Vale v. Valchuis

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SJC-11744
MICHAEL A. VALE vs. DAVID J. VALCHUIS & another.1
Middlesex. February 4, 2015. - May 22, 2015.
Present: Gants, C.J., Spina, Cordy, Botsford, Duffly, Lenk,
& Hines, JJ.
Corporation, Close corporation, Valuation of stock, Transfer of
shares. Massachusetts Arbitration Act. Uniform
Arbitration Act. Arbitration, Appeal of order compelling
arbitration, Arbitrable question.
Civil action commenced in the Superior Court Department on
July 8, 2013.
A motion to compel arbitration was heard by Kenneth V.
Desmond, Jr., J.
The Supreme Judicial Court granted an application for
direct appellate review.
Euripides D. Dalmanieras (James W. Bucking with him) for
New England Cleaning Services, Inc.
Robert R. Berluti (Edward F. Whitesell, Jr., with him) for
the plaintiff.
Ben Robbins & Martin J. Newhouse, for New England Legal
Foundation, amicus curiae, submitted a brief.
1
New England Cleaning Services, Inc. (NECS).
2
CORDY, J. In this case we decide whether the valuation of
stock, pursuant to a stock transfer restriction, is a proper
subject for arbitration and, if so, whether and when a selling
shareholder may terminate the arbitration process. The transfer
restriction in this case required the shareholder first to offer
his stock to the company at his desired price, and then, if the
company rejected it, to offer it at a price to be determined by
arbitrators. The plaintiff, Michael A. Vale, invoked this
process by tendering an offer to the defendant, New England
Cleaning Services, Inc. (NECS). After doing so, however, he
changed his mind regarding his desire to sell and sought to
withdraw from the process of valuing his stock. NECS moved to
compel arbitration.
A judge in the Superior Court denied the motion to compel,
relying on the doctrine of Palmer v. Clark, 106 Mass. 373, 389
(1871), which distinguishes arbitration from appraisal. The
judge concluded that a mere disagreement over the value of stock
was legally insufficient to give rise to arbitration. On
appeal, NECS argues that Palmer and its progeny were abrogated
by G. L. c. 251, inserted by St. 1960, c. 374, § 1, as amended
(Arbitration Act), which, among other things, provides that a
written contract providing for the arbitration "of any existing
controversy" is "valid, enforceable and irrevocable" except on
3
grounds that exist for "the revocation of any contract." See G.
L. c. 251, § 1.
We conclude that the distinction between arbitration and
appraisal remains valid, but affirm the judge's denial of the
motion to compel on other grounds. A stock valuation may be
conducted through arbitration, so long as an actual controversy
exists regarding the value of the stock. A rejected offer to
sell the stock creates such a controversy, provided that the
shareholder still desires to sell the stock and the transfer
restriction requires him to offer it first to the company. A
shareholder may not, however, unilaterally withdraw the
controversy from arbitration once it has commenced. Because the
shareholder in this case decided not to sell the stock prior to
the commencement of arbitration, the controversy to be
arbitrated was rendered moot.2
1. Background. Vale is a fifty per cent shareholder of
NECS, a Massachusetts close corporation. The only other
shareholder is Vale's brother, David J. Valchuis. Vale and
Valchuis formed NECS in 1977 and both remain directors of the
company. In 2005, Vale and Valchuis experienced a breakdown in
their business relationship, after Vale stepped down as NECS's
president. On several occasions over the ensuing eight years,
2
We acknowledge the amicus brief submitted by the New
England Legal Foundation.
4
Vale expressed a desire to sell his NECS stock. Article 5 of
NECS's articles of incorporation (Article 5) describes a
discrete process that a shareholder must follow if he desires to
sell his stock.3 Vale did not invoke Article 5 during these
initial discussions regarding the sale of his stock.
