership of the Class B shares —
"Shear's pro rata portion of the unjustified portion of the Class
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B premium" was "93.22% of $3.18 million, or $2,964,396." Id. at
120. Finally, the court ordered that Shear disgorge this amount,
and it awarded those funds to the plaintiff class, together with
interest. See id.
On a parallel track, MAZ challenged the jury verdict and
moved for a new trial with respect to the class's legal claims.
In support, MAZ contended that the district court had permitted
the introduction of unduly prejudicial evidence during the trial.
The district court denied this motion. See id. at 121-22. These
timely appeals ensued: Shear appeals the disgorgement order, and
MAZ appeals the denial of its motion for a new trial.
II. SHEAR'S APPEAL
Shear attacks the disgorgement order on several fronts.
His threshold argument is that MAZ's suit is infirm because it
should have been brought derivatively, not directly. Next, he
argues that the district court applied the wrong standards in
adjudicating MAZ's claim. Finally, he argues that the disgorgement
order was beyond the district court's authority and, even if it
was not, comprised an abuse of discretion. We deal with these
arguments sequentially.1
1
Shear has taken a blunderbuss approach and proffered a host
of other arguments. We have considered these other arguments, but
reject them out of hand as patently meritless, insufficiently
developed, or both.
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A. Direct and Derivative Actions.
The first skirmish centers on Shear's asseveration that
this suit should have been brought derivatively, not directly.
The distinction is critically important: shareholders can bring
a direct claim for their own benefit, but a derivative claim
belongs to the corporation. See Tucci, 70 N.E.3d at 923. This
distinction holds even though the law "permits an individual
shareholder to bring 'suit to enforce a corporate cause of action
against officers, directors, and third parties'" in the form of a
derivative action. Kamen v. Kemper Fin. Servs., Inc., 500 U.S.
90, 95 (1991) (emphasis omitted) (quoting Ross v. Bernhard, 396
U.S. 531, 534 (1970)). Derivative suits are subject to special
procedural guardrails designed to balance the legitimate exercise
of business judgment by corporate decisionmakers, on the one hand,
with the oversight function of corporate shareholders, on the other
hand. A claim that is brought directly when it should have been
brought derivatively is not a claim at all and, hence, is subject
to dismissal. See Tucci, 70 N.E.3d at 927.
In diversity jurisdiction, state law supplies the
substantive rules of decision. See Erie R.R. Co. v. Tompkins, 304
U.S. 64, 78 (1938). Questions of corporate law — including whether
a claim is properly classified as derivative or direct — are
generally substantive and, thus, governed by state law. See
Gasperini v. Ctr. for Humanities, 518 U.S. 415, 427 (1996); Kamen,
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500 U.S. at 99. Consistent with PHC's status as a Massachusetts
corporation, the parties agree that Massachusetts law controls in
this case.
The starting point for our inquiry is, of course, Tucci.
There, the SJC clearly articulated, for the first time, the
framework for determining which causes of action must be brought
derivatively and which can be brought directly.2 The crux of the
inquiry is "whether the harm [that shareholders] claim to have
suffered resulted 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." Tucci, 70 N.E.3d at 923. Because a
director's fiduciary duties are generally owed only to the
corporation, any suit to enforce those duties ordinarily must be
brought as a derivative action. See id. at 925-27.
We say "ordinarily" because the Tucci court identified
at least two situations in which a director's fiduciary duties are
owed to shareholders and can be enforced directly, rather than
derivatively. The first of these exceptions involves close
corporations, see id. at 926, and is plainly inapposite (PHC stock,
after all, was publicly traded, and PHC can by no stretch of even
the most lively imagination be considered a close corporation).
2MAZ argues that Tucci does not apply since the injury it
alleges is unique to a particular class of shareholders. We do
not reach this argument because — as we explain below — MAZ
prevails on a less exotic ground.
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The second exception hits closer to home: it involves situations
in which a "controlling shareholder who also is a director proposes
and implements a self-interested transaction that is to the
detriment of minority shareholders." Id. The case at hand
requires us to explore the parameters of this exception and decide
whether Shear fits within it.
To begin, Shear does not contest the self-interested
nature of the corporate transaction that gave rise to the Class B
premium. Nor can he gainsay that the jury made a special finding
of detriment: the merger was not entirely fair to the Class A
shareholders. The question, then, reduces to whether the district
court supportably determined that Shear possessed a sufficient
degree of control to be considered a controlling shareholder.3
Answering this question requires us to delve into
matters of first impression: Tucci did not elaborate on the
attributes that are necessary to distinguish a controlling
shareholder from a non-controlling shareholder. Faced with terra
incognito, we must "endeavor to predict how [the state's highest]
court would likely decide the question." Butler v. Balolia, 736
F.3d 609, 612-13 (1st Cir. 2013). We are mindful that, when making
such an informed prophecy, "[a] federal court should consult the
3Unless otherwise specifically indicated or when describing
Delaware cases, we use the term "controlling shareholder"
throughout this opinion to mean a controlling shareholder who is
also a director.
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types of sources that the state's highest court would be apt to
consult, including analogous opinions of that court, decisions of
lower courts in the state, precedents and trends in other
jurisdictions, learned treatises, and considerations of sound
public policy." Id. at 613.
At the outset, we reject out of hand Shear's insistence
upon a bright-line rule that only majority shareholders can be
controlling shareholders under Massachusetts law. He offers
little to support such a proposition. And while Shear is correct
that the SJC sometimes uses terminology reminiscent of the majority
shareholder/minority shareholder dichotomy, it has done so only in
the abstract or in cases in which those terms accurately describe
the relationship between the relevant parties. See, e.g., Tucci,
70 N.E.3d at 923-27; Coggins v. New England Patriots Football Club,
Inc., 492 N.E.2d 1112, 1119 (Mass. 1986). The SJC has given no
meaningful indication that the employment of such language was
meant to be a guiding principle for determining "controller" status
in the mine-run of future cases.
