MEMORANDUM AND ORDER
The Court held a nine-day jury trial in this shareholder class action arising from a corporate merger. The Court assumes familiarity with the parties’ dispute. See MAZ Partners LP v. Shear, 204 F.Supp.3d
On March 10, 2017, the jury returned a verdict in favor of Bruce Shear and Acadia Healthcare, Inc. (the “defendants”).
1. Has the plaintiff MAZ proven that Bruce Shear controlled a majority of the PHC Board of Directors with regard to the Board’s decision to approve the merger?
Yes _X_ No_
2. Has the defendant Bruce Shear proven that the merger was entirely fair to the Class A shareholders?
Yes_ No _X_
3. Has MAZ proven that, at the time of the merger, the class suffered an economic loss caused by Shear’s breach of fiduciary duty to the Class Á shareholders?
Yes_ No _X_
Docket No. 419. Pursuant to the instructions on the verdict form, the jury stopped after finding no economic loss and did not answer subsequent questions on aiding- and-abetting liability and damages.
Plaintiff MAZ Partners LP (“MAZ”) moves for judgment as a matter of law or, in the alternative, for a new trial. MAZ raises a number of issues: (1) alleged inconsistency in the jury verdict, (2) the appropriateness of one of the questions on the special verdict form, (3) the availability of equitable remedies notwithstanding the jury verdict, and (4) evidentiary error at trial. The defendants respond to those issues and also raise three alternative bases for a finding of non-liability.
• The Court ALLOWS in part the motion for judgment as a matter of law (Docket No. 423). The Court orders that Shear’s pro rata share of the $5 million Class B premium be disgorged to the certified class. Otherwise, the Court DENIES the motion. The Court DENIES the motion for a new trial (Docket No. 426).
DISCUSSION
I. Alleged Inconsistency of Jury Verdict
MAZ argues that the jury’s answer to Question 3 — that the class did not suffer an economic loss from Shear’s breach of fiduciary duty — is inconsistent with its determination that Shear was a controlling shareholder and that the merger was not entirely fair to the class. MAZ’s objection is untimely, and in any event the jury’s verdict was not inconsistent.
A. Waiver
MAZ failed to timely challenge the.jury’s special verdict as inconsistent. “[W]ith respect to special verdicts, ‘the law is perfectly clear that parties waive any claim of internal inconsistency by failing to object after the verdict is read and before the jury is discharged.’” In re Nexium (Esomeprazole) Antitrust Litig.,
B. Consistency of Verdict
In any event, the jury verdict was not inconsistent. The jury could have concluded that the premium paid to the Class B shareholders for their high-vote stock was too large but that there was no resulting economic loss to the Class A shareholders. That conclusion was supported by testimony of the defendants’ expert Andrew Capitman:
Well, one of the things that I disagree greatly with [plaintiffs expert] Mr. Morris about is simply this idea that if you weren’t getting the — if the Class Bs were not getting the premium, the buyer would have paid more for the Class As, and generally speaking, I don’t see any evidence for that. I don’t see any facts that would support that. But just as a matter of practicality and sort of how cheap and flinty-eyed anybody is when they’re a buyer in one of these big executive positions, they don’t have to pay it. They’re offering a fair price for A. That’s in and of itself enough. That they’ve got to get the Bs to come along with the deal and they’ve got to negotiate a deal for that, that’s a separate issue. So just like you’ve got to pay for lawyers and accountants and bankers, this is a cost of the deal, but it’s not a valuation issue.
Trial Tr. Day 8 at 94. Capitman reiterated that point in response to a juror question:
A JUROR: So if the B deal wasn’t done — is this what you’re saying — if the B deal was not done, the price of the A shares would not have changed?
THE WITNESS: Yes, that’s what I’m saying. What I’m saying is that from the point of view of assessing the fairness of the deal, the question is, were the A shareholders getting paid a fair price for their PHC stock?
A JUROR: I guess my question is, would the A shares’ stock price have changed if the.B deal — is there a potential for that to have happened if the B deal wasn’t made?
