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Maz Partners LP v. Shear

United States District Court, D. Massachusetts

September 1, 2016

MAZ PARTNERS LP, Individually and on Behalf of Others Similarly Situated, Plaintiff,
BRUCE SHEAR, et al., Defendants.


          Patti B. Saris Chief United States District Judge


         In this class action, the plaintiff, MAZ Partners LP (MAZ), alleges in Count I of its second amended complaint that the directors of PHC, Inc. (PHC), breached their fiduciary duty by approving inadequate compensation for Class A shareholders in connection with PHC's merger with Acadia Healthcare, Inc. (Acadia). In Count II, MAZ contends that one director, Bruce Shear, then CEO of PHC, breached his fiduciary duty as PHC's controlling shareholder by negotiating a $5 million sweetener for his Class B shares at the expense of the Class A shareholders. Finally, in Count III, MAZ alleges that Acadia aided and abetted these breaches of fiduciary duty.[1] The defendants respond the directors were independent and protected by the deferential business judgment rule, that Shear was not PHC's controlling shareholder, and that MAZ has provided no evidence that Acadia knowingly aided and abetted any alleged breach of the directors' fiduciary duty. The plaintiff moved for class certification and both parties moved for summary judgment. The Court held a consolidated hearing on those motions.

         After hearing, the Court allowed the plaintiff's motion to certify a class of all Class A shareholders who voted against the merger or abstained.[2] The defendants filed a petition for leave to appeal the Court's class certification order, and the Court stayed further proceedings-including ruling on the parties' summary judgment motions-pending the disposition of the petition for appeal. The First Circuit denied the defendants' petition on June 20, 2016, and this Court lifted the stay. Docket Nos. 238-39. The Court now addresses the parties' motions for summary judgment.

         The plaintiff's motion for partial summary judgment (Docket No. 182) and the defendants' motion for summary judgment (Docket No. 181) are ALLOWED in part and DENIED in part.


         The facts below are taken from the record, and are undisputed except where stated.

         PHC was a publicly traded behavioral healthcare company organized under Massachusetts law. MAZ is a partnership that owned over 100, 000 shares of stock in PHC. PHC had two classes of common stock, Classes A and B. Class B common stock had enhanced voting rights entitling holders to five votes per share; holders of Class A common stock were entitled to one vote per share. PHC's board consisted of six directors. Bruce Shear, a defendant, served as a director, chairman of the board, and chief executive officer of PHC. Shear held 93% of PHC's outstanding Class B shares and approximately 8% of Class A shares. Combined, Shear exercised approximately 20% of the total outstanding voting rights for all combined PHC shares. Class A shareholders elected two out of six board members. Class B shareholders elected the other four directors. Because Shear held 93% of the Class B stock, he had the power to elect four directors to the PHC board.

         In January 2011, Shear and Acadia CEO Joey Jacobs began meeting to discuss a possible merger of the two companies. Shear served as PHC's main negotiator during this phase. The two corporations, through Shear and Jacobs, agreed that PHC shareholders would own 22.5% and Acadia shareholders would own the remaining 77.5% of the newly merged corporation's stock. To accomplish this split, each PHC share, both Classes A and B, would be exchanged for a one-quarter share of the newly merged Acadia entity. The different classes would disappear. Prior to the merger, due to relative differences in the corporations' overall market value, Acadia would issue a $90 million dividend to its shareholders to effectuate the proper 22.5/77.5 percentage split. Significantly, the Class B shareholders would receive a pro rata share of an additional $5 million as consideration for the Class B shareholders' enhanced voting rights. As the holder of 93% of outstanding Class B shares, Shear received approximately $4.7 million of the additional consideration. The remaining seven percent of Class B stock was held by approximately 300 other PHC shareholders.

         On March 22, 2011, Joey Jacobs, Acadia's CEO, signed a letter of intent (LOI) and sent it to the PHC board. The LOI contained the major details of the proposed merger. It included: (1) a prohibition on PHC shopping the offer to other potential merger partners; (2) a deal termination fee if PHC backed out of the merger; (3) the 22.5/77.5 percentage stock split; (4) the $5 million payment for Class B shares; (5) a provision that Shear would select two directors of the newly merged company; and (6) the $90 million dividend to Acadia shareholders pre-merger. On March 23, 2011, all the PHC directors entered into voting agreements to vote all of their shares for the merger and against any alternative merger proposition. Together, all directors owned approximately 25% of outstanding PHC voting shares.

         On March 27, 2011, Shear requested that director William Grieco serve as the lead merger negotiator with the power to undertake discussions with Acadia, hire a financial advisory firm, and assist with PHC stockholder communications. Shear continued to play a lead role in negotiations. Shear had a longstanding professional relationship with Grieco and had appointed him to the PHC board. Shear eventually appointed himself and Grieco to the post-merger director positions in Acadia.

         The PHC board retained Arent Fox to advise it on transactional matters, Pepper Hamilton LLP to advise it on issues of Massachusetts corporate law, and Stout Risius Ross, Inc. (SRR), to provide the board with an opinion on the merger's overall fairness. SRR determined that the share price for Class A shareholders was fair, but it did not analyze the additional $5 million consideration for Class B shareholders or the $90 million pre-merger dividend. PHC declined to form an independent committee to evaluate the merger's fairness.

         On May 19, 2011, at the PHC board meeting, SRR presented its opinion that the merger consideration for Class A shares was fair, and the board voted to recommend the merger to the shareholders. Shear abstained from the board vote to avoid any apparent or actual conflict of interest. The other five directors, none of whom owned any Class B shares, voted to approve and recommend the merger to the shareholders.