A contrary hypothesis is more compelling. The SJC's use
of the adjective "controlling" to modify "shareholder" strongly
suggests a desire to encompass a category of shareholders broader
than majority shareholders. If "controlling shareholder" meant no
more than "majority shareholder," there would be no reason at all
for the SJC to resort to the "controlling shareholder" parlance.
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Cf. United States v. Thomas, 429 F.3d 282, 286 (D.C. Cir. 2005)
(explaining that a court's obvious choice to use one phrase over
another in authoring a decision should be given interpretive weight
in applying that decision).
Another clue points in the same direction. Although the
SJC has not opined as to who might qualify as a controlling non-
majority shareholder, it has expressed a concern for the protection
of minority shareholders when a director "is dominating in
influence or in character." Coggins, 492 N.E.2d at 1118 (quoting
Lazenby v. Henderson, 135 N.E. 302, 304 (Mass. 1922)). Such a
concern would not be palliated by restricting controlling
shareholder status to majority shareholders.
The sockdolager, we think, is that Massachusetts courts
often look to Delaware law in analyzing corporate issues. See,
e.g., Brigade Leveraged Capital Structures Fund Ltd. v. PIMCO
Income Strategy Fund, 995 N.E.2d 64, 72 (Mass. 2013); Billings v.
GTFM, LLC, 867 N.E.2d 714, 722 & n.24 (Mass. 2007); Piemonte v.
New Bos. Garden Corp., 387 N.E.2d 1145, 1150 (Mass. 1979).
Delaware law has long been hospitable to interpretations of the
term "controlling shareholder" that include non-majority
shareholders. In what is generally regarded as a landmark case in
the area of corporate governance, the Delaware Supreme Court
recognized that although a non-majority shareholder usually will
not be deemed a controlling shareholder, there are exceptions.
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See Kahn v. Lynch Commc'n Sys., Inc., 638 A.2d 1110, 1114 (Del.
1994). Such a status can be established by showing, say,
"domination [of the corporation] by a minority shareholder through
actual control of corporat[e] conduct." Id. (quoting Citron v.
Fairchild Camera & Instrument Corp., 569 A.2d 53, 70 (Del. 1989));
see Weinstein Enters., Inc. v. Orloff, 870 A.2d 499, 507 (Del.
2005). Ultimately, "the analysis of whether a controlling
stockholder exists must take into account whether the stockholder,
as a practical matter, possesses a combination of stock voting
power and managerial authority that enables him to control the
corporation, if he so wishes." In re Cysive, Inc. S'holders
Litig., 836 A.2d 531, 553 (Del. Ch. 2003). We conclude that the
SJC would follow such a rule and would hold that a non-majority
shareholder who dominates a corporation through actual control of
corporate conduct may be deemed a controlling shareholder. Cf.
Butler, 736 F.3d at 612-13 (explaining that "precedents and trends
in other jurisdictions" appropriately may be consulted in
determining what a state's highest court might rule).
This gets the grease from the goose. The record contains
ample evidence to ground the conclusion that Shear dominated PHC
and had pervasive control over its affairs. As the co-founder,
board chairman, and chief executive officer, Shear was a ubiquitous
force within the company. Indeed, PHC itself acknowledged his
control in filings submitted to the Securities and Exchange
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Commission (SEC). For example, in a 2011 filing, PHC stated (under
the heading "Management Risks") that "Bruce A. Shear is in control
of the Company . . . . [He] can establish, maintain and control
business policy and decisions by virtue of his control of the
election of the majority of the members of the board of directors."
Such representations are entitled to weight in determining whether
an individual is a controlling shareholder. See In re Primedia
Inc. Derivative Litig., 910 A.2d 248, 258 (Del. Ch. 2006).
While the percentage of the corporate stock that an
individual owns is surely a relevant integer in the calculus of
control, a party who dominates a corporation and has actual control
over it should not be allowed to hide behind mere arithmetic.
Shear, however, would have us place more weight on raw numbers.
He implores us to accord decretory significance to ownership
percentages, pointing out that his stock accounted for only 20% or
so of the overall voting power. But this is too myopic a view:
there is no formulaic rule regarding what percentage of outstanding
shares is sufficient to render a shareholder "controlling."
Moreover, the case law is hostile to Shear's absolutist position.
For instance, Delaware courts have found minority shareholders to
be controlling shareholders under particular circumstances. See,
e.g., In re Cysive, 836 A.2d at 535, 553.
In the end, everything depends on context. Here, the
numerical fraction of PHC's voting power conferred by Shear's
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shares — hardly an insubstantial portion — does not fairly reflect
salient facts regarding his domination of the company and his
formidable ability to steer fundamental corporate decisions.
Control has a distinctly practical dimension and, as a practical
matter, Shear had control of PHC.
For one thing, Shear's near-complete ownership of, and
concomitant voting control over, the Class B stock guaranteed him
the power to veto corporate decisions that were not to his liking.
The power to block certain corporate paths by veto is the power to
direct the corporation to take the route preferred by the veto-
wielder. As any motorist knows, when access is denied to road
after road, a driver has little choice but to follow the detour
signs. The existence of this power, then, is a telltale sign that
Shear had significant control over PHC's affairs.
For another thing, Shear had the power to name four of
the six directors (a majority of the board). Courts often have
found that the power to appoint a substantial portion of the board
is a meaningful indicium of control. See, e.g., Lynch, 638 A.2d
at 1112-13; see also In re Primedia, 910 A.2d at 258 (finding
number of directors appointed by allegedly controlling shareholder
relevant to "control" inquiry).
In addition, "control over the particular transaction at
issue" may be sufficient to establish controller status for
fiduciary-duty purposes. In re Primedia, 910 A.2d at 257. Shear
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had such control: he was the primary negotiator of the material
terms of the PHC-Acadia merger; he remained a leading player in
the negotiations even after Acadia's letter of intent was
transmitted and he arranged for his ally, Grieco, to be designated
(at least nominally) as PHC's principal negotiator; and his
suzerainty over the Class B shares allowed him to dictate board
voting and to scuttle any merger that was not to his taste. To
cinch the matter, the jury found that "Shear controlled a majority
of the PHC Board of Directors with regard to the Board's decision
to approve the merger." That finding is amply supported by the
evidence, and we — like the court below — have no reason to
disregard it. See Jones ex rel. U.S. v. Mass. Gen. Hosp., 780
F.3d 479, 487 (1st Cir. 2015); Ira Green, Inc. v. Military Sales
& Serv. Co., 775 F.3d 12, 18 (1st Cir. 2014).
