70 N.E.3d 918
Mass.2017Background
- EMC Corporation, a large publicly traded Massachusetts corporation with a federated structure (notably owning VMware), agreed to be acquired by Dell in October 2015 for roughly $64–$67 billion; EMC shareholders would receive cash plus VMware tracking stock.
- Plaintiffs (IBEW and other EMC shareholders) allege the board, led by CEO Joseph Tucci, pursued the full-sale merger to preserve the federation (and Tucci’s change-in-control benefits), foregoing potentially higher value from selling subsidiaries (e.g., VMware separately).
- The merger agreement contained deal-protection terms (including a $2 billion termination fee) that plaintiffs say discouraged superior bids.
- Plaintiffs filed a direct class-action claim against EMC directors for breach of fiduciary duty, arguing the directors failed to maximize shareholder value and agreed to preclusive deal protections.
- The Superior Court dismissed the complaint, holding the alleged injury was derivative (a wrong to the corporation), not a direct injury to shareholders, and plaintiffs had not complied with statutory derivative procedures (e.g., demand under G. L. c. 156D § 7.42).
- The Supreme Judicial Court affirmed, holding under Massachusetts law directors owe fiduciary duties to the corporation (with limited exceptions), so the claim must be brought derivatively.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether shareholders may bring a direct breach-of-fiduciary-duty claim challenging the fairness/price of a merger | The challenged merger directly injured shareholders by depriving them of the opportunity to obtain a higher per‑share price; thus the claim is direct | The alleged harm is to EMC (the corporation); shareholders’ loss is derivative of a corporate injury and must be pursued derivatively | Held: claim is derivative; shareholders must follow derivative procedures under the MBCA |
| Whether G. L. c. 156D § 8.30 imposes fiduciary duties directly to shareholders | § 8.30’s components impose duties to shareholders as well as the corporation | § 8.30 sets a unitary standard requiring directors to act in the best interests of the corporation, not directly to shareholders | Held: § 8.30 governs duties to the corporation; it does not create a separate fiduciary duty to shareholders |
| Whether Massachusetts should adopt Delaware’s approach treating merger‑fairness claims as direct | Plaintiffs urge adoption of Delaware/Tooley approach (harm to shareholders = direct) | Defendants urge applying Massachusetts precedent and statute, which recognize directors’ duties primarily to the corporation | Held: Court declines to follow Delaware; Massachusetts law controls and leads to derivative treatment |
| Whether equitable concerns (e.g., merger closing before derivative suit concludes) require allowing a direct action | Plaintiffs argue derivative process may be inadequate because merger could close and plaintiffs lose standing | Defendants respond plaintiffs had equitable remedies available (e.g., demand, preliminary injunction) and statutory derivative process is adequate | Held: equitable concerns do not justify displacing derivative requirements; plaintiffs could have made demand and sought injunctive relief |
Key Cases Cited
- Kamen v. Kemper Fin. Servs., Inc., 500 U.S. 90 (1991) (describes purpose and nature of derivative actions)
- Bessette v. Bessette, 385 Mass. 806 (1982) (minority shareholders’ claim for corporate wrong must be pursued derivatively)
- Chokel v. Genzyme Corp., 449 Mass. 272 (2007) (directors’ duties discussion in the context of tracking stock and contract scope)
- Demoulas v. Demoulas Super Mkts., Inc., 424 Mass. 501 (1997) (fiduciary duties in close corporations)
- Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031 (Del. 2004) (Delaware test for direct vs. derivative claims — who suffered harm and who benefits)
- Donahue v. Rodd Electrotype Co. of New England, 367 Mass. 578 (1975) (close corporation fiduciary duties analogous to partnership)
- Stegall v. Ladner, 394 F. Supp. 2d 358 (D. Mass. 2005) (inquiry into whether shareholder injury is distinct from the corporate injury)