As for stock valuation rights, the BLS judge is creating a new law

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Triggering the legal rights of closely held shareholders to have their shares valued and purchased at fair market value does not require a showing that new restrictions on the transfer or registration of those shares are “materially adverse”, a judge has ruled decided by the Supreme Court.

The exclusion from the Business Litigation Session provides rare guidance on how to interpret part of the Massachusetts Business Corporations Act.

In Baldwin, et al. v. Connor, et al.the plaintiffs, who allege that they were unlawfully excluded from a few closely held corporations, have sought declaratory and equitable relief that would allow them to timely exercise their statutory judgment rights under GLc 156D, §13.02(a)(5) to practice.

The defendants argued that the plaintiffs failed to demonstrate that new restrictions on their ability to transfer their shares were “materially detrimental” to that ability.

The plaintiffs countered that the “materially adverse” modifier only applies to changes to pre-existing restrictions, and not to new restrictions.

Judge Kenneth W. Salinger invoked the so-called “final antecedent rule” and sided with the plaintiffs, calling the defendants’ interpretation “not a natural or reasonable way to parse the statute.”

Salinger looked closely at the punctuation involved, distinguishing between the case before him and a 2011 Court of Appeal decision that the defendants had tendered: Bednark v. Catania Hospitality Group, Inc.

Judge Kenneth W. SalingerFurther, “issues of punctuation … are not necessarily determinative and should not undermine the true purpose and meaning of a statute,” Salinger wrote, citing the Court of Appeals’ 2022 decision in Lydon v. Contributory Retirement Appeal Bd.

Applying §13.02(a)(5), Salinger found that 2019 amendments to the corporations’ bylaws imposed several new restrictions on shareholders’ rights to sell or otherwise transfer their shares.

Even if the defendants’ interpretation of the statute had been correct, the new restrictions “taken as a whole would constitute ‘materially adverse’ revisions to the prior restrictions,” Salinger continued, and thus the plaintiffs’ statutory right of review and judgment. to force the companies to buy their shares at fair value would still have been in effect.

The 39-page decision is Lawyers Weekly No. 09-055-24.

Pioneering new territory

Appraisal actions may not be common, as most sophisticated investors are now based in Delaware or Nevada, said Boston attorney Euripides D. Dalmanieras. To the extent that there remain mature Massachusetts corporations, their governing documents will generally contain boilerplate language articulating an arbitration process that obviates the need for the court to serve such a role.

Nevertheless, Salinger has contributed meaningfully to the development of the law on what appear to be two issues of first impression, Dalmanieras said: the interpretation of the statutory language itself and the finding that failure to provide the required notice of assessment rights required by law amounts to a breach of the duty of confidence.

The latter should come as no surprise as it is consistent with the 1975 Supreme Court ruling Donahue v. Rodd Electrotype Co. of New England, Inc.and the series of cases that followed, Dalmanieras said.

Stephen D. RidenThis case should be noted by every corporate attorney in Massachusetts who understands what will trigger a shareholder’s appraisal rights.

“This decision underlines that the courts continue to view these companies in the same way, and that is to protect the reasonable expectations of minority shareholders when these types of changes occur,” he said.

Boston attorney Stephen D. Riden agreed.

“This case should be noted by every corporate attorney in Massachusetts who understands what will trigger a shareholder’s appraisal rights,” he said.

Regarding his use of the “last antecedent rule,” attorneys generally agreed with Salinger’s application of it, even as they chastised the Legislature for the statute’s murky drafting.

“If the framers had just used semicolons, they would have made everyone’s lives a little easier,” Dalmanieras said.

But some wondered how much practical importance Salinger’s interpretation will have.

“Any time you impose a restriction, it’s hard to think of how it wouldn’t be detrimental to the shareholder,” said Boston attorney Megan C. Deluhery. “So the fact that (Salinger) has interpreted the (‘materially adverse’) clause to merely change an amendment, I don’t think it makes a difference.”

However, Boston attorney David R. Suny said Salinger’s distinction between new and modified restrictions presents an opportunity for corporate lawyers. To the extent they can package statute changes as changes to pre-existing restrictions, they may be able to take advantage of the “safe harbor” that Salinger’s decision creates, he noted.

Another notable aspect of the decision is the solution Salinger came up with, the lawyers agreed.

Dalmanieras highlighted the footnote in which Salinger said there is no right to a jury trial on the claim that a shareholder or director of a closely held company breached his fiduciary duty to minority owners. That provided the starting point for Salinger to exercise what the judge believes is broad discretion to shape the remedy, Dalmanieras said.

