Halebian v. Berv, et al. 

 (Massachusetts Supreme Judicial Court)

• Defending the Business Judgment Rule in Massachusetts

In this case, the Massachusetts SJC has before it an important question of Massachusetts corporate law certified to it by the Second Circuit, namely whether the business judgment rule, codified in the Massachusetts Business Corporation Act, G. L. c. 156D, applies to dismiss a shareholder derivative suit that was filed before the corporation’s board of directors refused the demand underlying the suit.  The defendants, the board of trustees of a Massachusetts mutual fund organized as a Massachusetts business trust, refused the shareholder demand underlying the derivative suit after the derivative suit was timely filed under the Act.  The plaintiff, a shareholder in the mutual fund, argues that the Act restricts the business judgment rule to pre-suit refusals.  He relies for support on language in the Act that “[a] derivative proceeding commenced after rejection of a demand shall be dismissed by the court on motion by the corporation if the court finds that [the board of directors] has determined in good faith after conducting a reasonable inquiry upon which its conclusions are based that the maintenance of the derivative proceeding is not in the best interests of the corporation[.]”  G. L. c. 156D, § 7.44(a) (emphasis added).  NELF has filed a brief in support of the defendants, arguing that the relevant provisions of c. 156D, including the drafters’ comments to each provision, expressly allow a corporation’s board of directors to obtain dismissal of a shareholder derivative suit based on a post-suit refusal.  In particular, NELF pointed out that the comment to § 7.42  of the Act, which requires all shareholders to make written demand on the corporation and then wait generally at least 90 days before filing a derivative suit, states that the board may seek a stay under the subsequent section, § 7.43, if it has not reached a decision before suit is brought.  Section 7.43 , in turn, authorizes a court to stay a derivative suit to allow a board to conclude its inquiry into the allegations made in the demand or complaint.  The comment to § 7.43 expressly states that a stay would be appropriate where a board needs more time to complete its inquiry after a complaint is filed.  Significantly, the comment to § 7.44 , which codifies the business judgment rule for board litigation decisions and contains the very “after rejection” language giving rise to the certified question in this case, expressly states that the board can reject a shareholder demand either before or after a derivative suit has been filed.  NELF confronted the “after rejection” statutory language and argued that, rather than restricting application of the business judgment rule to pre-suit refusals, it is more likely that this language merely refers to the typical sequence of events under the common law in a “demand refused” derivative suit, in which a shareholder typically had to wait an unspecified length of time for the board’s refusal before being allowed to file suit.  NELF argued that, to give full effect to the § 7.43  stay provision and related comments, the “after rejection” language of § 7.44  should not be interpreted as limiting the business judgment rule to pre-suit refusals but instead as merely describing the procedural posture of the familiar “demand refused” case under the common law.  That is, the “after” language should be read as illustrative and not exclusive, because the Act expressly allows for the dismissal of a derivative suit based on a post-suit refusal.  NELF also argued that the Act’s provisions and comments indicate a clear legislative intent to achieve a reasonable balance between the competing goals of corporate autonomy and corporate accountability with respect to shareholder derivative suits.  While the Act strengthens a shareholder’s role in holding directors accountable to their duties owed to the corporation and encourages boards to respond promptly to shareholder demands, the Act also preserves management’s autonomy by codifying the well-established business judgment rule and establishing a universal written demand requirement.  While the Act does encourage a prompt decision by the board, the Legislature has tempered this goal with the practical reality that corporations may need more time to reach a decision and should be allowed to do so after suit is brought.  This well-crafted balance of interests would be destroyed if the Act were interpreted as arbitrarily limiting the application of the business judgment rule to a board decision made only before a derivative suit was filed.  NELF further argued that the plaintiff’s interpretation of the Act contravenes the SJC’s clear precedent recognizing that “[t]he business judgment rule affords protection to the business decisions of directors, including the decision to institute litigation, because directors are presumed to act in the best interests of the corporation.”  Harhen v. Brown, 431 Mass. 838, 845 (2000) (emphasis added).  There is no conceivable policy served in depriving management of the business judgment rule merely because a shareholder has filed a derivative suit before the board has reached a decision.  The plaintiff’s interpretation of the Act would invite judicial second-guessing of corporate litigation decisions, chilling managerial autonomy and the entrepreneurial spirit essential to a robust economy. The Legislature could not have intended such a deleterious result.