In June, 2013, NECS suspended shareholder distributions on
the asserted grounds of increased labor costs and other
expenses. In response, Vale filed a complaint against NECS and
Valchuis in Superior Court, alleging breach of fiduciary duty
and seeking an accounting. Vale contended in essence that the
3
Article 5 of the articles of organization (Article 5) of
NECS provides, in relevant part:
"Any stockholder . . . desiring to sell, transfer or pledge
such stock owned by him or them, shall first offer it to
the corporation through the Board of Directors, in the
manner following:
"He shall notify the directors of his desire to sell or
transfer by notice in writing, which notice shall contain
the price at which he is willing to sell or transfer and
the name of one arbitrator. The directors shall within
thirty days thereafter either accept the offer, or by
notice to him in writing name a second arbitrator, and
these two shall name a third. It shall then be the duty of
the arbitrators to ascertain the value of the stock, and if
any arbitrator shall neglect or refuse to appear at any
meeting appointed by the arbitrators, a majority may act in
the absence of such arbitrator.
"After the acceptance of the offer, or the report of the
arbitrators as to the value of the stock, the directors
shall have thirty (30) days within which to purchase the
same at such valuation, but if at the expiration of thirty
days, the corporation shall not have exercised the right so
to purchase, the owner of the stock shall be at liberty to
dispose of the same in any manner he may see fit. . . ."
5
suspension of distributions was designed to force him to sell
his shares at a reduced price. NECS filed a counterclaim,
alleging breach of fiduciary duty and breach of contract. The
basis of the breach of contract claim was Vale's failure to
comply with Article 5.
In October, 2013, during the pendency of the litigation,
Vale specifically invoked Article 5 in a letter sent to Valchuis
in the latter's capacity as a director of NECS. In the letter,
Vale offered his shares to NECS at the price of $5 million and,
and as required by Article 5, named one arbitrator. Consistent
with Article 5, Vale's letter also stated that "the Board of
Directors must within thirty (30) days of this notice either
accept this offer, or notify me in writing the name of an
arbitrator selected by NECS." On November 1, 2013, NECS
declined Vale's offer and named a second arbitrator accordingly.
Under the provision of Article 5, the two named arbitrators were
then to select a third arbitrator for the purpose of arbitrating
(or "ascertaining") the value of the stock.
On November 8, 2013, Vale argued in his motion before the
Superior Court that because he had invoked Article 5, NECS's
counterclaim for breach of contract was moot. The following
week, prior to the selection of the third arbitrator, Vale
informed NECS that he was "no longer interested in selling his
NECS stock" and that the "arbitration that has not yet commenced
6
. . . is therefore moot." NECS responded that Vale had no power
to terminate the arbitration proceedings that he commenced by
invoking Article 5.
NECS filed a motion to compel Vale to arbitrate the value
of his stock. The judge concluded that, notwithstanding its
references to "arbitrators," Article 5 called for a valuation
proceeding in the nature of an appraisal rather than
arbitration. Finding that there was no agreement to arbitrate
and, therefore, that the Arbitration Act did not apply, the
judge denied NECS's motion to compel arbitration. NECS filed an
interlocutory appeal pursuant to G. L. c. 251, §§ 2, 18, and we
granted NECS's application for direct appellate review.
2. Discussion. The validity and scope of arbitration
agreements have been governed by statute in the Commonwealth
since at least 1786. See St. 1960, c. 374; St. 1925, c. 294;
Rev. St. 1901, c. 194; Pub. St. 1881, c. 188; Gen. St. 1855,
c. 147; Rev. St. 1835, c. 114; St. 1786, c. 21. In an early
case, Fowler v. Bigelow, 8 Mass. 1, 2 (1811), this court
construed the 1786 statute as limiting arbitration to disputes
in the nature of personal actions at law and, as a result, held
that an arbitrator had no jurisdiction to determine title to
real estate. In 1835, the Legislature, citing Fowler, expanded
the realm of arbitrable disputes to include "[a]ll
controversies, which might be the subject of a personal action
7
at law, or of a suit in equity." Rev. St. 1835, c. 114. The
question then arose whether a contractual provision calling for
a valuation of property created an agreement to arbitrate.
