Whether an Agreement to Submit Valuation of Stock to the Binding Decision of Arbitrators is an Arbitration Agreement Enforceable Under the Massachusetts Arbitration Act
At issue in this case, pending before the Massachusetts Supreme Judicial Court (“SJC”), is whether a stock valuation provision in the articles of organization of a closely held Massachusetts corporation is enforceable under the Massachusetts Arbitration Act, G. L. c. 251, §§ 1-18 (“MAA”). The SJC requested amicus briefing on this issue. Under this familiar contract provision, the shareholders have agreed in advance to submit any future dispute about the value of a departing shareholder’s stock to a binding and final determination by an arbitral panel. Unlike the common law, the MAA provides for expedited specific performance of an arbitration agreement, via a motion to compel arbitration, along with other streamlined statutory mechanisms designed to enforce the parties’ bargained-for expectations.
The departing shareholder in this case has refused to complete the parties’ agreed-upon process for arbitrating the value of his shares. Instead, he has sought an accounting in court, as part of his claim for breach of fiduciary duty against the defendant, New England Cleaning Services, Inc. (“NECS”). The Superior Court denied NECS’ motion to compel arbitration, concluding that the parties’ valuation agreement was not an arbitration agreement. The lower court based its decision on Palmer v. Clark, 106 Mass. 373 (1871), and its progeny. In Palmer, decided nearly a century before the MAA’s enactment in 1960, this Court drew a distinction between an appraisal and an arbitration agreement. The SJC has also requested amicus briefing on whether Palmer and its progeny survive the MAA.
In its amicus brief supporting NECS, NELF has argued that the parties’ valuation agreement is indeed an arbitration agreement enforceable under the MAA, which applies broadly to any “controversy” that the parties have designated in their agreement for resolution in binding arbitration. In fact, this Court has already enforced a property valuation agreement under the MAA. See Trustees of Boston & Maine Corp. v. Massachusetts Bay Transp. Auth., 363 Mass. 386 (1973) (enforcing railroad right-of-way valuation agreement under MAA). As the Court recognized implicitly in Trustees of Boston & Maine, the MAA allows the parties to decide in advance both what is to be arbitrated--however specific and factual the issue--and how it is to be arbitrated--however informal the procedures. See G. L. c. 251, § 1 (MAA applies to “any controversy thereafter arising . . . .“), § 5 (MAA requires certain arbitral procedures “[u]nless otherwise provided by the agreement . . . .”) (emphasis added). In short, the MAA embodies the modern notion of party autonomy in the crafting of arbitration agreements tailored to each particular dispute. Therefore, the parties’ valuation agreement should be specifically enforced under the MAA. As a result, the old distinction between an appraisal and an arbitration agreement under Palmer should not survive the MAA. That distinction was drawn under a predecessor arbitration statute that did not apply to valuation agreements. Moreover, Palmer was decided when predispute arbitration agreements were voidable. Thus, in its day, Palmer actually protected the rights of shareholders to an appraisal agreement. Such protection is no longer necessary now that such an agreement can be enforced under the MAA.
On May 22, 2015, the Supreme Judicial Court issued its opinion in this case. Agreeing with NELF, the Court concluded that Article 5 of NECS's articles of incorporation contained a valid agreement to arbitrate future controversies regarding the value of NECS's stock. However, the Court also concluded that no such controversy existed at the time of NECS's motion to compel arbitration and, therefore, affirmed the order denying the NECS's motion to compel arbitration.
At issue in this case, pending before the Massachusetts Supreme Judicial Court (“SJC”), is whether a stock valuation provision in the articles of organization of a closely held Massachusetts corporation is enforceable under the Massachusetts Arbitration Act, G. L. c. 251, §§ 1-18 (“MAA”). The SJC requested amicus briefing on this issue. Under this familiar contract provision, the shareholders have agreed in advance to submit any future dispute about the value of a departing shareholder’s stock to a binding and final determination by an arbitral panel. Unlike the common law, the MAA provides for expedited specific performance of an arbitration agreement, via a motion to compel arbitration, along with other streamlined statutory mechanisms designed to enforce the parties’ bargained-for expectations.
The departing shareholder in this case has refused to complete the parties’ agreed-upon process for arbitrating the value of his shares. Instead, he has sought an accounting in court, as part of his claim for breach of fiduciary duty against the defendant, New England Cleaning Services, Inc. (“NECS”). The Superior Court denied NECS’ motion to compel arbitration, concluding that the parties’ valuation agreement was not an arbitration agreement. The lower court based its decision on Palmer v. Clark, 106 Mass. 373 (1871), and its progeny. In Palmer, decided nearly a century before the MAA’s enactment in 1960, this Court drew a distinction between an appraisal and an arbitration agreement. The SJC has also requested amicus briefing on whether Palmer and its progeny survive the MAA.
In its amicus brief supporting NECS, NELF has argued that the parties’ valuation agreement is indeed an arbitration agreement enforceable under the MAA, which applies broadly to any “controversy” that the parties have designated in their agreement for resolution in binding arbitration. In fact, this Court has already enforced a property valuation agreement under the MAA. See Trustees of Boston & Maine Corp. v. Massachusetts Bay Transp. Auth., 363 Mass. 386 (1973) (enforcing railroad right-of-way valuation agreement under MAA). As the Court recognized implicitly in Trustees of Boston & Maine, the MAA allows the parties to decide in advance both what is to be arbitrated--however specific and factual the issue--and how it is to be arbitrated--however informal the procedures. See G. L. c. 251, § 1 (MAA applies to “any controversy thereafter arising . . . .“), § 5 (MAA requires certain arbitral procedures “[u]nless otherwise provided by the agreement . . . .”) (emphasis added). In short, the MAA embodies the modern notion of party autonomy in the crafting of arbitration agreements tailored to each particular dispute. Therefore, the parties’ valuation agreement should be specifically enforced under the MAA. As a result, the old distinction between an appraisal and an arbitration agreement under Palmer should not survive the MAA. That distinction was drawn under a predecessor arbitration statute that did not apply to valuation agreements. Moreover, Palmer was decided when predispute arbitration agreements were voidable. Thus, in its day, Palmer actually protected the rights of shareholders to an appraisal agreement. Such protection is no longer necessary now that such an agreement can be enforced under the MAA.
On May 22, 2015, the Supreme Judicial Court issued its opinion in this case. Agreeing with NELF, the Court concluded that Article 5 of NECS's articles of incorporation contained a valid agreement to arbitrate future controversies regarding the value of NECS's stock. However, the Court also concluded that no such controversy existed at the time of NECS's motion to compel arbitration and, therefore, affirmed the order denying the NECS's motion to compel arbitration.
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