Shareholders of EMC Corp. could not bring a direct class action accusing company directors of breaching a fiduciary duty by recommending EMC’s sale for an allegedly inadequate price, a Superior Court judge in Massachusetts has ruled in a case of first impression.
The defendant directors had recommended the sale of the Hopkinton-based data storage and services company to Texas computer giant Dell Inc. for $24 a share in a $64 billion transaction. The defendants argued that, under Massachusetts law, their fiduciary duty was to the corporation, not the shareholders.
Judge Edward P. Leibensperger agreed, holding that any claim had to be brought derivatively on the corporation’s behalf.
“[T]he director cannot be permitted to serve two masters whose interests are antagonistic,” Leibensperger wrote, referring to conflicts that can arise between a corporation and shareholders in a merger situation. “In sum, in the context of a decision to approve a plan of merger where all shareholders will receive identical consideration for their shares, a director’s fiduciary duties can run only to the corporation.”
The seven-page decision is IBEW Local No. 129 Benefit Fund v. Tucci, et al.
Dimitry S. Herman, a corporate transactional attorney in Waltham, said the decision provides helpful guidance as to what a Massachusetts court will consider in deciding whether a direct claim is appropriate.
For example, said Herman, who was not involved in the case, the decision indicates that a court would not entertain general allegations that a board failed to take necessary steps to maximize shareholder value to go forward. Similarly, a court also probably would dismiss general allegations that deal protection provisions built into the transaction unreasonably preclude other potentially superior offers.
At the same time, the decision suggests that deals in which consideration is not the same for every shareholder — or where change-of-control bonuses for management are created as part of the transaction — might be vulnerable to direct shareholder suits, he said.
Herman further commented that the decision seemed like “a good outcome” for Massachusetts corporations and those who sit on their boards.
“If there’s a merger-and-acquisition deal and you’re a stockholder and you don’t like the price, this decision suggests that you can’t sue the board for failing to have done its job and sitting idly by and rubber-stamping something the management thought was good,” he said. “If I’m a board member of a company incorporated in Massachusetts, it gives me comfort that I won’t be exposed to a direct lawsuit by a minority stockholder for breach of fiduciary duty on this set of facts.”
Boston attorney James L. Rudolph, who represents shareholders in stock disputes, said while the decision may be new law, it is a “consistent extension of recent Massachusetts decisions” and is in line with the law in other states as well.
However, he noted, it leaves unanswered some questions for future courts to address regarding fiduciary duties owed by directors to shareholders.
For example, Rudolph said, attorneys would want to know how the number of shareholders might impact whether directors have a fiduciary duty toward them. Similarly, it would be useful to have judicial guidance on whether some or all directors need to benefit from a corporate action more than shareholders in order to impose a fiduciary duty and whether material information needs to be hidden from shareholders before such a duty applies, he said.
Boston lawyers Jeffrey C. Block, Jason M. Leviton and Steven P. Harte represented the plaintiffs. James R. Carroll, Thomas J. Dougherty and Kurt W. Hemr, of Boston, were counsel for the defendants.
Attorneys for the parties could not be reached for comment prior to deadline.
On Oct. 12, 2015, publicly traded Massachusetts corporation EMC announced a deal in which Dell would purchase the company in a transaction expected to close in mid-2016.
According to the transaction’s terms, each EMC shareholder would receive $24.05 per share in cash plus an estimated 0.111 shares of “tracking stock” of VMWare Inc., a company 80 percent owned by EMC.
Just three days after the announcement, the lead plaintiff, a pension fund for IBEW Local No. 129, which apparently holds a significant amount of EMC stock, filed a class action on behalf of itself and other similarly situated shareholders.
According to the plaintiffs, the board breached its fiduciary duty to shareholders by recommending the deal without taking proper steps to maximize the value of the stock and by agreeing to deal protection provisions that would unreasonably hinder any potential better deals that might come along.
Specifically, the plaintiffs alleged that because of EMC’s unique “federation” structure, its subsidiaries and divisions would be worth more sold separately than the sale of the company as a whole. According to the plaintiffs, the board unreasonably ignored efforts by shareholders to be heard on that point.
The plaintiffs also claimed that defendant Joseph M. Tucci, EMC’s longtime CEO and a member of the board who would receive $27 million under “change in control” provisions in his compensation package should the company be sold intact, wrongly influenced the board’s decision to recommend the deal as structured.
The defendants moved to dismiss the case, arguing that their fiduciary obligation was to the corporation, not any particular shareholders, and thus the plaintiffs could bring a derivative action only on the corporation’s behalf, not a direct action on their own behalf.
No direct action
Leibensperger agreed with the defendants that a direct fiduciary claim was inappropriate.
Section 8.30(a)(3) of the Massachusetts Business Corporation Act states that a director must act in a manner that he or she believes to be in the best interest of the corporation and cannot be held directly liable for decisions made in accordance with that standard, the judge noted.
Leibensperger also rejected the plaintiffs’ contention that the Business Corporation Act, Chapter 156D, implicitly recognizes directors’ fiduciary obligations to shareholders in all cases by stating in Section 2.02(b)(4) that a company can limit the fiduciary duties of directors as long as the limitation does not apply to “any breach of the director’s duty of loyalty to the corporation or its shareholders.”
Such a broad assertion would mean that shareholders of public companies could sue directors even when the directors acted in the company’s best interest, the judge said.
“Such exposure to a director is directly contrary to [Section 8.30(d)],” Leibensperger added.
Meanwhile, the proposed transaction in the case was a cash-out of 100 percent of EMC’s equity, with all shareholders being treated equally.
In such a case, “there is no distinction between ‘shareholder value’ and the ‘corporation’s value,’” Leibensperger said. “‘Shareholder value’ is simply derivative of the corporation’s value. The plaintiffs do not allege any harm distinct from the alleged harm to the corporation.”
Leibensperger further rejected the plaintiffs’ assertion that dismissing their action would deprive them of a remedy, pointing out that they could still vote their shares against the proposed deal and try to persuade other shareholders to do the same, and they could still attempt to bring their claim derivatively.
Accordingly, he concluded, the action should be dismissed.