Shear tries twice over to throw sand in the gears of
this reasoning. Both attempts hark back to Tucci. First, he
argues that his control over PHC was less than that of the
defendant in Tucci. This argument, though, is smoke and mirrors:
the defendant in Tucci was not sued as a controlling shareholder,
see 70 N.E.3d at 923-27, and the SJC had no earthly reason to
determine whether he qualified as such.
Shear's second sortie fares no better. He notes that
the Tucci court spoke of a controlling shareholder's power to
"propose[] and implement[]" transactions, id. at 926, and says
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that, by himself, he could not have implemented the merger — he
needed the votes of the Class A shareholders. On its own terms,
this argument is problematic. The Tucci court gave no hint that
by using the word "implement," it meant "unilaterally implement."
In all events, such an interpretation would be overly rigid
because, among other things, it does not account for the degree of
a fiduciary's pervasive influence within the company.
That ends this aspect of the matter. As we have
indicated, control is a practical concept. It is derived from a
combination of elements. See In re Cysive, 836 A.2d at 553. Taken
in the aggregate, the combination of elements in this case easily
supports the district court's determination that Shear dominated
PHC and had actual control over its affairs (including the merger
transaction). Accordingly, the district court did not err in
holding that Shear — as the jury had found — was a controlling
shareholder within the Tucci taxonomy. It follows inexorably, as
night follows day, that MAZ's suit was appropriately brought as a
direct suit against Shear. See Tucci, 70 N.E.3d at 926.
B. Fairness.
Having found that Shear was a controlling shareholder,
the district court proceeded to determine that he had breached his
fiduciary duty to the Class A shareholders. See MAZ II, 265 F.
Supp. 3d at 118-19. In making this determination, the court
adopted a finding by the jury: that the process through which
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Shear had arranged the merger (and, in particular, the payment of
the Class B premium) was not "entirely fair" to the Class A
shareholders. Shear challenges both the applicability of the
"fairness" standard and the court's allocation of the burden of
proof on this issue.
We turn first to Shear's argument that the district court
painted with too broad a brush in instructing the jury to apply
the "fairness" standard and then turn to his argument that, in all
events, the plaintiff class should have borne the burden of proof
with respect to fairness. Since both of Shear's arguments center
on abstract questions of law, our review is de novo. See San Juan
Cable LLC v. P.R. Tel. Co., 612 F.3d 25, 29 (1st Cir. 2010);
Charlesbank Equity Fund II v. Blinds To Go, Inc., 370 F.3d 151,
158 (1st Cir. 2004).
1. Scope of the Inquiry. Endorsing Delaware's
conception of fairness as "closely related to the views expressed
in [Massachusetts] decisions," the SJC has explained that "where
one stands on both sides of a transaction, he has the burden of
establishing its entire fairness, sufficient to pass the test of
careful scrutiny by the courts." Coggins, 492 N.E.2d at 1117
(quoting Weinberger v. UOP, Inc., 457 A.2d 701, 710 (Del. 1983)).4
4 The SJC has made plain its view that fairness extends beyond
a simple finding of fair price. See Coggins, 492 N.E.2d at 1117,
1119 (explaining that fairness inquiry involves examination of
totality of circumstances, and noting that Delaware's fairness
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Coggins thus makes pellucid that fairness is an essential element
in judicial examination of intra-corporate claims involving self-
dealing.5 See id. at 1117-19; see also Bos. Children's Heart
Found., Inc. v. Nadal-Ginard, 73 F.3d 429, 433 (1st Cir. 1996)
(applying Massachusetts law and explaining that "fairness"
standard applies to fiduciary's ability to set own salary); Geller
v. Allied-Lyons PLC, 674 N.E.2d 1334, 1338 n.8 (Mass. App. Ct.
1997) (explaining that "fairness" standard applies to contract
promising fiduciary finder's fee).
Shear argues that in this instance the fairness standard
was misplaced because the majority of Class A shareholders voted
to approve the transaction. He argues, in the alternative, that
even if some judicial review was warranted, the court should have
narrowed its aperture and reviewed the alleged breach not under
the "fairness" standard but, rather, under the highly deferential
"business judgment" rule. In support of both of these arguments,
inquiry, encompassing "fair dealing and fair price," is compatible
with Massachusetts' inquiry (quoting Weinberger, 457 A.2d at
711)).
5 In Houle v. Low, 556 N.E.2d 51 (Mass. 1990), the SJC
discussed a standard that did not require a reviewing court to
examine fairness. See id. at 59. That more generous standard
only applies, though, when an independent committee has decided
not to pursue derivative breach-of-fiduciary-duty claims. See id.
Even then, the altered standard might not be satisfied if the
contested action allowed a "defendant who has control of the
corporation to retain a significant improper benefit." Id. This
case is far removed from any set of facts that might bring the
Houle standard into play.
- 23 -
he points to section 8.31 of the Massachusetts Business Corporation
Act (the Act). See Mass. Gen. Laws ch. 156D, § 8.31. That statute,
though, simply will not bear the weight that Shear loads upon it.
In relevant part, section 8.31 states that a "conflict
of interest transaction is not voidable by the corporation solely
because of the director's interest in the transaction if . . . the
material facts of the transaction and the director's interest were
disclosed or known to the shareholders entitled to vote and they
authorized, approved, or ratified the transaction." Id.
§ 8.31(a)(2). Assuming, favorably to Shear, that the merger
transaction at issue here is a "conflict of interest" transaction
within the purview of section 8.31(a)(2) — a matter on which we
take no view — the statute says what it means and means what it
says: it simply protects such a transaction from voidability.
See id. § 8.31 cmt. 1 ("Section 8.31(a) makes any automatic rule
of voidability inapplicable to transactions that are fair or that
have been approved by directors or shareholders in the manner
provided by the balance of § 8.31.").
