In a recent decision, the Massachusetts Supreme Judicial Court ruled that directors of a corporation owe a fiduciary duty to the corporation itself, and not to the stockholders of the corporation (as is the case in Delaware, among other states). In Int’l Brotherhood of Electrical Workers Loc. No. 129 Benefit Fund v. Tucci, SJC-12137 (Mass. Mar. 6, 2017), the Court ruled that the directors of EMC Corporation did not breach their fiduciary duties to the corporation when they approved the sale of EMC as a whole, versus selling off the constituent operations individually, which might have brought a higher price. The Court relied on the plain language of M.G.L ch. 156D, Section 8.30, which provides that a director shall discharge his duties “in a manner the director reasonably believes to be in the best interests of the corporation.”
Mark J. Tarallo is a member of the Business & Finance Department, and Mergers & Acquisitions and Entrepreneur practice groups.
Mark represents entities ranging from startups to publicly listed international businesses. He works closely with clients to negotiate, draft and review all documents in connection with venture capital financing, mergers & acquisitions, and securities offerings.
Additionally, Mark advises clients on general corporate matters including securities, governance, intellectual property, licensing, employment and litigation. He also assists clients such as private funds and investment advisers in connection with regulatory and securities matters.
All too often, family businesses are run in an “informal” fashion, with insufficient attention being paid to corporate formalities, including requirements set forth in a corporation’s bylaws. The Delaware Chancery Court recently ruled in Rainbow Mountain, Inc. vs. Begeman (March 23, 2017), that even in a family-owned business where all of the parties to a dispute are family members, the bylaws will control corporate actions.
In Rainbow Mountain, the defendant Terry Begeman was a member of the family that had founded the corporation. After a falling out among the family members, the group that held a controlling interest sought to remove Terry from the board of directors of the corporation, and in 2008 voted him off of the board of directors. Terry refused to accept this removal, and in 2014 the corporation filed an action for declaratory judgment seeking to confirm that Terry had been removed from the board.
In a recent decision, the United States Bankruptcy Court for the Eastern District of Massachusetts sent a reminder to practitioners and family business owners that it is critical to maintain corporate formalities in order to avoid unintended liabilities. In the case of In re Cameron Construction & Roofing Co., Adv. P. No. 15-1121, 2016 WL 7241337 (Bankr. D. Mass. December 14, 2016), the Bankruptcy Court applied the concept of substantive consolidation and made the assets of a non-bankrupt related entity available to creditors in the bankruptcy proceeding.
When a family business operated as a limited liability company brings on professional management, the parties typically focus on items in the operating agreement such as capital contributions, allocations and distributions, and governance. However, a recent Delaware Chancery Court case serves as a reminder that all provisions of a limited liability company operating agreement must be given careful consideration, including the provisions relating to advancement and indemnification rights. In Harrison v. Quivus Systems, C.A. 12084-VCMR, the Delaware Chancery Court ruled on cross motions for summary judgment in a case where the plaintiff, the former CEO of the defendant, sought indemnification and advancement from the defendant corporation. The court ruled in favor of the plaintiff, and awarded not only the advancement and indemnification sought, but also “fees on fees” incurred by the plaintiff in bringing the action in Delaware.
John Harrison (the plaintiff in this action) had served as the CEO of Quivus Systems, LLC (the defendant), since its inception in 2007. In 2014, the controlling shareholder of Quivus removed Harrison as CEO, and in 2015 filed suit against Harrison in the Superior Court for the District of Columbia, alleging mismanagement and corporate malfeasance. In response to this lawsuit, Harrison made a demand for indemnification (including advancement of expenses), which was refused by Quivus. After this refusal, Harrison sued Quivus in the Delaware Chancery Court, leading to the ruling issued by Vice Chancellor Montgomery-Reeves on August 5, 2016. Continue Reading Family Businesses Should Carefully Consider Indemnification and Advancement Obligations Included In Limited Liability Company Operating Agreements