On August 23, 2010, the Supreme Judicial Court of Massachusetts issued its ruling in Helabian v. Berv, that the business judgment rule can be applied to dismiss a derivative complaint filed timely under the Massachusetts Business Corporations Act but prior to a corporation’s rejection of the demand serving as the basis for the suit. Previously, the District Court for the Southern District of New York dismissed a shareholder’s derivative action for an alleged breach of fiduciary duty by the Board of CitiFund Trust in connection with the approval of new investment advisory agreements following Legg Mason Inc.’s acquisition of Citigroup’s asset management business. In dismissing the suit, the district court relied upon the trustees’ good-faith determination (i.e., their business judgment) that prosecuting the action would not be in the fund’s best interests.

The Massachusetts Act contains a universal demand requirement that prevents shareholders from filing a derivative action until a board has had at least 90 days to evaluate the claim and make a formal recommendation. The district court found that, although the plaintiff had satisfied the demand requirement before filing suit, the Board’s decision not to pursue the action required dismissal of the lawsuit, despite the fact that it came six weeks after the 90-day period for review had expired. The district court’s analysis was based largely on its interpretation of a provision the Act, which states that a derivative proceeding commenced after the rejection of a demand shall be dismissed by the court on motion by the corporation.

On appeal, the Second Circuit reversed the district court’s decision, but withheld judgment in the case, opting to certify a question to the Supreme Judicial Court of Massachusetts. The Second Circuit will now make a final judgment on the appeal.