Critically, section 8.31 is silent as to director
liability. This silence is especially telling when section 8.31
is juxtaposed with the immediately preceding section of the Act —
section 8.30. In contrast to section 8.31, section 8.30 is
explicit about the circumstances in which a director will be
shielded from liability. See id. § 8.30(c) ("A director is not
- 24 -
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."). When a legislature offers protection to a
party under one section of a statute but declines to offer the
party the same protection under a closely related section, it is
usually fair to presume that the legislature did not intend to
afford such protection under the latter section. See Duncan v.
Walker, 533 U.S. 167, 173 (2001) ("It is well settled that where
Congress includes particular language in one section of a statute
but omits it in another section of the same Act, it is generally
presumed that Congress acts intentionally and purposely in the
disparate inclusion or exclusion." (internal quotation marks and
alteration omitted)); Citizens Awareness Network, Inc. v. United
States, 391 F.3d 338, 346 (1st Cir. 2004) (stating that the "use
of differential language in various sections of the same statute
is presumed to be intentional and deserves interpretive weight").
So it is here.
Viewed against this backdrop, section 8.31 offers Shear
little shelter. Fairly read, the statute sets up shareholder
ratification as a potential protection against the voidability of
a transaction, but it does not give a controlling shareholder a
free pass for a breach of his fiduciary duty qua director. We
hold, without serious question, that section 8.31 does not afford
a conflicted director a safe harbor for a breach of his fiduciary
- 25 -
duty. See Mass. Gen. Laws ch. 156D, § 8.31 cmt. 1 ("A director
who engages in a transaction with the corporation that is not
voidable . . . is not thereby automatically protected against a
claim of impropriety on his part.").
If more were needed — and we doubt that it is — section
8.31 offers no support for the notion that the Massachusetts
legislature sought to dislodge the "vigorous" level of judicial
oversight available for breach-of-fiduciary-duty claims against
conflicted directors. Coggins, 492 N.E.2d at 1117. Section 8.31
was enacted in 2003 — at a time when Massachusetts common law
concerning self-interested fiduciaries was well-developed, and it
is a familiar tenet that when a statute addresses issues previously
governed by common law, an inquiring court should presume that —
except where explicit changes are made — the legislature intended
to retain the substance of preexisting law. See Kirtsaeng v. John
Wiley & Sons, Inc., 568 U.S. 519, 538 (2013). Shear has identified
no principled basis for refusing to honor this presumption here.6
6 The only Massachusetts cases in which shareholder
ratification appears to have been given a cleansing effect involve
close corporations. See Demoulas v. Demoulas Super Markets, Inc.,
677 N.E.2d 159, 182 (Mass. 1997); see also In re Mi-Lor Corp., 348
F.3d 294, 304 (1st Cir. 2003) (applying Massachusetts law). Such
cases have no bearing here: shareholders in close corporations
have materially different rights and responsibilities than do
shareholders in public corporations. See In re Mi-Lor Corp., 348
F.3d at 305.
- 26 -
As a fallback, Shear invites us to follow a trail blazed
by the Delaware courts, which under certain circumstances require
less searching judicial scrutiny of transactions that have been
ratified by shareholders. See, e.g., Singh v. Attenborough, 137
A.3d 151, 151 (Del. 2016); Corwin v. KKR Fin. Holdings LLC, 125
A.3d 304, 309 n.19 (Del. 2015). We conclude, though, that this
line of cases does not aid Shear's cause. Hence, we decline his
invitation. Even under the Delaware cases, shareholder
ratification does not change the scope of judicial review in the
context of conflicted transactions engaged in by a controlling
fiduciary. See In re JCC Holding Co., 843 A.2d 713, 723-24 (Del.
Ch. 2003). This limitation makes eminently good sense inasmuch as
the coercion inherent in the relationship between a controlling
shareholder and the remaining shareholders "undermine[s] the
fairness-guaranteeing effect of a majority-of-the-minority vote
condition because coerced fear or a hopeless acceptance of a
dominant power's will, rather than rational self-interest, is
deemed likely to be the animating force behind the minority's
decision to approve the merger." Id. at 723. We are confident
that the SJC would hue to this limitation and retain the fairness
standard for self-interested transactions even in the face of
shareholder ratification.
To say more on this point would be supererogatory. Given
the self-interested nature of the challenged transaction, we hold
- 27 -
that the district court did not err in subjecting the transaction
to the "fairness" inquiry elucidated in Coggins and its progeny.
2. Burden-Shifting. Having concluded that the district
court properly framed the inquiry in terms of the fairness of the
challenged transaction, we turn to Shear's remonstrance that the
court erred in assigning him the burden of proof. We start with
the general rule that, in Massachusetts, "[a] controlling
stockholder who is also a director standing on both sides of the
transaction bears the burden of showing that the transaction does
not violate fiduciary obligations." Coggins, 492 N.E.2d at 1118;
see Geller, 674 N.E.2d at 1338 n.8. Policy considerations buttress
this allocation of the burden of proof. See Coggins, 492 N.E.2d
at 1118 (noting concern for protection of minority shareholders in
presence of controlling fiduciary). At first blush, then, the
district court would appear to have been on solid footing in
holding that Shear — as a controlling shareholder and self-
interested director — bore the burden of proving that the process
underlying the merger transaction was fair to the Class A
shareholders.
Despite this general rule, Shear contends that the
burden of proof should have been shifted to the plaintiff class.
In advancing this contention, he asks us to break new ground: the
SJC has never addressed what circumstances, if any, might justify
shifting the burden from a conflicted fiduciary to complaining
- 28 -
shareholders. Shear urges us to hold that shareholder ratification
is one such circumstance.