THE WITNESS: I see no evidence that there was any discussion like that.
Trial Tr. Day 8 at 94-95. There was adequate evidentiary support for the jury’s conclusion that even if the $5 million premium for Class B shares was too high (or that no premium should have been paid at all), there was no resulting economic loss' to the Class A shareholders because the Class A shareholders would not have gotten a higher price but for the Class B premium.
The entire fairness standard involves an inquiry into two interrelated concepts: fair dealing and fair price. To determine whether the merger was .a product of fair dealing, you may consider when the transaction was timed, how it was initiated, how it was structured, how it was negotiated, how it was disclosed to the directors, and how the approvals of the directors and stockholders were obtained .... The fair dealing and fair price components are not viewed in isolation. Rather, you should consider both concepts in conjunction to determine whether the merger was entirely fair to PHC’s Class A shareholders. The paramount issue, however, is whether the exchange ratio — you’ve heard about this during the testimony — whether the exchange ratio, the additional consideration to Class B shareholders, arid the $90 million pre-merger dividend to Acadia shareholders were fair to the Class A shareholders.
Trial Tr. Day 9 at 26-27; see also Weinberger v. UOP, Inc.,
II. Question 3 on Verdict Form
MAZ argues that the Court’s inclusion of Question 3 on the verdict form was error because there is no separate causation element necessary to éstablish a fiduciary duty claim against a controlling shareholder. MAZ failed to timely object to Question 3, and in any event the inclusion of Question 3 on the verdict form was not error.
A. Waiver
Under Federal Rule of Civil Procedure 51(b)(2), the Court must inform the parties of its proposed instructions and “must give the parties an opportunity to object on the record and out of the jury’s hearing before the instructions and arguments are delivered.” A party may make a timely objection by “objecting] at the opportunity provided under Rule 51(b)(2).” Fed. R; Civ. P. 51(c)(2)(A), If the party was not iriformed of an instruction before the opportunity provided under Rule 51(b)(2), the party must “object[] promptly after learning that the instruction ... has been given.” The First Circuit has adhered to a “strict enforcement of the object-or-forfeit rule.” Booker v. Mass. Dep’t of Pub. Health,
On February 14, 2017, the Court distributed an initial draft verdict form to the parties via email. Question 9 on the draft verdict form asked: “Has MAZ proven that the class has suffered an economic
On March 8, 2017, the seventh day of trial, the Court distributed to the parties a revised draft verdict form and draft jury instructions. Trial Tr. Day 7 at 7-8. Although the draft verdict form had been significantly shortened since the February pretrial conference because of the intervening decision in Int’l Bhd. of Elec. Workers Local No. 129 Benefit Fund v. Tucci,
On March 9, 2017, the eighth day of trial, the Court distributed to the. parties a revised draft verdict form and revised draft jury instructions that incorporated the parties’ requests from the prior day’s charge conference. Trial Tr. Day 8 at 80. Later that day, following the close of evidence, the Court stated: “as far as I’m concerned, the verdict form is set at this point because I can’t change it at the last minute, and I will hand that out to the jury beforehand. So if there are any problems with it, you need to shoot me an email by, say, 4:00 o’clock.” Trial Tr. Day 8 at 134. The parties raised some issues at the time, but none related to the economic loss question. Trial Tr. Day 8 at 134-40. The parties also emailed , the clerk before the 4:00 PM deadline with additional issues related to the jury charge, but none of the emails related .to the economic loss question,
On March 10, 2017, the ninth day of trial, the- Court handed out the special verdict form to the jury and charged the jury. MAZ did not object to Question 3 or the associated jury instruction. Following the jury charge and the closing arguments, the Court held a final sidebar conference before sending the jury to deliberate. Trial Tr. Day 9 at 108. The Court stated: “If it’s just preserving an objection for the record, let me do it after I send the jury back; but if it’s something, that I misstated or some other such issue, you know, like that one instruction, that kind of thing.” Trial Tr. Day 9 at 108. MAZ still did not challenge the question on economic loss.
