Director Fiduciary Duty: Massachusetts Changes

The common understanding is that boards of directors owe fiduciary duties to the shareholders. This is the “Delaware rule” and has been understood until now to apply also to Massachusetts corporations.

Not so fast.

Although the rule in Massachusetts remains that the board duty runs to the shareholders in closely held companies (where the Massachusetts approach has always been similar to imposing the kinds of high fiduciary standards expected from partners), a current decision of the Massachusetts Supreme Judicial Court changes the rules for publicly held entities.

In the high-profile acquisition by Dell of Massachusetts-incorporated EMC, the transaction was structured by EMC’s holding company merging upstream into Dell, rather than having EMC sell each of the individual EMC operating companies separately. Shareholders sued the directors, claiming that the proper way to maximize shareholder value was to sell each individual unit and have a separate price for each.

The Supreme Judicial Court struck down the case, establishing a new rule for public corporations in Massachusetts. Citing the Massachusetts Corporation Act that makes it clear that directors must hold the reasonable belief that they act in “the best interests of the corporation,” and further citing the statute to the effect that in so acting directors may consider other constituencies including employees, creditors, customers and societal considerations, the Court broke with the Delaware rule as it relates to public companies.

This does not mean that disgruntled shareholders have no recourse against directors. They can always make demand on the board, asking the independent members of the board to find that the directors violated their duty to the corporation. But direct litigation by shareholders of public corporations (absent self-dealing) now will no longer be permitted in Massachusetts.

It should be noted that the SJC applied the literal language of the statute in articulating the obligation of corporate directors to public companies. But the statute itself makes no such distinction, and the SJC seemingly has retained its interpretation that the duty of directors in private Massachusetts companies runs directly to the shareholders notwithstanding the language in the statute.

I bet the legislature didn’t have this dichotomy in mind when they passed the statute!

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