In IBEW Local No. 129 Benefit Fund v. Tucci, the Massachusetts Supreme Judicial Court (SJC) affirmed the dismissal of direct claims for breach of fiduciary duty by EMC shareholders challenging the merger of EMC and Dell, Inc. No. SJC-12137, 2017 Mass. LEXIS 124 (Mar. 6, 2017). The Court held that because directors of Massachusetts corporations generally owe fiduciary duties only to the corporation and not to shareholders, breach of duty claims could be asserted only derivatively. The decision is significant because it deviates dramatically from Delaware law, which allows direct claims in these circumstances, and it could have profound implications for merger litigation in Massachusetts going forward.
The transaction with Dell was approved unanimously by the EMC board. Plaintiff shareholders sued directly as opposed to derivatively, alleging among other things that the merger consideration (which consisted of a combination of cash and a “tracking stock” in one of EMC's subsidiaries) was inadequate and failed to maximize value, thereby allegedly harming them.
The cases initially were dismissed by a judge of the Business Litigation Session of the Massachusetts Superior Court, on the basis that under Massachusetts law directors owe fiduciary duties only to the corporation and not to shareholders, and therefore any claim for breach of duty had to be brought derivatively on behalf of the corporation. The SJC affirmed, relying on substantially the same reasoning. The Court noted that two exceptions to the general rule that fiduciary duties run only to the corporation—the enhanced duties of directors of close corporations and where a director imposes a self-interested transaction to the detriment of minority shareholders—did not apply to this public company merger.
The Broader Context of M&A Litigation
The Court acknowledged that Delaware law permits direct suits by shareholders challenging mergers on a breach of fiduciary duty theory, but was unpersuaded that Massachusetts should adopt the same rule. In particular, Delaware historically has allowed direct claims to proceed in merger lawsuits, concluding that fiduciary duties run both to the corporation and to shareholders, and that direct claims lie where the injury at issue is to the shareholders, not the corporation itself. See, e.g., El Paso Pipeline GP Co., L.L.C. v. Brinckerhoff, No. 103, 2016, 2016 Del. LEXIS 653, at *25 (Dec. 20, 2016) (involving a limited partnership) (citing Tooley v. Donaldson, Lufkin, & Jenrette, Inc., 845 A.2d 1031, 1033 (Del. 2004))
However, there have been other developments in Delaware law that make the Chancery Court a less favorable forum for merger litigation, leading plaintiffs to look for alternative venues to file merger lawsuits. See, e.g., Matthew D. Cain, et al., The Shifting Tides of Merger Litigation 8, (U. Penn. Inst. L. & Econ. Research Paper No. 17-6, 2017). Prior to recent changes in Delaware law, virtually all deals over $100 million resulted in fiduciary duty lawsuits seeking among other things to enjoin the merger until further disclosures were made, and typically also challenging the merger price and sales process. These lawsuits were criticized for yielding only marginal benefits for shareholders; plaintiffs often resolved the litigation for amended disclosures in connection with the merger in return for an award of attorneys' fees. Id. at 10. The Delaware Chancery Court recently took a stand against this type of litigation, announcing that it would not approve such settlements without a “meaningful benefit to stockholders.” In re Trulia, Inc. Stockholder Litig., 129 A.3d 884, 899 (Del. Ch. 2016). As a result of this harder stand against disclosure-only settlements, and because Delaware corporations have begun adopting exclusive-forum bylaws, which mandate that claims against the corporation asserting internal governance claims be filed in Delaware—thus channeling merger litigation into a forum where it is now more difficult for plaintiffs to prevail—merger lawsuits in Delaware have declined dramatically.
What Massachusetts Corporations Can Expect Following IBEW Local No. 129 v. Tucci
The SJC's decision in Tucci could be the death knell for this type of litigation in Massachusetts. There are substantial obstacles to derivative litigation. For one, a derivative action may only be filed after a shareholder files a written demand upon the corporation—and unlike in other jurisdictions, there is no exception waiving the demand requirement if demand would be futile. See Mass. Gen. Laws ch. 156D, § 7.42(1). Shareholder plaintiffs may not file suit for a minimum of 90 days following the submission of the mandatory demand, see id. § 7.42(2), meaning that many mergers may close before plaintiffs are actually permitted to file their complaint. And, as the Court recognized in Tucci, once a merger closes and a potential plaintiff no longer holds stock in the entity being acquired, she loses standing to bring fiduciary duty claims under the continuous ownership rule. Plaintiffs conceivably could still seek preliminary injunctions on the basis of disclosure claims, assuming they could show irreparable injury to the corporation, but in addition to the difficulties of showing irreparable harm or material non-disclosures, they would lose the leverage of price and process claims, which would be extinguished once the merger closed.
Given that Tucci will make merger litigation much more difficult to pursue in Massachusetts, companies incorporated in Massachusetts may want to consider following the trend of Delaware corporations in adopting exclusive-forum bylaws. These bylaws would mandate that any derivative litigation filed against the company in state court must be filed in the courts of Massachusetts. The adoption of an exclusive-forum bylaw could help companies avoid vexatious litigation that otherwise would serve to block, delay or raise the price of a merger.1
1 Tucci probably does not affect the recent trend where plaintiffs' lawyers sue in federal court to block mergers under the Securities Exchange Act of 1934 and SEC Rule 14a-9, but such claims may not include challenges to the price or the sale process.