Shear's attempt to give a cleansing effect to
shareholder ratification relies in large part on the commentary to
section 8.31 of the Act. See Mass. Gen. Laws ch. 156D, § 8.31
cmt. 2 (stating that shareholder ratification may shift the burden
of proof to the complaining party with respect to "any challenge
to the acts for which the requisite vote was obtained"). His
reliance is mislaid. As we already have explained, see supra Part
II(B)(1), the animating purpose of section 8.31 is to curtail the
common law rule making conflicted transactions automatically
voidable. See Mass. Gen. Laws ch. 156D, § 8.31 cmt. 1. There is
no issue of voidability in this case and, thus, the commentary
upon which Shear relies does not breathe life into his novel
contention.
Shear has another shot in his sling. He points to
Delaware case law suggesting that certain facts, such as full
disclosure to disinterested shareholders who subsequently ratify
a transaction, may sometimes justify shifting the burden to the
plaintiff to prove that a transaction is unfair. See, e.g., Ams.
Mining Corp. v. Theriault, 51 A.3d 1213, 1242 (Del. 2012). This
case law simply does not fit. Even in Delaware, such burden-
shifting occurs only when a pretrial determination regarding the
crucial facts can be made. See id. at 1243 (holding that "if the
- 29 -
record does not permit a pretrial determination that the defendants
are entitled to a burden shift, the burden of persuasion will
remain with the defendants throughout the trial to demonstrate the
entire fairness of the interested transaction"). No such pretrial
determination was possible here: the evidence was inconclusive as
to whether the Class A shareholders, prior to ratification, had
been sufficiently informed of the material facts of the
transaction.
We do not think that the SJC would depart from its
settled rule and shift the burden of proof on these facts. No
precedent compels (or even strongly suggests) such a result.
Massachusetts law has long imposed the burden of proving entire
fairness on a director accused of self-dealing, see Coggins, 492
N.E.2d at 1117-18, and this rule has special salience where, as
here, a case involves a controlling shareholder who is dominating
in influence, see id. Viewed through this prism, we conclude that
the Class A shareholders' approval of the merger package did not
constitute the sort of fully informed ratification that might
cleanse the transaction of the stench of self-dealing so as to
warrant a shifted burden.
C. Disgorgement.
Shear next complains that the district court erred in
ordering disgorgement of so much of the Class B premium as exceeded
what would have been a fair premium for the Class B shares.
- 30 -
Disgorgement is an equitable remedy, and we review the award of an
equitable remedy "under a bifurcated standard." State St. Bank &
Tr. Co. v. Denman Tire Corp., 240 F.3d 83, 88 (1st Cir. 2001).
The availability of an equitable remedy presents a question of law
engendering de novo review, while the decision either to award or
to refrain from awarding an available equitable remedy is reviewed
for abuse of discretion. See id. Shear's plaint implicates both
prongs of this bifurcated standard.
1. Availability. To begin, Shear asserts that
disgorgement was not an equitable remedy available to MAZ. In
support, he offers a hodge-podge of theories, all of which draw
their essence from a fundamental misunderstanding of breach-of-
fiduciary-duty claims: he insists that such claims are essentially
legal, not equitable. Shear is wrong.
A claim for breach of fiduciary duty is a claim
originating in equity. See In re Evangelist, 760 F.2d 27, 29 (1st
Cir. 1985) (Breyer, J.) ("Actions for breach of fiduciary duty,
historically speaking, are almost uniformly actions 'in equity' —
carrying with them no right to trial by jury."); see also Coggins,
492 N.E.2d at 1117 ("The court is justified in exercising its
equitable power when a violation of fiduciary duty is claimed.").
For decades, Massachusetts courts have recognized that equity
empowers them to examine putative breaches of fiduciary duty,
particularly when evidence of self-dealing exists. See, e.g.,
- 31 -
Coggins, 492 N.E.2d at 1117; Winchell v. Plywood Corp., 85 N.E.2d
313, 316-17 (Mass. 1949); Sagalyn v. Meekins, Packard & Wheat,
Inc., 195 N.E. 769, 771 (Mass. 1935). If a breach of fiduciary
duty is found, equity allows the court to order appropriate
equitable relief. See Allison v. Eriksson, 98 N.E.3d 143, 154
(Mass. 2018); Demoulas v. Demoulas, 703 N.E.2d 1149, 1169 (Mass.
1998). This remains true even when a remedy at law is also
available. See Cosmopolitan Tr. Co. v. Mitchell, 136 N.E. 403,
409 (Mass. 1922); see also Demoulas v. Demoulas Super Markets,
Inc., 677 N.E.2d 159, 178 n.32 (Mass. 1997) (explaining that even
though breach of fiduciary duty can, under certain circumstances,
form the basis for an action at law for money damages, it generally
forms the basis for an equitable cause of action).
The hallmark of equitable relief is its protean nature
and — within wide limits — a court sitting in equity may tailor
relief to fit the circumstances of a particular case. See Allison,
98 N.E.3d at 154; Demoulas, 703 N.E.2d at 1169. Within this
remedial realm, it is standard fare for a court to fashion remedies
that deny a breaching fiduciary undue gain or advantage received
by virtue of his position. See Chelsea Indus., Inc. v. Gaffney,
449 N.E.2d 320, 327 (Mass. 1983); Sagalyn, 195 N.E. at 771; Geller,
674 N.E.2d at 1337; see also Haseotes v. Cumberland Farms, Inc.
(In re Cumberland Farms, Inc.), 284 F.3d 216, 229 (1st Cir. 2002)
(applying Massachusetts law).
- 32 -
Examples abound and we invoke one to illustrate this
point. In Sagalyn, the SJC considered a series of votes by
directors who were also corporate officers, which had the effect
of raising salaries for one another. See 195 N.E. at 771. Finding
that the directors had breached their fiduciary duty, the court
upheld a decree directing that each of them must refund to the
corporation "the excess of salary [received as a result of the
vote] beyond the fair value of his services" as determined by a
special master. Id. at 771-72. The court explained that
fiduciaries have a "responsibility to refrain from taking an undue
advantage of the corporation" and that a breach of fiduciary duty
may lie "even in the absence of moral turpitude." Id. at 771.