In Palmer, 106 Mass. at 389, this court concluded that it
did not, observing that a "reference to a third person to fix by
his judgment the price, quantity or quality of material, to make
an appraisement of property and the like, especially when such
reference is one of the stipulations of a contract founded on
other and good considerations, differs in many respects from an
ordinary submission to arbitration." In an appraisal, for
example, "[t]he decision may be made without notice to or
hearing of the parties . . . and it may be made upon such
principles as the person agreed on may see fit honestly to
adopt, or upon such evidence as he may choose to receive." Id.
Our subsequent cases continued to apply the doctrine of Palmer,
firmly entrenching the "distinction between the arbitration of a
controversy and a contract one term of which calls for the
ascertainment by designated persons of values, quantities,
losses or similar facts." Franks v. Franks, 294 Mass. 262, 266
(1936). See Eliot v. Coulter, 322 Mass. 86, 90 (1947).
The scope of arbitrable disputes remained unchanged until
the passage of the present Arbitration Act, which provides that
"a provision in a written contract to submit to arbitration any
controversy thereafter arising between the parties shall be
8
valid, enforceable and irrevocable, save upon such grounds as
exist at law or in equity for the revocation of any contract."
G. L. c. 251, § 1. Notably absent from the Arbitration Act is
the long-standing limitation of arbitration to actions in law
and equity. NECS makes much of this omission, arguing that the
Arbitration Act rendered Palmer and its progeny obsolete. We
disagree.
Although NECS is correct that the Arbitration Act expanded
the scope of arbitrable controversies, the fact of the matter is
that a controversy actually must exist to be submitted for
arbitration. The long line of cases distinguishing arbitration
from appraisal was largely concerned with the absence of a
controversy and other indicia of arbitration, rather than the
valuation proceeding's genesis in law or equity. Thus, in
Franks, 294 Mass. at 266-267, quoting Matter of Fletcher, 237
N.Y. 440, 451 (1924), we explained that the "provisions of the
Arbitration Law are properly applicable to any contract where
the parties have agreed to substitute for the courts an informal
tribunal of their choice in the settlement of a controversy."
Here, the motion judge ruled that Article 5 did not create
a controversy and, thus, did not contain an arbitration clause.
Relying on Eliot, 322 Mass. at 89, the judge reasoned that
although "[t]here may be a dispute about the value of NECS stock
. . . such a difference of opinion regarding value does not
9
convert the valuation process into an arbitration determinative
of the rights and liabilities of the parties." The Eliot case
does not support this proposition.
In Eliot, supra, we observed that our understanding of the
distinction between appraisal and arbitration was in accord with
that of the United States Supreme Court in Omaha v. Omaha Water
Co., 218 U.S. 180 (1910) (Omaha Water Co.). In that case, the
Court held that a valuation proceeding was an appraisal, rather
than arbitration, where there was "no antecedent disagreement as
to price." Id. at 196. The notion that an arbitration of value
required an antecedent disagreement was drawn from an English
case, Collins v. Collins, 53 Eng. Rep. 916 (1858), in which
"there was a contract for the sale of a brewery at a price to be
fixed by persons called arbitrators, one chosen by each party
and a third by these two, before entering upon valuation."
Omaha Water Co., supra at 194. In Collins, the English court
observed that although "fixing the price of a property may be
'arbitration,'" the case before the court involved a mere
appraisal. Collins, supra at 918. The court explained the
distinction as follows:
"An arbitration is a reference to the decision of one or
more persons, either with or without an umpire, of some
matter or matters in difference between the parties. It is
very true that in one sense it must be implied that
although there is no existing difference, still that a
difference may arise between the parties; yet I think the
distinction between an existing difference and one which
10
may arise is a material one, and one which has been
properly relied upon in the case. If nothing has been said
respecting the price by the vendor and purchaser between
themselves, it can hardly be said that there is any
difference between them. It might be that if the purchaser
knew the price required by the seller, there would be no
difference, and that he would be willing to give it. It
may well be that if the vendor knew the price which the
purchaser would give, there would be no difference, and
that he would accept it. It may well be that the decision
of a particular valuer appointed might fix the price and
might be equally satisfactory to both; so that it can
hardly be said that there is a difference between them.