Time and time again, the BLS has shown a willingness to “put on its thinking cap” and think about what is right and issue strong, fair orders, Riden said.

“It should be an inspiration for litigants to be creative in what they ask of the BLS,” he said.

But Deluhery noted that it is “a little strange” to give the plaintiffs the option to value their shares on two different dates, including the current day. Even though they may have been delayed for a long time in exercising their appraisal rights, these minority shareholders may have enjoyed years of benefits from their continued ownership, such as dividends or distributions, which should be taken into account when determining the fair current value of shares, Deluhery said.

Attorneys for the parties in the case declined to comment, citing the ongoing nature of the litigation.

Keeping it in the family

The plaintiffs – John, Robert, James and John Baldwin – allege that defendant Connors – Thomas, Maria and John – unlawfully frozen them out of two closely held companies founded in the 1950s under different names, Polyvinyl Films Inc . and Indusol Inc.

The Baldwins claim that they successfully ran and grew the businesses and that the Connors, with the help of another man, forced them out of their operating and management roles as part of a scheme to sell the businesses and increase their profits . The Connors counter that the Baldwins’ mismanagement led to their ouster.

The original articles of incorporation and bylaws of Indusol and Polyvinyl Films gave both companies the right of first refusal before a shareholder or their estate could sell their shares in either company to someone else.

Baldwin, et al. v. Connor, et al.

THE PROBLEM: If new restrictions on the transfer or registration of shares are added to the corporate bylaws, will the Massachusetts Business Corporations Act require shareholders in a closely held corporation to demonstrate that the new restrictions are “materially adverse” to trigger their legal rights to acquire their shares? have it appraised and bought? for fair market value?

DECISION: No (higher court case)

LAWYERS: Robert M. Duffy, Stacey P. Nakasian and Stephanie F. Friedel, of Duffy & Sweeney, Providence (plaintiffs)

Michael P. Angelini, Ashley Barnes and Brian J. Edmonds, of Bowditch & Dewey, Worcester and Boston; Theodore M. Hess-Mahan of Hutchings, Barsamian, Mandelcorn, Wellesley Hills (defense)

The articles of association and bylaws provided that a shareholder (or their heirs, assigns, executors or administrators of their estate) who wished to sell or transfer their shares must first tender the shares to the company.

After receiving the notice, the board would have 30 days to accept the shareholder’s offer or elect to let arbitrators determine the value of the shares.

The original articles and statutes provided that if the corporation did not timely exercise its right to purchase shares offered for sale, the shareholder “shall be at liberty to dispose of them in any manner he may deem fit.”

The original articles of incorporation and bylaws also provided that the board of directors of any corporation could waive the requirement that no shares be sold or transferred at any time without giving the corporation this right of first refusal.

On May 13, 2019, the boards of directors and a majority of shareholders of Polyvinyl and Indusol voted to adopt revised articles of association that exempted the transfer of shares to family members from the companies’ right of first refusal and imposed a detailed set of new rules. restrictions on share transfers.

The new restrictions, among other things, required each shareholder to give family members the right of first refusal to purchase shares and limited the price at which shareholders could sell their shares to third parties, if neither the family members nor the company chose to purchase them.

Salinger rejected the Baldwins’ claim that the directors’ votes were invalid, but did find that they triggered the plaintiffs’ review rights.

Best of both worlds

Because the companies were closely held, the failure of the directors and majority shareholders to notify the Baldwins and allow them to exercise their appraisal rights was a “clear breach of the majority’s fiduciary duty to the minority shareholders” , Salinger thought. .

But now that five years had passed, Salinger was left with the conundrum of what kind of remedy would cure the plaintiffs.

He concluded that the appropriate remedy was to require the companies to give the Baldwins the opportunity to exercise their valuation rights and to compel the companies to purchase their shares for an amount equal to the greater of their fair value as of May 2019 or the fair value as of the date of repurchase.

“The Court finds that, if the fair value of Polyvinyl or Indusol shares at the time of buyback is much higher than in May 2019, it would be unfair to allow the companies to buy back shares at fair value from May 2019. ”, ruled Salinger.

He then instructed the parties to follow the steps described in §13.22 and §13.23. First, the companies must provide the Baldwins with a written valuation form detailing each company’s estimate of the fair value of its shares as of May 2019 and as of the date of the valuation notice.

For any plaintiff who chooses to exercise its appraisal rights, the companies would be required to pay them within 30 days the fair value of the shares in cash, along with all reasonable attorneys’ fees and litigation costs incurred by the plaintiff in obtaining that payment.

Salinger added that the statute provides remedies if any of the plaintiffs, after invoking their judgment rights, were dissatisfied with the amount of payment they received.