Viewed against this backdrop, Shear's claim that
disgorgement was not an available remedy goes up in smoke. His
most loudly bruited argument — that a claim of breach of fiduciary
duty requires a showing of damages — runs headlong into a wall of
precedent. The case law holds with conspicuous clarity that when
a fiduciary has secured an undue advantage by virtue of his
position, equitable relief is available even in the absence of
direct economic loss to the complaining party.7 See Chelsea
7 Groping for support, Shear directs us to a few cases that
list "damages" as an "element" of a claim for breach of fiduciary
duty. See, e.g., Qestec, Inc. v. Krummenacker, 367 F. Supp. 2d
89, 97 (D. Mass. 2005); Hanover Ins. Co. v. Sutton, 705 N.E.2d
279, 288 (Mass. App. Ct. 1999). Once again, Shear fails to
appreciate that breach-of-fiduciary-duty claims can have both
- 33 -
Indus., 449 N.E.2d at 327; Sagalyn, 195 N.E. at 771; see also In
re Cumberland Farms, 284 F.3d at 229.
The Massachusetts decisions align comfortably with
decisions elsewhere. The better-reasoned view is that harm is
required "only for [the legal remedy of] damages, not for the
equitable remedy of disgorgement." Huber v. Taylor, 469 F.3d 67,
77 (3d Cir. 2006). Embracing this principle, the D.C. Circuit has
explained that the equitable remedy of forfeiture does not require
a showing of injury to a victim because forfeiture is aimed at
"deter[ing] . . . misconduct, a goal worth furthering regardless
of whether a particular [person] has been harmed. It also fulfills
a longstanding and fundamental principle of equity — that
fiduciaries should not profit from their disloyalty." Hendry v.
Pelland, 73 F.3d 397, 402 (D.C. Cir. 1996) (internal citations
omitted). This reasoning applies four-square to the circumstances
at hand. Requiring a controlling shareholder who had breached his
fiduciary duty to disgorge the fruits of his misconduct serves a
legal and equitable dimensions. In the bargain, he ignores the
SJC's repeated affirmation that equitable relief can be provided
for such claims. See, e.g., Allison, 98 N.E.3d at 154; Chelsea
Indus., 449 N.E.2d at 327.
Billings, cited hopefully by Shear, is not to the contrary.
867 N.E.2d 714. The language to which Shear adverts is from the
court's recitation of the case's procedural history, see id. at
719, and Billings never considered whether equitable relief could
have been available absent a showing of economic harm.
- 34 -
valid societal purpose regardless of whether the innocent
shareholders have been injured by his misconduct.
Relatedly, Shear argues that disgorgement is an
inappropriate remedy for a breach of fiduciary duty and that its
availability should be limited to claims for unjust enrichment.
This is much too crabbed a view.
A breach of fiduciary duty is historically an equitable
claim, see In re Evangelist, 760 F.2d at 29, and a court faced
with such a breach has the authority to choose an appropriate
remedy from the wide armamentarium of equitable remedies, see
Demoulas, 703 N.E.2d at 1169. Ordering a fiduciary to relinquish
the undue advantage obtained through a breach of his fiduciary
duty is an unremarkable exercise of this authority. See Chelsea
Indus., 449 N.E.2d at 327; Sagalyn, 195 N.E. at 771; see also Bos.
Children's Heart Found., 73 F.3d at 433.
Shifting gears, Shear argues that the jury's verdict —
specifically, the jury's finding that the plaintiff class suffered
no economic loss — foreclosed any equitable remedy. He frames
this argument in terms of the Seventh Amendment, which he says
forbids a district court from applying equitable doctrines that
depend to any degree on factual predicates previously rejected by
a jury verdict. We believe that Shear is trying to fit a square
peg into a round hole.
- 35 -
In the proceedings below, MAZ sought both legal and
equitable relief. The district court tried the legal claims to a
jury and reserved ruling on the equitable claims. This bifurcation
was not only agreed to by the parties but also tracked generally
accepted procedures: when a single issue may be viewed as either
legal or equitable (depending upon what relief is forthcoming),
the issue should first be tried to a jury even though the court,
taking into account the jury's findings, may later have to
determine whether to grant equitable relief. See Dairy Queen,
Inc. v. Wood, 369 U.S. 469, 479 (1962); Boit v. Gar-Tec Prods.,
Inc., 967 F.2d 671, 677 (1st Cir. 1992); see also 9 Charles Alan
Wright et al., Federal Practice and Procedure § 2306 (3d ed. 2018).
To support his position that disgorgement is unavailable
once a jury has found no damages, Shear pins his hopes to the
decision in National Railroad Passenger Corp. v. Veolia
Transportation Services, Inc., 886 F. Supp. 2d 14 (D.D.C. 2012).
But there, the court found "[n]o shattered fiduciary relationship
between [the parties that] require[d] the court's protection."
Id. at 19. Such a finding distinguishes Veolia from this case —
a differentiating circumstance that is made luminously clear by
the Veolia court's careful distinguishing of cases permitting
disgorgement. See id. at 18-19.
We add, moreover, that the district court's disgorgement
order was not at odds with the jury's verdict. Contrary to Shear's
- 36 -
importunings, the disgorgement order did not contradict the jury's
finding that the plaintiff class had sustained no economic loss.
Rather, the court accepted that finding and relied on the jury's
other findings — particularly its findings that Shear was a
controlling shareholder and that the process leading up to the
merger had not been entirely fair — to form an acceptable predicate
for equitable relief. See MAZ II, 265 F. Supp. 3d at 119. This
process accorded with the procedure endorsed by the SJC. See
Demoulas, 703 N.E.2d at 1172-73 (upholding order for equitable
relief when jury had made determinations regarding wrongdoing).
The Seventh Amendment figures into Shear's
asseverational array in yet another way. He urges us to find that
the disgorgement order is an unconstitutional additur. Here, too,
Shear is foraging in an empty cupboard.
The prohibition against unconstitutional additurs is
rooted in the Seventh Amendment's guaranty of the right to trial
by jury. See Dimick v. Schiedt, 293 U.S. 474, 485 (1935). As
such, the prohibition only applies to jury awards on legal claims.
