Clemmer v. Cullinane (Massachusetts Supreme Judicial Court)

Plaintiff George Clemmer was terminated in 1999 as an employee of LiveData, a closely held Delaware software company doing business in Massachusetts. Clemmer was also, and has remained, a minority shareholder and director of the company. Clemmer brought suit in Massachusetts Superior Court alleging that his termination as an employee resulted in a shareholder freeze-out. While Massachusetts may recognize such a claim in the close corporation context, Delaware does not. The Superior Court applied Delaware law and dismissed the case, but the Appeals Court reversed, holding that Clemmer had in fact stated a viable freeze-out claim under Delaware law. Concerned that the Appeals Court had misinterpreted important Delaware precedent, NELF directly represented LiveData in an application for further appellate review by the Massachusetts Supreme Judicial Court (“SJC”). NELF presented to the SJC the Delaware decisions clearly establishing that Clemmer had no freeze-out or any other breach of fiduciary duty claim under Delaware law based on his termination as an employee. NELF also reminded the Court of its own ruling in Harrison v. NetCentric Corp., 433 Mass. 465, 471 (2001), which applied Delaware law to a minority shareholder’s termination claim, that, absent some contractual agreement to the contrary, “Delaware law does not impose the heightened fiduciary duty of utmost good faith and loyalty on shareholders in a close corporation.” NELF argued that the many Delaware close corporations based in Massachusetts should be able to rely on this fundamental principle of Delaware law in litigation, even if brought in the Massachusetts courts. Under Delaware law, shareholders in close corporations must bargain for the heightened fiduciary duties recognized under Massachusetts law, such as through a shareholder or employment agreement, or by agreeing to incorporate as a Delaware statutory close corporation. Clemmer did not pursue any of these protections. On December 1, 2004, the SJC denied NELF’s application for further appellate review, Clemmer v. Cullinane, et al., 442 Mass. 1113 (2004). The SJC leaves unresolved whether the Appeals Court simply misread Delaware precedent or was signaling an unwillingness by Massachusetts courts to enforce Delaware’s freedom-of-contract approach to the rights of shareholders in close corporations.