983 N.W.2d 354
Mich.2022Background
- Covisint agreed to a cash-out merger with OpenText in 2017; OpenText paid $2.45 per share and Covisint became an OpenText subsidiary.
- Leslie Murphy, a Covisint shareholder, sued Covisint’s directors before the merger closed, alleging breaches of fiduciary duties (inadequate price, self-dealing, and a materially misleading/omissive proxy).
- The trial court and Court of Appeals held Murphy’s claim was derivative and dismissed for lack of standing (Murphy had not met derivative-demand requirements).
- Michigan Supreme Court considered (1) whether directors owe common‑law fiduciary duties directly to shareholders notwithstanding the Business Corporation Act (BCA), and (2) whether a claim challenging a cash‑out merger’s fairness is direct or derivative.
- The Court held directors do owe common‑law fiduciary duties to shareholders that the BCA did not abrogate, and that a shareholder may bring a direct claim for breaches arising from a cash‑out merger.
- The Supreme Court reversed the lower courts and remanded for further proceedings.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Do corporate directors owe common‑law fiduciary duties directly to shareholders, or did the BCA abrogate those duties? | Murphy: common‑law duties to shareholders exist independently of § 1541a and were not abrogated by the BCA. | Defendants: the BCA (MCL 450.1541a) governs directors’ duties and displaced any common‑law duties to shareholders. | The Court: common‑law fiduciary duties to shareholders survive the BCA; § 1541a governs managerial duties to the corporation but does not abrogate shareholder fiduciary duties. |
| In a cash‑out merger, what fiduciary obligations do directors owe to shareholders? | Murphy: directors must maximize shareholder value and fully disclose material facts when negotiating and presenting a cash‑out merger. | Defendants: (implicitly) directors’ duties are to the corporation and any harm is corporate/derivative. | The Court: once sale is inevitable, directors act to maximize the sale price for shareholders and must disclose all material facts to enable informed shareholder votes. |
| Is a shareholder challenge to the fairness/validity of a cash‑out merger a direct or derivative claim? | Murphy: the harm (receiving inadequate cash consideration) injures shareholders directly and any recovery would flow to shareholders, so the claim is direct. | Defendants: the claim is derivative and must satisfy statutory derivative‑action prerequisites (demand, etc.). | The Court: adopt Tooley test (who suffered the harm; who gets the recovery). A claim attacking merger fairness is direct because shareholders, not the corporation, suffer the harm and would get the remedy. |
Key Cases Cited
- Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031 (Del. 2004) (adopted test: distinguish direct vs derivative by who suffered harm and who receives recovery)
- Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986) (when sale of control is inevitable, board’s role is to maximize sale price for shareholders)
- Dodge v. Ford Motor Co., 204 Mich. 459 (Mich. 1919) (corporation organized for stockholders’ profit; directors’ powers to be used for that end)
- Christner v. Anderson, Nietzke & Co., P.C., 433 Mich. 1 (Mich. 1989) (Michigan precedent recognizing avenues for direct shareholder suits, including special‑injury formulations)
- Shenker v. Laureate Education, Inc., 983 A.2d 408 (Md. 2009) (directors negotiating cash‑out merger owe duties to negotiate fair price and make full disclosure)
- RBC Capital Markets, LLC v. Jervis, 129 A.3d 816 (Del. 2015) (disclosure duty in sale‑of‑control context is an application of fiduciary duties of care, loyalty, and good faith)