See Haskins v. City of Boaz, 822 F.2d 1014, 1015 (11th Cir. 1987)
(per curiam). It follows inexorably that the Seventh Amendment
has no application to an equitable remedy (such as a dollars-and-
cents disgorgement order) issued to remediate an equitable
violation. See id.
- 37 -
That ends this aspect of the matter. Exercising de novo
review, we conclude that, in the circumstances of this case, the
equitable remedy of disgorgement was available in principle.
2. Appropriateness. Our holding that disgorgement was
an available remedy does not speak to whether the district court's
crafting of the disgorgement order was an appropriate exercise of
its discretion. We turn next to that question.
The baseline premise is that "[e]quitable remedies are
flexible tools to be applied with the focus on fairness and
justice." Demoulas, 703 N.E.2d at 1169. Acting in accordance
with this premise, the district court purposed to fashion a two-
step disgorgement order. First, the order stripped Shear of the
unfair advantage — his share of the inflated portion of the Class
B premium — gained through his breach of fiduciary duty. Second,
the order redistributed those gains to the plaintiff class. The
court's methodology is not in issue. Based on comparable
transactions, the court identified the portion of the $5,000,000
Class B premium that represented fair compensation for the enhanced
voting rights carried by the Class B shares ($1,820,000). The
remainder of the Class B premium ($3,180,000), the court found,
was unjustified. Based on Shear's percentage ownership of the
Class B shares, the court calculated that Shear had received
$2,964,396 in unjustified compensation. The court ordered that
- 38 -
Shear disgorge this amount and, at the same time, awarded those
funds to the plaintiff class, together with interest.
Chaffing under this regime, Shear asseverates that
disgorgement, even if theoretically available, was wholly
inappropriate in this instance and, thus, an abuse of discretion.
We reject this asseveration and conclude that, in the circumstances
at hand, the disgorgement order was well within the compass of the
district court's discretion.
We need not tarry. Given Shear's breach of fiduciary
duty, forcing him to disgorge the fruits of his inequitable
behavior seems an altogether fitting remedy. Indeed, when a
conflicted fiduciary gains an unfair advantage through a breach of
his fiduciary duty, it is hard to imagine equitable relief more
appropriate than an order compelling him to disgorge the fruits of
his breach. It is, therefore, unsurprising that the SJC has
approved the use of disgorgement as a remedy in highly analogous
circumstances. See Sagalyn, 195 N.E. at 771 (upholding order that
fiduciaries refund portion of compensation in excess of fair value
as determined by special master).
Shear's rejoinder is unavailing. He says that the
plaintiff class sustained no loss and, accordingly, did not need
disgorgement in order to be made whole. That is true as far as it
goes — but it does not take Shear very far. The district court
dealt effectively with this argument. It acknowledged that the
- 39 -
disgorgement order resulted in something of a windfall for the
plaintiff class and that such windfalls should generally be
avoided. See MAZ II, 265 F. Supp. 3d at 120. Refusing to order
disgorgement, though, would have resulted in a windfall to Shear.
See id. Faced with this quandary, the court reasonably determined
that it was more equitable that any windfall accrue to the
plaintiff class rather than to the self-dealing fiduciary. See
id. at 120-21.
We think that this choice was a supportable exercise of
the district court's broad discretion. If a windfall is in
prospect, time-honored principles of equity favor bestowing the
windfall upon the wronged party as opposed to allowing the
wrongdoer to retain it. See Lawton v. Nyman, 327 F.3d 30, 45 (1st
Cir. 2003) (explaining that it is "more appropriate to give the
defrauded party the benefit even of windfalls than to let the
fraudulent party keep them" (quoting Janigan v. Taylor, 344 F.2d
781, 786 (1st Cir. 1965))); cf. Law v. Griffith, 930 N.E.2d 126,
132 (Mass. 2010) (stating that, under collateral source rule,
"avoiding a windfall to a tortfeasor is preferable even if a
plaintiff thereby receives an excessive recovery in some
circumstances").
Shear's citation to Brodie v. Jordan, 857 N.E.2d 1076
(Mass. 2006), for the proposition that a "remedy should neither
grant the minority a windfall nor excessively penalize the
- 40 -
majority" does not undermine this conclusion. Id. at 1080. Brodie
is inapposite: that case did not involve the disgorgement of a
financial benefit improperly gained by a fiduciary through his
position.
The short of it is that the disgorgement order was
comfortably within the district court's authority and was suitably
tailored to redress Shear's inequitable conduct. Consequently, we
find the disgorgement order to be an appropriate exercise of the
district court's discretion.
D. Recapitulation.
To recapitulate, we conclude that this suit was
appropriately brought directly against Shear as a "controlling
shareholder who also is a director." Tucci, 70 N.E.3d at 926.
Given Shear's controller status, the district court correctly
applied the fairness standard to his course of conduct and quite
properly allocated the burden of proving fairness to him. After
a supportable finding of breach of fiduciary duty, disgorgement
was well within the wide armamentarium of equitable remedies
available to the district court. Last but not least, we conclude
that the district court did not abuse its discretion in crafting
a disgorgement order designed to ensure that Shear would not be
allowed to enjoy the fruits of his breach.
- 41 -
III. MAZ'S APPEAL
There is one last leg to our journey. MAZ appeals the
district court's denial of its motion for a new trial. In support,
MAZ submits that the district court abused its discretion in
allowing Shear, during the jury-trial phase of the case, to
introduce evidence of Acadia's "more than ten-fold" increase in
its stock price post-merger (over the course of nearly four years).
MAZ objected to the stock-price evidence below, and this claim of
error is preserved for purposes of appeal.
Where, as here, the denial of a motion for new trial
hinges on a preserved challenge to an evidentiary ruling, we review
the underlying evidentiary ruling for abuse of discretion. See
Ira Green, 775 F.3d at 18. Even if we find that an abuse of
discretion occurred, we will not order a new trial unless we also
find that "the error in admitting evidence 'had a substantial and
injurious effect or influence upon the jury's verdict.'" Id.
(quoting Gomez v. Rivera Rodríguez, 344 F.3d 103, 118 (1st Cir.
