Defending the Business Judgment Rule in Massachusetts
Responding to a question certified to it by the Second Circuit, the Massachusetts Supreme Judicial Court confirmed, in a decision issued on August 23, 2010, that a corporation may seek dismissal of a shareholder derivative suit based on the business judgment doctrine after suit has been filed. The plaintiff, whose demand was ultimately rejected by the board of directors of the Massachusetts business trust on whose behalf his suit had been filed, sought to draw a negative inference from what the SJC in its opinion recognized was unfortunate language in Mass. G.L. c. 156D (the statute that in 2003 codified, inter alia, the rules governing shareholder derivative claims), to argue that the statute required the board of directors to exercise its business judgment and refuse the demand before he filed suit. He relied for support on Mass. G. L. c. 156D, § 7.44(a) which provides 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[.]” (Emphasis added.) Plaintiff also relied on § 7.42 of the statute, which generally gives shareholders the right to file suit 90 days after making written demand on the corporation.
NELF argued in its amicus brief in support of the defendants that, despite the isolated phrase “after rejection” in the business judgment provision, a consideration of all of the relevant provisions of c. 156D, including the drafters’ comments, defeats plaintiff’s interpretation and clearly allows a corporation’s board of directors to obtain dismissal of a shareholder derivative suit based on a post-suit rejection of a shareholder’s demand. Among its arguments, NELF pointed to the stay provision in the statue, § 7.43, which 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 beyond the 90 days provided in § 7.42. Moreover, the comment to that provision expressly states that a stay would be appropriate where a board needs more time to complete its inquiry after a complaint is filed. Perhaps most significantly, the drafter’s comment to § 7.44 itself expressly states, contra to the “after rejection” language in that provision giving rise to the certified question in this case, that a board can reject a shareholder demand either before or after a derivative suit has been filed.
In its unanimous decision, the SJC embraced NELF’s interpretation of the Act, concluding that the Legislature expressly intended to allow a corporation’s board to seek dismissal of a shareholder derivative suit based on a post-suit refusal of the demand underlying the suit. The Court agreed with NELF that, notwithstanding the “after rejection” language, “[t]he language in various other provisions of the Act [and] language within [the provision containing the “after rejection” language] itself, clearly indicates that the Legislature intended that a corporation should be entitled to dismiss a derivative proceeding under the business judgment doctrine regardless whether the corporation’s rejection of the shareholder’s demand precedes or follows the filing of the derivative suit.”
Responding to a question certified to it by the Second Circuit, the Massachusetts Supreme Judicial Court confirmed, in a decision issued on August 23, 2010, that a corporation may seek dismissal of a shareholder derivative suit based on the business judgment doctrine after suit has been filed. The plaintiff, whose demand was ultimately rejected by the board of directors of the Massachusetts business trust on whose behalf his suit had been filed, sought to draw a negative inference from what the SJC in its opinion recognized was unfortunate language in Mass. G.L. c. 156D (the statute that in 2003 codified, inter alia, the rules governing shareholder derivative claims), to argue that the statute required the board of directors to exercise its business judgment and refuse the demand before he filed suit. He relied for support on Mass. G. L. c. 156D, § 7.44(a) which provides 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[.]” (Emphasis added.) Plaintiff also relied on § 7.42 of the statute, which generally gives shareholders the right to file suit 90 days after making written demand on the corporation.
NELF argued in its amicus brief in support of the defendants that, despite the isolated phrase “after rejection” in the business judgment provision, a consideration of all of the relevant provisions of c. 156D, including the drafters’ comments, defeats plaintiff’s interpretation and clearly allows a corporation’s board of directors to obtain dismissal of a shareholder derivative suit based on a post-suit rejection of a shareholder’s demand. Among its arguments, NELF pointed to the stay provision in the statue, § 7.43, which 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 beyond the 90 days provided in § 7.42. Moreover, the comment to that provision expressly states that a stay would be appropriate where a board needs more time to complete its inquiry after a complaint is filed. Perhaps most significantly, the drafter’s comment to § 7.44 itself expressly states, contra to the “after rejection” language in that provision giving rise to the certified question in this case, that a board can reject a shareholder demand either before or after a derivative suit has been filed.
In its unanimous decision, the SJC embraced NELF’s interpretation of the Act, concluding that the Legislature expressly intended to allow a corporation’s board to seek dismissal of a shareholder derivative suit based on a post-suit refusal of the demand underlying the suit. The Court agreed with NELF that, notwithstanding the “after rejection” language, “[t]he language in various other provisions of the Act [and] language within [the provision containing the “after rejection” language] itself, clearly indicates that the Legislature intended that a corporation should be entitled to dismiss a derivative proceeding under the business judgment doctrine regardless whether the corporation’s rejection of the shareholder’s demand precedes or follows the filing of the derivative suit.”
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