In Baldwin v. Connor, Justice Kenneth W. Salinger,
sitting in the Business Litigation Session in Suffolk County
Superior Court, recently issued a summary judgment decision in
which he ruled on issues of first impression involving appraisal
rights of stockholders in a closely held Massachusetts corporation,
among other issues. This decision is required reading for lawyers
that litigate shareholder disputes involving the fiduciary duty
principles that the Supreme Judicial Court announced in its 1975
decision in Donahue v. Rodd Electrotype Co. of New England,
Inc.
The Court held that a modification of an existing stock restriction
that has a material adverse effect on a shareholder's ability
to transfer their shares automatically triggers the
shareholder's appraisal rights and ability to require the
company to redeem the shares at the appraised price under Mass.
Gen. Laws c. 156D, § 13.02. The Court's analysis suggests
that any modification that does not clearly loosen an existing
restriction will be deemed to have a material adverse effect on the
shareholder's ability to transfer their shares.
Moreover, Judge Salinger ruled that a close corporation's
failure to give a shareholder required notice of appraisal rights
constitutes a breach of fiduciary duty under Donahue by
the directors who are also shareholders. This ruling was consistent
with Donahue, which held that all shareholders in a
Massachusetts close corporation owe each other a duty of utmost
good faith and loyalty.
In a discussion dropped in a footnote, the Court stated that there
is no right to a jury trial on a fiduciary duty claim under
Donahue, citing a 1996 Supreme Judicial Court decision
holding that such claims are equitable and not legal in nature.
From that premise, the Court ruled, on summary judgment, that
defendants had breached their fiduciary duties as a matter of law
by failing to notify plaintiffs of their appraisal rights and it
fashioned a remedy. The Court held that plaintiffs had the right to
redeem their shares for their fair value as of the date (i) the
company should have been provided notice of appraisal rights or
(ii) the date the company belatedly did provide such notice,
whichever is higher.
Baldwin v. Connor is an important case because it is the
first Massachusetts decision to rule that a modified stock
restriction triggers appraisal rights and to mete out consequences
for the failure to provide timely notice of such rights.
Directors/shareholders in Massachusetts close corporations will be
found to have breached their fiduciary duties if they fail to
provide timely notice of appraisal rights. And that determination
will be made by a judge, not a jury. Litigators and business
attorneys who represent Massachusetts corporations and their
stakeholders should advise their clients about this decision.
Summer associate Sebastian Peguero co-authored this
alert.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.