Only after the. jury was excused, MAZ stated: ‘Tour Honor, from the verdict form, we would object to the inclusion of the question with respect to economic loss, which is No. 3. We would- also object to the — and we would on that, one ask that the question be removed from the charge.” Trial Tr. Day 9 at 110. This was the first time MAZ asked that the economic loss
MAZ did not adequately preserve its objection to Question 3 on the special verdict form by raising it for the first time after the jury commenced deliberation. The Court had given MAZ notice even before the final pretrial conference that the jury was going to be asked about economic loss, and MAZ had many opportunities to object to the question. Even when MAZ did raise the objection for the first time after the jury commenced its deliberation, MAZ did not articulate its reason for seeking to eliminate Question 3.
B. Causation and Breach of Fiduciary Duty
In any event, the Court did not err in asking the jury to determine economic loss. Under Massachusetts law, a plaintiff must prove causation to recover damages for breach of fiduciary duty. Qestec, Inc. v. Krummenacker,
But equitable relief may be available without a showing of causation. Massachusetts courts have recognized the availability of equitable remedies as relief for breach of fiduciary duty. See Berish v. Bornstein,
The jury’s function was only to determine whether damages should be awarded.
MAZ. argues that causation can be presumed in a controlling stockholder case, even for purposes of a legal damages remedy. The case law does not support that position. First, MAZ argues that there is no mention of causation as a separate element to a fiduciary duty claim in two Massachusetts cases discussing the fiduciary duty of a controlling shareholder in a corporate merger: Coggins v. New England Patriots Football Club, Inc., 397
III. Equitable Relief
MAZ seeks two foriris of equitable relief: (1) disgorgement of Shear’s $4.7 million pro rata portion of the Class B payment, plus prejudgment interest, and (2) rescis-sory damages as necessary to reform the 22.5%/77,5% equity split in the merger to the split that the Court determines is fair.
/ Under Massachusetts law, “[ejquitable remedies are flexible tools to be applied with the focus on fairness and justice. A court has the power to grant equitable relief when there has been a violation of fiduciary duty and fraud, and rescission may be ordered to avoid unjust enrichment of the fiduciary at the expense of a beneficiary. A court may also reform an agreement to correct wrongdoing,” Demoulas,
While equitable relief is withiii the equitable power of the Court, the Court is bound by the jury’s determination on any issues the jury decided relating to the legal remedy. See Wright & Miller, supra, § 2306; see also Int’l Fin. Servs. Corp. v. Chromas Techs. Canada, Inc.,
By answering “yes” to the first question on the special verdict form, the jury deter
At trial, MAZ presented two theories as to why the transaction was not entirely fair: first, because the Class B premium was too large, and second, because the equity split for the PHC shareholders was unfair. The jury’s answers on the special verdict form are consistent if the jury agreed with the first theory but then determined that the Class A shareholders suffered no injury from'the unfairly high Class B premium. There does not seem to be (and the parties do not suggest) a way that the jury verdict can be squared with liability under MAZ’s second theory that the Acadia/PHC equity split was also unfair and therefore .a breach of fiduciary duty. If Shear had breached his fiduciary duty by obtaining an unfair equity split, then the Class A shareholders must have suffered economic loss because the Class A merger consideration was directly tied to the equity split. The Court would reach this same conclusion independently of the jury verdict. Shear breached his fiduciary duty as a controlling shareholder because the Class B premium was not entirely fair to the Class A shareholders, but MAZ failed to prove that the 22.5% equity share for PHC was also a breach of fiduciary duty.