Undoubtedly, as a general rule, the seller wants to get the
highest price for his property, and the purchaser wishes to
give the lowest, and in that sense it may be said that an
expected difference between the parties is to be implied in
every case, but unless a difference has actually arisen, it
does not appear to me to be an 'arbitration.' Undoubtedly,
if two persons enter into an arrangement for the sale of
any particular property, and try to settle the terms, but
cannot agree, and after dispute and discussion respecting
the price, they say, 'We will refer this question of price
to A.B., he shall settle it,' and thereupon they agree that
the matter shall be referred to his arbitration, that would
appear to be an 'arbitration,' in the proper sense of the
term, and within the meaning of the [Common Law Procedure
Act]; but if they agree to a price to be fixed by another,
that does not appear to me to be an arbitration."
Id. at 918-919.
The analysis of the English court in Collins is consistent
with our precedent. The Palmer and Eliot cases each involved
valuation clauses in contracts similar to that of the Collins
case, that is, clauses that did not presuppose an antecedent
disagreement regarding value. The contracts merely stated that
value would be determined by a third party. Palmer, 106 Mass.
at 386 ("By the terms of the contract, and as a mode of fixing
compensation, the amount of gravel deposited in filling it to a
11
fixed grade was to be measured on the ground by the city
engineer, whose measurements were to be conclusive"); Eliot,
322 Mass. at 87 (lease set annual rent at percentage of "fair
valuation of the land comprised in the premises; said fair
valuation to be determined . . . by three [3] disinterested
parties or a majority of them, one to be chosen by the lessors,
one by the lessees and one by the two so chosen"). As such, the
contracts did not call for arbitration.
Nonetheless, our cases -- both prior to and following the
Arbitration Act -- have recognized that value may be arbitrable
so long as an actual controversy exists. For example, in
Franks, 294 Mass. at 265, we explained that if, "before the
agreement to arbitrate was entered into the plaintiff had
completed a sale delivery of stock to the defendants on terms
which obligated the defendants to pay a fair price for it, an
issue as to price would be a controversy which might be the
subject of a personal action, and so also a proper subject for
statutory arbitration." Although we concluded that no
controversy existed in that case, in other cases we have
enforced arbitration clauses triggered by antecedent
disagreements regarding value. See, e.g., Berkshire Mut. Ins.
Co. v. Burbank, 422 Mass. 659, 660 (1996) (contract provided for
submission of damages valuation only if agreement could not be
reached); Trustees of Boston & Me. Corp. v. Massachusetts Bay
12
Transp. Auth., 363 Mass. 386, 387 (1973) (contract provided for
submission of price to arbitration only after objection to offer
price).
Here, there clearly was -- at least initially -- an
arbitrable disagreement regarding the value of Vale's shares.
Acting pursuant to Article 5, Vale offered his shares to NECS at
the price of $5 million. NECS rejected that offer, ostensibly
disputing the value of the shares. See 1 Williston on Contracts
§ 5:3 (4th ed. 2007) ("As a general principle, any words or acts
of the offeree indicating that the offer has been declined . . .
amount to a rejection"). At that juncture, a controversy
existed that properly could be submitted to arbitration. See
Collins, 53 Eng. Rep. at 918-919. Although not dispositive, the
fact that Article 5 repeatedly refers to "arbitrators" suggests
that the parties intended the valuation proceeding to be an
arbitration. General Convention of New Jerusalem in the U.S. of
Am., Inc. v. MacKenzie, 449 Mass. 832, 835 (2007) ("When the
words of a contract are clear, they must be construed in their
usual and ordinary sense"). Had the valuation proceeding gone
forward, NECS would have, pursuant to Article 5, received an
enforceable right to purchase the shares at the price determined
by the arbitrators. See Franks, 294 Mass. at 267 (arbitrations
result in judgments enforceable in court). See also G. L.
c. 251, § 16 (court has jurisdiction to enforce arbitration
13
awards). Consequently, we hold that Article 5 contains an
agreement to arbitrate future controversies regarding valuation,
which is properly within the scope of the Arbitration Act.
