On March 6, 2017, in a decision authored by Justice Margot Botsford, the Massachusetts Supreme Judicial Court affirmed the dismissal of an action for breach of fiduciary duty brought by former shareholders of EMC Corporation against its directors in connection with its merger with Dell Inc., finding that the claims could only have been brought derivatively. Int’l Brotherhood of Electrical Workers Loc. No. 129 Benefit Fund v. Tucci, SJC-12137 (Mass. Mar. 6, 2017). In its decision, the Court clarified that “the general rule of Massachusetts corporate law is that a director of a Massachusetts corporation owes a fiduciary duty to the corporation itself, and not its shareholders.” Further, the Court found that the injury alleged—the undervaluation of EMC in the transaction—“qualifies as a direct injury to the corporation” and “fit[s] squarely within the framework of a derivative action,” which plaintiffs as former shareholders did not—and could not—bring.
EMC was a large publicly traded Massachusetts corporation. Dell agreed to acquire EMC in a transaction unanimously approved by EMC’s board and announced on October 12, 2015. On October 15, 2015, plaintiffs, then EMC shareholders, filed a direct action against EMC’s directors claiming they breached their fiduciary duties by allegedly failing to maximize the value of EMC. The merger was completed on September 7, 2016. The trial court found plaintiffs’ claims were derivative and granted defendants’ motion to dismiss.
The Massachusetts Supreme Court affirmed the dismissal. In doing so, the Court noted that “whether a claim asserted by stockholders of a Massachusetts corporation is one that may be pursued directly by them against the corporation’s directors or must be pursued derivatively depends on whether the harm they claim to have suffered resulted 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.” Referring to the Massachusetts Business Corporation Act, G. L. c. 156D, § 8.30, the Court found that “the plain words of the statute,” which provides that a director shall discharge his duties “in a manner the director reasonably believes to be in the best interests of the corporation,” mandate the finding that directors generally owe fiduciary duties to the corporation and not the shareholders (with exceptions not pertinent here).
The claims plaintiffs had asserted were therefore properly considered derivative. Thus, plaintiffs’ failure to bring them derivatively in accordance with the requirements for derivative actions—including the prerequisite demand on the board to bring the claims and the limitation that only current shareholders can assert derivative claims—subjected the action to dismissal.
The Court also rejected plaintiffs’ contention that the finding that the action was derivative deprived them of a meaningful opportunity for relief. The Court noted that plaintiffs could have made a demand on EMC’s board in accordance with the requirements for a derivative action when the merger was first announced and they were still shareholders and, if necessary, could have moved for a preliminary injunction.
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