United States District Court, D. Massachusetts
MAZ PARTNERS LP, Individually and on Behalf of Others Similarly Situated, Plaintiff,
BRUCE SHEAR, et al., Defendants.
MEMORANDUM AND ORDER
B. Saris Chief United States District Judge
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. 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.
hearing, the Court allowed the plaintiff's motion to
certify a class of all Class A shareholders who voted against
the merger or abstained. 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.
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.
facts below are taken from the record, and are undisputed
except where stated.
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.
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.
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.
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
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
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.
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
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.
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.
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).
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).
Defendants' Motion for Summary Judgment
Count I: The Directors' Fiduciary Duty
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.
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.
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 ...