As a result of the foregoing, there is no basis for rescission to reform the equity split. The facts presented .at trial do justify disgorgement of Shear’s.$4.7 million pro rata portion of the Class B premium-. See Berish,
Thé Court calculates the disgorgement remedy as follows. The Class B shareholders received a $5 million premium. While that premium was too high, the payment of a premium was not altogether wrongful. Matthew Morris, the-expert'for MAZ, testified about a report that Evercore wrote for Xerox about premiums for high-vote share classes. Trial Tr. Day 7 at 95. The Evercore report found thirty transactions in which a company with two classes of shares was acquired. Id. at 96. In twenty-three of those transactions, zero premium was paid to the high-vote shares. Id.'In the seven transactions in which a premium was paid, the premium ranged1 from-1.1 to 5.2 percent'of the equity value of the company before the transaction, with an average of around 3.2 percent. Id. at 97. Morris calculated that 3.2 percent of PHC’s market capitalization at the time of the merger was about $1.82 million. Id. at 98. In other words, MAZ’s own expert suggested that a $1.82 million Class B premium - may have been 'defensible. The difference between that and $5 million — $3.18 million — was unjustified. According to the final proxy statement, Shear owned 721,259 shares of Class B common stock. Docket No. 187-1 at 183. As of the record date, there were 773,717 shares of Class B common stock
There remains an additional question: to whom that sum is disgorged. Disgorgement of that sum to MAZ and the class it represents would be a windfall, since Shear breached his fiduciary duty to all of the Class A shareholders but MAZ represents only 29.2%
When the defendant has acted in conscious disregard of the claimant’s rights, the whole of the resulting gain is treated as unjust enrichment, even though the defendant’s gain may exceed both (i) the measurable injury to the claimant, and (ii) the reasonable value of a license authorizing the defendant’s conduct. Restitution from a conscious wrongdoer may therefore yield a recovery that is profitable to the claimant — a result that is generally not permitted when the restitution claim is against an innocent recipient. Restitution requires full disgorgement of profit by a conscious wrongdoer, not just because of the moral judgment implicit in the rule of this section, but because any lesser liability would provide an inadequate incentive to lawful behavior.
Restatement (Third) of Restitution and Unjust Enrichment § 3 cmt. c (2011). The Restatement expressly recognizes that principle as a remedy for the breach of fiduciary duty. See id. § 43 cmt. c (“Gain resulting from breach of fiduciary duty is a prime example of the unjust enrichment that the law of restitution condemns, and one function of the rule of this section is to exclude the possibility of profit from this kind of wrongdoing. An equally fundamental goal of liability under § 43, and one which may be stated without reference to unjust enrichment, is to enforce by prophylaxis the special duties of the fiduciary. Restitution offers a further safeguard, beyond the fiduciary’s liability to make good any injury, protecting the reliance of the beneficiary on the fiduciary’s disinterested conduct. To this end, a liability in restitution by the rule of this section does not depend on proof either that the claimant has sustained quantifiable economic injury or that the defendant has earned a net profit from the transaction.”). In short, there have been other cases in which disgorgement would result in greater recovery to the plaintiff than the amount of injury that it actually suffered. That in itself is not an extraordinary situation that makes disgorgement inequitable.
MAZ asks for interest on the disgorgement amount. In determining the equitable remedy, the Court is not bound by the state statutory interest rate for tort damage awards in Mass. Gen. Laws ch. 231, § 6B. The Court finds that it would be equitable to award interest at the one-year Treasury bill rate, compounded annually, running from the date of the merger to the date of this order.
Finally, awarding equitable relief is not unconstitutional additur, as the defendants claim. “[T]he • Seventh Amendment flatly prohibits federal courts from augmenting jury verdicts by additur.” Campos-Orrego v. Rivera,
IY. Prejudicial Evidence Concerning Post-Merger Stock Performance
MAZ argues, in the alternative, that a new trial is warranted on the basis of prejudicial evidence and argument concerning Acadia’s post-merger stock performance.
Under Federal Rule of Civil Procedure 61, “Unless justice requires otherwise, no error in admitting or excluding evidence— or any other error by the court or a party — is ground for granting a new trial, for setting aside a verdict, or for vacating, modifying, or otherwise disturbing a judgment or order. At every stage of the proceeding, the court must disregard all errors and defects that do not affect any part/s substantial rights.” See Granfield v. CSX Transp., Inc.,
MAZ filed a motion in limine to exclude any reference to Acadia’s post-merger stock price performance. Docket No. 315. The Court allowed in part and denied in part the motion in limine. The Court ruled that evidence of post-merger stock price performance is admissible to the extent that the evidence demonstrates why the PHC board opted to negotiate for a larger percentage of the equity in the resulting company. But the Court ruled that the defendants could not make a “no harm, no foul” argument that MAZ did not suffer an injury because of the rise in the stock price. Docket No. 374 at 68-70.
