INTERNATIONAL BROTHERHOOD OF ELECTRICAL WORKERS LOCAL NO. 129 BENEFIT FUND
JOSEPH M. TUCCI & others (and eight consolidated cases).
Heard: November 7, 2016.
actions commenced in the Superior Court Department on October
15, October 16, October 19, October 20, October 23, October
28, and October 29, 2015.
consolidation, a motion to dismiss was heard by Edward P.
Leibensperger, J. The Supreme Judicial Court granted an
application for direct appellate review.
M. Leviton (Michael G. Capeci, of New York, & Joel A.
Fleming also present) for International Brotherhood of
Electrical Workers Local No. 129 Benefit Fund & others.
J. Dougherty (Kurt Wm. Hemr also present) for Joseph M. Tucci
Pagliaro & Martin J. Newhouse, for New England Legal
Foundation, amicus curiae, submitted a brief.
Roffman & Matthew J. Connolly, for Associated Industries
of Massachusetts, amicus curiae, submitted a brief.
Present: Gants, C.J., Botsford, Lenk, Hines, Gaziano, Lowy,
& Budd, JJ.
these consolidated cases, shareholders of a publicly traded
corporation claim that a merger transaction proposed by the
board of directors will result in the effective sale of the
corporation for an inadequate price. The question we consider
is whether they may bring that claim directly against the
board members, or must bring it as a derivative claim on
behalf of the corporation. We answer that the claim must be
plaintiffs appeal from the dismissal of their first amended
class action complaint (complaint)alleging breaches of
fiduciary duty by the board of directors of EMC Corporation
(EMC) arising from a merger between EMC and Denali Holding
Inc. and Dell Inc. (collectively, Dell). At the time that
they commenced these actions, the plaintiffs were
shareholders of EMC; the proposed merger would result in the
shareholders receiving a cash payment in exchange for their
EMC stock. The plaintiffs' complaint alleges that they
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 [directors'] breaches of
fiduciary duty and other misconduct." The plaintiffs
assert that the members of EMC's board of directors
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 sale of EMC to Dell.
recite the pertinent facts alleged in the complaint, taking
as true its factual allegations and drawing all reasonable
inferences in the plaintiffs' favor. Blank
v. Chelmsford Ob/Gyn, P.C., 420 Mass. 404,
407 (1995). EMC is a Massachusetts corporation providing
information technology products and services in a global
market, with its principal place of business in Hopkinton.
Its stock is traded on the NASDAQ stock exchange.
a federation structure; that is, it acts as parent company to
numerous related but independently functioning businesses.
The defendant Joseph M. Tucci, the long-time chief executive
officer of EMC and the architect of this federated structure,
wanted to keep the federation of companies together. This
caused EMC's shares to trade at a "conglomerate
discount" because investors valued the large company
less than they would its individual components. In the fall
of 2014, an investor in EMC, Elliott Management (Elliott),
began advocating for EMC to sell off the most valuable
subsidiaries of the federation to provide maximum value to
EMC's shareholders; the individual sales of some or all
of EMC's subsidiaries would yield higher value per share
for EMC shareholders than would sale of the company as a
whole. Elliott argued for an alternative to the conglomerate
discount in which VMware, one of EMC's most valuable
subsidiaries, would be sold separately and EMC would inquire
into acquisition for the remaining components. Tucci, fearing
that Elliott would prevail in breaking up the EMC federation,
reached an agreement with Elliott in January, 2015, by which
Elliott was permitted to participate in the appointment of
new directors but agreed to a limit on stock it could buy for
a period of time. Tucci and EMC used this period to
strategize the sale of the company to Dell. Tucci had
scheduled his retirement several times, but continually
extended the date. He negotiated the sale of EMC and all its
subsidiaries to Dell via his long-time friend and business
associate, Michael Dell, in order to keep the company's
federated structure intact. Tucci is to receive approximately
$27 million in "change-in-control" benefits as a
result of selling the entire company, a sum that Tucci would
not have received if he had retired as planned. The proposed
transaction also permits Dell to shelter significant tax
liability and to retain the value locked in the subsidiaries
through a potential break-up of the EMC federation in the
October, 2015, Tucci announced that Dell agreed to acquire
all of EMC for approximately $67 billion. Tucci used his
influence over the other board members to convince them to
approve the merger. The transaction was unanimously approved
by the board and announced on October 12, 2015. In approving
the proposed merger, the board also agreed to termination
fees that further dissuaded competing companies from placing
a higher bid on EMC than Dell: the merger agreement between
EMC and Dell included a $2 billion termination fee that any
higher bidder would have to pay before it could top the Dell
the proposed transaction's terms, EMC shareholders are to
receive $24.05 in cash per share and an estimated 0.111
shares of "tracking stock" of VMware; the tracking
stock does not provide the same rights that shares in VMware
common stock provide. According to Elliott, selling EMC's
interest in VMware separately would have yielded a total
value for EMC's shareholders of over forty dollars per
share. In addition, just before the transaction was
announced, VMware announced a new business venture with an
expected revenue of several hundreds of millions of dollars
in 2016. This value would have been realized by EMC
shareholders, but as a result of the transaction will be
realized by Dell.
plaintiff International Brotherhood of Electrical Workers
Local No. 129 Benefit Fund (IBEW) filed a complaint on
October 15, 2015, as a direct action against members of
EMC's board of directors in their individual capacities.
The defendants moved to dismiss the complaint for failure to
state a claim pursuant to Mass. R. Civ. P. 12 (b) (6), 365
Mass. 754 (1974), after which eight other actions were
consolidated with IBEW's action. After a hearing, the
judge allowed the motion, ruling that the board owed no
fiduciary duty directly to the shareholders in this case and
that the action was necessarily derivative because any
alleged harm to shareholders was not distinct from harm to
the corporation. He reasoned that there were no allegations
that any EMC shareholder would receive more per share in this
proposed transaction than any other shareholder, nor were
there allegations that any one shareholder or group of
shareholders controlled the company to assure a positive vote
on the transaction. A judgment of dismissal entered on
December 24, 2015. The plaintiffs timely filed an appeal, and
we subsequently granted the plaintiffs' application for
direct appellate review.
parties agree that EMC is a large, publicly traded
Massachusetts corporation, and that the corporate statute
under which it operates is the Massachusetts Business
Corporation Act, G. L. c. 156D (act). They also agree that
the plaintiffs' legal claim is one for breach of
fiduciary duty by the members of EMC's board of directors
and particularly by Tucci for failing to take steps to
maximize the value of the shareholders' EMC stock in
arranging for the merger transaction. As indicated at the
outset, the principal question raised is whether the
plaintiffs, as shareholders who challenge the fairness or
validity of a proposed merger on the ground that it will
effectively result in the sale of EMC and for them a loss of
personal property -- their EMC stock holdings -- for an
inadequate price, must bring their claim against the
directors as a derivative action on behalf of the
corporation, or may bring it directly on their own behalf. We
review the judge's allowance of the motion to dismiss de
novo. Curtis v. Herb Chambers 1-95,
Inc., 458 Mass. 674, 676 (2011).