Vale argues that even if Article 5 contains an arbitration
agreement, he was entitled to withdraw his offer to sell his
shares at any time prior to NECS's acceptance of the price
determined by the arbitrators. NECS counters that Vale is
precluded from withdrawing his offer, because his invocation of
Article 5's arbitration provisions, i.e., the naming of an
arbitrator, was irrevocable. NECS argues further that allowing
Vale to invoke and withdraw from arbitration would destroy NECS'
right to receive the fruits of Article 5. Neither party's
interpretation of Article 5 is sound.
We interpreted a nearly identical stock transfer
restriction in Merriam v. Demoulas Super Mkts., Inc., 464 Mass.
721, 731 (2013).4 In that case, we explained that the "text of
4
The stock transfer restriction in Merriam v. Demoulas
Super Mkts., Inc., 464 Mass. 721, 723 n.9 (2013), likewise
contained in the articles of organization, provided:
"Any stockholder . . . desiring to sell, assign, transfer,
pledge, or hypothecate in any manner such stock owned by
him, shall first offer it to the corporation through the
Board of Directors, in the manner following:
"He shall notify the directors of his desire to sell . . .
in writing, which notice shall contain the price and all
other terms at which he is willing to sell . . . and the
name of one arbitrator. The directors shall within [thirty]
days thereafter either accept the offer or by notice to him
14
[the stock transfer restriction] begins with a requirement that
a shareholder first offer his shares to the corporation, but
thereafter describes a discrete process of valuation and
subsequent offer at a price determined by arbitrators." Id. at
731. Here, Article 5 operates in the same manner. It
prescribes an initial offer of shares at Vale's desired price,
which NECS is free to accept or reject. As explained herein,
the rejection of that offer creates a controversy, which is to
be resolved by arbitration. The question then, is not whether
Vale was able to withdraw his offer, but whether he was able to
withdraw the controversy from arbitration.5
At common law and under earlier statutes, the general rule
was that a party could withdraw an issue from arbitration at any
in writing, name a second arbitrator, and these two shall
name a third. It shall . . . then be the duty of the
arbitrators to ascertain the value of the stock. . . .
"After the acceptance of the offer, or the report of the
arbitrators as to the value of the stock, the directors
shall have thirty (30) days within which to purchase the
same at such valuation, but if at the expiration of thirty
(30) days, the corporation shall not have exercised the
right to so purchase, the owner of the stock shall be at
liberty to dispose of the same in any manner he may see
fit."
5
Had the arbitration gone forward, the arbitrators'
decision would have conferred on NECS the option to purchase the
shares within thirty days at the price their decision set. See
Merriam, 464 Mass. at 728 (characterizing same language as
creating option); Stapleton v. Macchi, 401 Mass. 725, 729 n.6
(1988) ("An option is simply an irrevocable offer creating a
power of acceptance in the optionee").
15
time prior to the arbitrator's award. See, e.g., Wallis v.
Carpenter, 13 Allen 19, 24 (1866) ("submission to arbitrators is
a power; and it is generally true that a power may be revoked at
any time before execution"); Allen v. Watson, 16 Johns. 205, 208
(N.Y. Sup. Ct. 1819) ("revocation of the powers of the
arbitrators stripped them of all pretence of authority to act as
such; and, in the strictest truth, the instrument to which they
put their hands and seals, was no award under the submission,
for the submission itself was at an end"). This rule arose from
the long-standing judicial hostility toward arbitration
agreements. See La Stella v. Garcia Estates, Inc., 66 N.J. 297,
299 (1975) ("English common law at the time of the American
Revolution was undoubtedly hostile to arbitrations. . . . Thus
it permitted either party to an arbitration of an existing
dispute to withdraw at any time before the actual award and,
beyond that, it declared that an agreement to arbitrate future
disputes was against public policy and not enforceable").