2003)). Here, however, we discern no abuse of discretion in the
admission of the challenged evidence, so our consideration stops
short of any harmless-error inquiry.
To be admissible, evidence must be relevant, that is, it
must have a "tendency to make" the existence of any fact that is
of consequence to the determination of the action "more or less
probable than it would be without the evidence." Fed. R. Evid.
- 42 -
401. Even so, a court may preclude the admission of relevant
evidence "if its probative value is substantially outweighed by a
danger of . . . unfair prejudice, confusing the issues, [or]
misleading the jury." Fed. R. Evid. 403. When the balancing of
probative value and unfair prejudice ends in equipoise, Rule 403
tilts the decisional calculus in favor of admissibility. See
United States v. Whitney, 524 F.3d 134, 141 (1st Cir. 2008).
The court below determined that the stock-price evidence
was relevant to the issues raised during the trial. This
determination was unimpugnable: among other things, the evidence
was relevant to the reasonableness of the directors' judgment in
pursuing the merger as a means of creating value for shareholders.
And as the district court supportably found, this evidence was
also relevant because the plaintiff class was challenging both the
reasonableness of the stock-for-stock swap and the structure of
the merger. Finally, as in Gonsalves v. Straight Arrow Publishers,
Inc., 701 A.2d 357, 362 (Del. 1997), the challenged data was
relevant to "show that plans in effect at the time of the merger
[had] born fruition."
Of course, the finding of relevance gets us only halfway
home. Even relevant evidence may be excluded if it is unfairly
prejudicial. The emphasis on unfair prejudice (as opposed to
prejudice simpliciter) is not an idle formality. After all,
"[v]irtually all evidence is meant to be prejudicial, and Rule 403
- 43 -
only guards against unfair prejudice." United States v. Sabean,
885 F.3d 27, 38 (1st Cir. 2018). And it is no easy task to show
unfair prejudice: we have made pellucid that, once a district
court overrules a Rule 403 challenge and admits relevant evidence,
"[o]nly rarely — and in extraordinarily compelling circumstances
— will we, from the vista of a cold appellate record, reverse [the]
district court's on-the-spot judgment concerning the relative
weighing of probative value and unfair effect." Freeman v. Package
Mach. Co., 865 F.2d 1331, 1340 (1st Cir. 1988).
In the case at hand, MAZ asserts that the admission of
the stock-price evidence was unfairly prejudicial because it may
have tainted the jury's perception of whether Shear's alleged
breach of fiduciary duty caused the plaintiff class to sustain any
economic loss. In effect, MAZ suggests that the admission of this
evidence allowed Shear to make what amounted to a "no harm, no
foul" argument even though the district court explicitly
foreclosed such an argument. As MAZ sees it, this enabled Shear
to introduce through the back door a line of defense that the
district court had forbidden him to introduce through the front
door.
There is, however, a clearly visible fly in the ointment:
Shear never made a "no harm, no foul" argument to the jury. MAZ
suggests, though, that given the stock-price evidence and what it
showed about the profit that inured to the shareholders, the "no
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harm, no foul" argument was the elephant in the room (and,
therefore, the jury likely gave it weight).
We do not dismiss MAZ's suggestion lightly. At a
minimum, there was some risk that the jury might have thought along
"no harm, no foul" lines without any prompting from Shear. The
district court concluded, however, that this risk did not
substantially outweigh the probative value of the stock-price
evidence.
Where Rule 403 is in play, battles over how to strike
the balance between probative value and unfairly prejudicial
effect are usually won or lost in the district court. This is not
a mere fortuity: a trial court is in the best position to evaluate
both the force of particular evidence and the likelihood of unfair
prejudice. See Galarneau v. Merrill Lynch, Pierce, Fenner & Smith,
Inc., 504 F.3d 189, 206 (1st Cir. 2007) (noting that district court
"observ[es] first-hand the nuances of trial" and, thus, merits
substantial discretion when balancing probative value and
prejudicial effect). In this instance, we do not think that the
risk of unfair prejudice loomed so disproportionately large as to
warrant second-guessing the district court's on-the-spot balancing
of probative worth and prejudicial effect.
This conclusion is fortified by what transpired when the
specter of prejudice from the stock-price evidence was brought
front and center during a sidebar conference. After hearing from
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the parties, the district court offered to give the jury a
prophylactic instruction, limiting the permissible use of the
stock-price evidence to relevant issues. MAZ refused the offer,
opting instead for no instruction.
We long have recognized the value of limiting
instructions. See, e.g., Rubert-Torres v. Hosp. San Pablo, Inc.,
205 F.3d 472, 479 (1st Cir. 2000); Daigle v. Me. Med. Ctr., Inc.,
14 F.3d 684, 690 (1st Cir. 1994). Such instructions, skillfully
employed by a district court, often will eliminate — or at least
mitigate — a risk of unfair prejudice. See United States v.
Mehanna, 735 F.3d 32, 64 (1st Cir. 2013). When a party who objects
to evidence declines the trial court's offer to caution the jury
about the limited utility of that evidence, the objecting party is
in a perilously poor position to complain, after the fact, that
the evidence was unduly prejudicial. See United States v. Walter,
434 F.3d 30, 35 (1st Cir. 2006); United States v. Cintolo, 818
F.2d 980, 999 (1st Cir. 1987); Dente v. Riddell, Inc., 664 F.2d 1,
6 n.5 (1st Cir. 1981). So it is here.
We add a coda. Common sense suggests that MAZ's claim
of prejudice is severely undermined by the jury's finding that the
process undertaken by the directors in structuring the merger was
not entirely fair. This finding is a telltale sign that, rather
than succumbing to an unstated "no harm, no foul" argument, the
jury found a foul and called it.
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To say more about the challenged evidentiary ruling
would be to paint the lily. We conclude that the ruling was not
an abuse of the district court's broad discretion. It follows,
therefore, that MAZ's attack on the denial of its new-trial motion
is without force.
IV. CONCLUSION
We need go no further. For the reasons elucidated above,
the judgment of the district court is
Affirmed. Two-thirds costs shall be taxed in favor of the
plaintiff.
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