MAZ’s argument for a new trial can be parsed into two parts. First, MAZ argues that the Court’s ruling on the motion in limine was erroneous. Second, MAZ ar
MAZ’s first argument is adequately preserved. “When a court makes a definitive ruling on a motion in limine, a party need not renew the objection at the time the evidence is offered.” United States v. Carpenter,
MAZ’s second argument, is not adequately preserved, MAZ did not make any contemporaneous objections at trial when, it now alleges, the defendants did not comply with the line the Court drew. In any event, the Court-finds that the defendants complied with the line by avoiding any “no harm, no foul” argument. No,limiting instruction was necessary, and none was requested — in fact, when the Court offered to bring the jury back for a limiting instruction, MAZ declined. Trial Tr. Day 9 at 116-18.
Y, Defendants’ Alternative Arguments
The defendants raise three alternative arguments supporting a verdict in their favor: the Tucci decision from the Supreme Judicial Court, insufficiency of evidence on control of a majority of directors, and statutory ratification. None have merit, but they are adequately preserved for appeal.
A. Tucci
The defendants argue that judgment should have been entered as a matter of law based on International Bhd. of Elec. Workers Local No. 129 Benefit Fund v. Tucci,
The defendants argue that the exception applies only to majority controlling
B.Sufficiency of Evidence bn Control
The defendants argue that there was insufficient evidence of Shear’s control of a majority of the board of directors. They point out, correctly, that Shear’s power to appoint a majority of the directors does not, without more, establish control. See In re Primedia Inc. Derivative Litig.,
There was sufficient evidence of control. Even without evidence pertaining specifically to each individual director, MAZ presented evidence that Shear was intimately involved in the operations of the company from its very beginning. The various emails - to and from Shear during the course of the merger negotiations showed that Shear controlled the entire negotiation process, with little involvement from most of the other members of the board. See, MAZ,
C.Shareholder Ratification
The defendants argue for shareholder ratification under Mass. Gen. Laws. ch. 156D, § 8.31. The Court previously held, in its order on the defendants’ motion for partial reconsideration ’of the summary judgment order, that the statute does not apply. Docket No. 302 at 16-21.
As the Court stated, § 8.31 applies to “conflict of interest transactions.” A conflict of interest transaction is defined as “a transaction with the corporation in which a director of the corporation has a material direct or indirect interest.” Mass. Gen. Laws ch. 156D, § 8.31(a).
A director has an indirect interest in a transaction if either “another entity in which he has a material financial interest or in which he is a general partner is a party to the transaction” or “another enti
ORDER
The Court ALLOWS in part the motion for judgment as a matter of law (Docket No. 423) to the extent that $2,964,396 plus interest is disgorged from Shear to the certified class. The Court otherwise DENIES the motion. The Court DENIES the motion for a new trial (Docket No. 426).
The parties shall submit a proposed form of judgment within fourteen days.
Notes
. The other defendants were dismissed from the case, leaving only Shear and Acadia by the time the case went to the jury. Trial Tr. Day 8 at 52-53.
. "Actions for breach of fiduciary duty, historically speaking, are almost uniformly actions 'in equity’ — carrying with them no right to trial by jury.” Ed Peters Jewelry Co. v. C & J Jewelry Co.,
. MAZ represents "all Class A shareholders who voted against the merger or abstained,” Docket No. 234 at 3, which includes both Class A shareholders that affirmatively abstained and those who did not vote at all, Docket Nos. 325, 367, 374 at 62. Those voters constituted 29.2% of the Class A shareholders. Trial Ex. 18 (SEC Form 8-K reporting shareholder vote).
. Disgorgement may be inequitable in some cases where the plaintiff seeks "unduly re