Superior Court of Massachusetts, Suffolk, Business Litigation Session
IBEW Local No. 129 Benefit Fund, Individually and on Behalf of Others
Joseph M. Tucci et al Opinion No. 132257
Filed Date December 7, 2015
MEMORANDUM AND ORDER ON DEFENDANTS' MOTION TO DISMISS
Edward P. Leibensperger, Justice
The question presented by this motion appears, according to the parties, to be one not directly addressed by the Massachusetts Supreme Judicial Court and Appeals Court. Must shareholders of a Massachusetts company who wish to challenge a decision by the board of directors to recommend a transaction that will effect the sale of the company at an allegedly inadequate price, bring their challenge as a derivative claim on behalf of the corporation or may they bring the claim directly? Here, plaintiffs are a putative class of shareholders in EMC Corporation. They commenced these consolidated actions as direct claims. Defendants are the members of the board of directors of EMC (" the EMC Defendants"). The EMC Defendants move to dismiss the amended complaint on the ground that the claim must be asserted as a derivative claim on behalf of the corporation. Because it is undisputed that plaintiffs do not assert a derivative claim and, thus, have not complied with the statutory requirement for a derivative claim of pre-suit demand on the board of directors, a determination that the claim asserted is one on behalf of the corporation results in dismissal of the actions.
The First Amended Class Action Complaint (" FACAC") filed in the lead case in this consolidated action (CA 2015-3130-BLS 1) alleges the following.
Plaintiffs in the consolidated actions are holders of the common stock of EMC. They seek to bring the actions on behalf of a class consisting of " all other shareholders of EMC . . . who are or will be deprived of the opportunity to maximize the value of their shares of EMC as a result of the breaches of fiduciary duty and other misconduct complained of herein." FACAC ¶ 127. Plaintiffs assert a single substantive claim in Count I: the directors of EMC (the EMC Defendants) violated their fiduciary duties, allegedly owed to both EMC and the shareholders, by " (i) failing to take steps to maximize the value of EMC stock; and (ii) agreeing to unreasonably preclusive deal protection provisions, thereby hindering any potential bid that may have been superior to the 'Proposed Transaction.'" FACAC ¶ 139.
The " Proposed Transaction" that is the subject of the claim is an Agreement and Plan of Merger unanimously agreed to by the EMC Defendants. The EMC Defendants voted to recommend to shareholders a positive vote, after required disclosures, to sell EMC to Dell, Inc. EMC and Dell announced the acquisition on October 12, 2015. The expected closing of the transaction is in the middle of 2016. FACAC ¶ ¶ 58, 59. Under the terms of the deal, each shareholder of EMC will receive $24.05 per share in cash plus an estimated 0.111 shares of " tracking stock" of VMware, Inc. (a company owned 80% by EMC). " The Proposed Transaction is valued at approximately $64 billion." FACAC ¶ ¶ 1 and 2.
EMC is a Massachusetts corporation. Its stock is widely traded on the NASDAQ stock exchange. FACAC ¶ 25. EMC is described as a global leader in enabling businesses to deliver technological services such as the storage and management of data and information. FACAC ¶ 25. While the amended complaint is not specific about the process for completion of the proposed transaction, the Massachusetts Business Corporation Act, M.G.L.c. 156D (the " Act"), mandates that a plan of merger or share exchange, adopted by the board of directors, is subject to a shareholder vote to approve. Act, § 11.04. Under the federal securities laws, the vote of shareholders will occur after preparation of a proxy statement or prospectus that will be filed with the Securities and Exchange Commission.
To survive a motion to dismiss, a complaint must set forth the basis for the plaintiff's entitlement to relief with " more than labels and conclusions." Iannacchino v. Ford Motor Co., 451 Mass. 623, 636, 888 N.E.2d 879, quoting Bell A. Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). At the pleading stage, Mass.R.Civ.P. 12(b)(6) requires that the complaint set forth " factual 'allegations plausibly suggesting (not merely consistent with)' an entitlement to relief . . ." Id., quoting Bell A. Corp., 550 U.S. at 557. The court must, however, accept as true the allegations of the complaint and draw every reasonable inference in favor of the plaintiff. Curtis v. Herb Chambers I-95, Inc., 458 Mass. 674, 676, 940 N.E.2d 413 (2011).
I. Plaintiffs' Claim
In their amended complaint, plaintiffs claim that the proposed deal " fails to maximize shareholder value." FACAC ¶ 2. Plaintiffs describe EMC as having an " unconventional 'federation' structure" such that its parts (various subsidiaries and divisions) are worth more if sold separately than if the company is sold as a whole. FACAC ¶ 3. Allegedly, certain shareholders have advocated to the board of directors that the company be broken up and the parts sold separately. The board refused such entreaties. Instead, the board approved the proposed deal with Dell which may result in the company being sold as a whole. According to plaintiffs, the proposed deal reflects a " conglomerate discount" in the proposed price that is unfair to shareholders. FACAC ¶ ¶ 36, 75-87. Plaintiffs also claim that the terms of the proposed deal agreed to by the EMC Defendants, such as an " onerous termination fee" will negate the provisions of the deal that allow EMC to " shop" the company or its parts to other bidders. FACAC ¶ 107. In sum, all of plaintiffs' allegations amount to a complaint that the EMC Defendants did not negotiate favorable terms in the deal with Dell so as to maximize the value of plaintiffs' shares. The claim is cast as one for breach of fiduciary duty. Plaintiffs contend that the EMC Defendants owe them, as holders of publicly traded stock, a fiduciary duty to " maximize shareholder value." FACAC ¶ 2.
A significant portion of the amended complaint is devoted to allegations regarding the motivations of EMC's CEO and member of the board of directors, defendant Joseph M. Tucci. Plaintiffs attribute the decision to sell the company as a whole rather than in parts to Tucci's philosophical and financial reasons. Philosophically, Tucci viewed EMC as " his baby" and did not want to see it ripped apart. FACAC ¶ 51. Financially, Tucci will allegedly receive payments amounting to $27 million pursuant to " change in control" provisions in his compensation agreement with EMC if the deal is closed. FACAC ¶ 52. Tucci allegedly asserted influence on the board of directors such that they sat " idly by" and approved the proposed deal at Tucci's insistence. FACAC ¶ 106.
It is important to note what the amended complaint does not allege. There is no allegation that any shareholder of EMC, including any of the EMC Defendants, will receive more per share of EMC in the deal than any other shareholder. There is no allegation that any one shareholder or group of shareholders (whether such shareholders are members of the board of directors or not) controls the company such as to assure a positive vote on the proposed deal. There is no allegation that defendants failed to disclose material information regarding the transaction. Finally, with respect to the obligation of the company to pay $27 million to Tucci upon a change in control, there is no allegation that the obligation was created as part of the deal to sell the ...