Today, however, the law "express[es] a strong public policy
favoring arbitration as an expeditious alternative to litigation
for settling commercial disputes." Home Gas Corp. of Mass.,
Inc. v. Walter's of Hadley, Inc., 403 Mass. 772, 774 (1989),
quoting Danvers v. Wexler Constr. Co., 12 Mass. App. Ct. 160,
163 (1981). See Gilmer v. Interstate/Johnson Lane Corp., 500
U.S. 20, 24 (1991) ("purpose [of Federal Arbitration Act] was to
16
reverse the longstanding judicial hostility to arbitration
agreements that had existed at English common law and had been
adopted by American courts, and to place arbitration agreements
upon the same footing as other contracts").
The consensus among courts construing modern statutory
arbitration clauses is that "a party to a binding, irrevocable
arbitration cannot unilaterally withdraw from participation in
the arbitration after it has begun." Crihfield v. Brown, 224 W.
Va. 407, 412 (2009). See, e.g., Brown v. Engstrom, 89 Cal. App.
3d 513, 523 (1979); Cabus v. Dairyland Ins. Co., 656 P.2d 54, 56
(Colo. Ct. App. 1982); Juhasz v. Costanzo, 144 Ohio App. 3d 756,
762 (2001); Godfrey v. Hartford Cas. Ins. Co., 142 Wash. 2d 885,
897 (2001). See generally 6 C.J.S. Arbitration § 85 (2004)
("Where the agreement is irrevocable, a party may not
unilaterally withdraw an issue from arbitration"). Sound policy
justifications support this view. Allowing withdrawal after the
parties have expended resources in preparing for and
participating in the arbitration would be antithetical to the
Arbitration Act's purpose of "further[ing] the speedy,
efficient, and uncomplicated resolution of business disputes."
Floors, Inc. v. B.G. Danis of New England, Inc., 380 Mass. 91,
96 (1980). See Cabus, supra ("to allow one party to withdraw
such an issue after going through the arbitration process does
not comport with the policy favoring arbitration"). See also
17
Manatt, Phelps, Rothenberg & Tunney v. Lawrence, 151 Cal. App.
3d 1165, 1171 (1984) (noting unfairness that would result if
withdrawal were allowed "after testimony had been taken,
evidence received and documents produced and filed"). Moreover,
a party should not be permitted to commence arbitration and then
withdraw without prejudice to avoid an unfavorable outcome. See
Godfrey, supra (parties may not "submit a dispute to arbitration
only to see if it goes well for their position"). Here, NECS
argues that Vale commenced arbitration when he invoked Article
5. We do not agree.
Arbitration is commonly understood to commence with the
filing of a submission agreement or a demand for arbitration.
6 C.J.S. Arbitration, supra at § 9 ("agreement for the
submission of an issue to arbitrators constitutes the charter of
the entire arbitration proceedings, is a prerequisite to the
commencement of a valid proceeding, and defines or limits the
issues to be decided"); 1 Domke on Commercial Arbitration § 18:2
(3d ed. Supp. 2014) ("demand for arbitration . . . must contain
the name of the parties, the arbitration clause upon which it is
based, the nature of the dispute and the relief sought"). The
submission agreement or demand is generally "considered to be in
effect when the parties agree on arbitrators and the controversy
is submitted to them for their determination." 21 Williston on
Contracts § 57:45 (4th ed. 2001). See P.A. Finn, B.J. Mone, &
18
J.N. Seich, Mediation and Arbitration § 12:1 (2004). Thus,
unless otherwise provided in the contract or rules governing the
arbitration, the mere selection of an incomplete panel of
arbitrators does not constitute a commencement of arbitration.