         Acadia and PHC signed the merger agreement on May 23, 2011. On September 27, 2011, PHC disseminated its Final Proxy Statement to the PHC shareholders that disclosed the following details of the merger: (1) Shear would receive most of the additional $5 million consideration as the holder of 93% of Class B common stock; (2) Shear would serve as the merged company's executive vice president and a director, and Grieco would serve as a director; (3) PHC directors' vesting schedule for share options would be accelerated to avoid forfeiture of compensation; (4) the directors had entered into voting agreements to vote their shares for the merger; (5) Acadia shareholders would receive a pre-merger $90 million dividend; and (6) the PHC board declined to form a special committee to evaluate the merger based upon advice of counsel. The full SRR fairness opinion was attached to the Final Proxy, which was nearly 500 pages long including attachments.

         Merger approval required a two-thirds majority shareholder vote of (1) Class A voting stock alone, (2) Class B voting stock alone, and (3) Class A and B voting stock together. The PHC directors together held approximately 11% of PHC's outstanding Class A stock and 93.2% of its Class B stock. Together the directors held a total of 24.8% of PHC's outstanding voting power. On October 26, 2011, the PHC shareholders voted in favor of the merger with 88.7% of Class A shares and 99.9% of Class B shares voting for the merger. On November 1, 2011, the merger was fully consummated. After the merger, MAZ's PHC shares were automatically converted to Acadia shares. In January 2012, MAZ sold all of its Acadia shares at a profit.


         I. Legal Standard

         Summary judgment is appropriate when there is “no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a). To succeed on a motion for summary judgment, the moving party must demonstrate that there is an “absence of evidence to support the nonmoving party's case.” Sands v. Ridefilm Corp., 212 F.3d 657, 661 (1st Cir. 2000) (citing Celotex Corp. v. Catrett, 477 U.S. 317, 325 (1986)). Once such a showing is made, “the burden shifts to the nonmoving party, who must, with respect to each issue on which [it] would bear the burden of proof at trial, ” come forward with facts that demonstrate a genuine issue. Borges ex rel. S.M.B.W. v. Serrano-Isern, 605 F.3d 1, 5 (1st Cir. 2010) (citing Celotex, 477 U.S. at 324).

         “A genuine issue exists where a reasonable jury could resolve the point in favor of the nonmoving party.” Meuser v. Fed. Express Corp., 564 F.3d 507, 515 (1st Cir. 2009) (internal quotation marks omitted). “A party cannot survive summary judgment simply by articulating conclusions the jury might imaginably reach; it must point to evidence that would support those conclusions.” Packgen v. BP Expl. & Prod., Inc., 754 F.3d 61, 67 (1st Cir. 2014). A material fact is “one that has the potential of affecting the outcome of the case.” Calero-Cerezo v. U.S. Dep't of Justice, 355 F.3d 6, 19 (1st Cir. 2004).

         In its review of the evidence, the Court must “examine the facts in the light most favorable to the nonmoving party, ” and draw all reasonable inferences in its favor, to “determine if there is sufficient evidence favoring the nonmoving party for a jury to return a verdict for that party.” Sands, 212 F.3d at 661 (internal quotation marks omitted). The Court must ignore “conclusory allegations, improbable inferences, and unsupported speculation” at the summary judgment stage. Chiang v. Verizon New England Inc., 595 F.3d 26, 30 (1st Cir. 2010). “Ultimately, credibility determinations, the weighing of the evidence, and the drawing of legitimate inferences from the facts are jury functions, not those of a judge.” Sensing v. Outback Steakhouse of Fla., LLC, 575 F.3d 145, 163 (1st Cir. 2009) (internal quotation marks and alteration omitted).

         II. Defendants' Motion for Summary Judgment

         A. Count I: The Directors' Fiduciary Duty

         The defendants argue that, because the directors are protected by an exculpation provision, they are entitled to summary judgment on all of MAZ's duty of care claims-including the claim for material omissions in the Final Proxy-and that the plaintiff has put forth insufficient evidence that the directors violated their duty of loyalty. The plaintiff responds that the stock option acceleration provision, director voting agreements, Shear and Grieco's post-merger employment, the $5 million Class B sweetener, and Shear's influence over the merger negotiations show that the directors failed to act in the best interests of the PHC shareholders in approving the merger.

         i. Disclosure Claims

         The defendants argue that PHC's exculpation clause immunizes them from any claim that they violated their duty of disclosure in the Final Proxy. Although the plaintiff failed to amend its complaint to include § 14(a) claims, the plaintiff's second amended complaint included a common law fiduciary duty claim for failure to disclose material information to PHC shareholders. Docket No. 177 at 9. The complaint alleged thirty separate omissions and misrepresentations in the Final Proxy. Id. at 55-64. The plaintiff responds that intentional and reckless violations of the duty of disclosure implicate the duty of loyalty, and therefore, the defendants are not saved by the exculpation clause which applies only to duty of care claims.

         In its articles of organization, a Massachusetts corporation may set forth “a provision eliminating or limiting the personal liability of a director to the corporation for monetary damages for breach of fiduciary duty, ” but the articles may not limit liability for “any breach of the director's duty of loyalty, ” for “acts or omissions not in good faith or which involve intentional misconduct, ” or “for any transaction from which the director derived an improper personal benefit.” M.G.L. ch. 156D, § 2.02 (b)(4). PHC's articles of organization contained the following exculpation clause:

No director of the Corporation shall be liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty . . . or (iv) for any ...

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