See Norfleet v. Safeway Ins. Co., 144 Ill. App. 3d 838, 842
(1986) ("in our view, the appointment of a partial board of
arbitrators cannot logically constitute 'initiation' of
arbitration proceedings. At the very least, there must be a
full panel of arbitrators selected before the proceedings could
commence"). Cf. Northcom, Ltd. v. James, 848 So. 2d 242, 247
(Ala. 2002) ("Appointing an arbitrator does not initiate the
arbitration process as provided in the Commercial Arbitration
Rules").
Here, Article 5 does not set forth the rules for
arbitration, nor does it articulate a particular point at which
arbitration is deemed to commence. It merely describes a
process for appointing arbitrators, which process remained
incomplete at the time Vale changed his mind about selling his
shares. The record does not reflect that a formal submission
agreement or demand for arbitration was ever filed with the
arbitrators in this case. Permitting a shareholder to retract
his desire to sell at this preliminary stage undercuts neither
the express terms of Article 5 nor the policies disfavoring
withdrawal from arbitration. See Invicta Plastics, U.S.A., Ltd.
19
v. Superior Court, 120 Cal. App. 3d 190, 193 (1981) (mere change
of mind prior to commencement of arbitration not equivalent to
unilateral withdrawal from arbitration).
NECS speculates that allowing Vale to terminate the Article
5 process -- even at this preliminary stage -- will provide
incentive for Vale repeatedly to invoke and terminate the
process, thereby disrupting NECS's business operations and
pressuring it to buy his shares at an exorbitant price. The law
is clear, however, that the invocation and termination of the
Article 5 process must be in good faith. Merriam, 464 Mass. at
727 ("Although a shareholder in a close corporation always owes
a fiduciary duty to fellow shareholders, good faith compliance
with the terms of an agreement entered into by the shareholders
satisfies that fiduciary duty"). Cf. Certain Underwriters at
Lloyd's London v. Argonaut Ins. Co., 500 F.3d 571, 575 (7th Cir.
2007) (withdrawal of arbitration demand did not render
controversy moot where withdrawal constituted procedural
maneuvering aimed to defeat counterparty's ability to obtain
judicial determination of rights). Thus, if Vale were to engage
in such vexatious conduct, NECS would have recourse.
Moreover, allowing Vale to change his mind prior to the
commencement of arbitration does not destroy NECS's ability to
enjoy the fruits of Article 5. The purpose of Article 5 is to
provide shareholders in a close corporation the opportunity to
20
sell their shares at a fair price, while protecting the company
against an infusion of undesirable new shareholders. See
Merriam, 464 Mass. at 731 ("Valuation processes like those
described by [the stock transfer restriction] are often employed
in close corporations because there is no ready market for stock
in a close corporation"). Should Vale decide to sell his shares
in the future, NECS will have the opportunity to purchase them
pursuant to Article 5. In view of the foregoing, Vale was
entitled to change his mind regarding his desire to sell his
shares, thereby rendering moot the controversy to be arbitrated.6
Without a controversy, there can be no arbitration. G. L.
c. 251, § 1.
3. Conclusion. For the reasons set forth herein, we
conclude that Article 5 of NECS's articles of incorporation
contained a valid agreement to arbitrate future controversies
regarding the value of NECS's stock, but that no such
controversy existed at the time of NECS's motion to compel
arbitration. Therefore, for reasons other than those set forth
6
It does not follow, however, that NECS would be entitled
to terminate the Article 5 process. As the Appeals Court
explained in Brodie v. Jordan, 66 Mass. App. Ct. 371, 383-384,
S.C., 447 Mass. 866 (2006), refusing to proceed with arbitration
could improperly hinder Vale's ability to sell his shares on the
open market.
21
by the motion judge, the order denying NECS's motion to compel
arbitration is affirmed.7
So ordered.
7
In consequence of this conclusion, we need not reach
Vale's remaining arguments that NECS waived Article 5, that
NECS's board of directors never properly rejected Vale's initial
offer, or that Article 5 was superseded by a subsequent
declaration of trust.