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International Brotherhood of Electrical Workers Local No. 129 Benefit Fund v. Tucci

Supreme Judicial Court of Massachusetts, Suffolk

March 6, 2017

JOSEPH M. TUCCI & others [2](and eight consolidated cases[3]).

          Heard: November 7, 2016.

         Civil actions commenced in the Superior Court Department on October 15, October 16, October 19, October 20, October 23, October 28, and October 29, 2015.

         After consolidation, a motion to dismiss was heard by Edward P. Leibensperger, J. The Supreme Judicial Court granted an application for direct appellate review.

          Jason 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.

          Thomas J. Dougherty (Kurt Wm. Hemr also present) for Joseph M. Tucci & others.

          John Pagliaro & Martin J. Newhouse, for New England Legal Foundation, amicus curiae, submitted a brief.

          Ian D. 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.

          BOTSFORD, J.

         In 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 brought derivatively.[4]


         The plaintiffs appeal from the dismissal of their first amended class action complaint (complaint)[5]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.

         We 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.

         EMC has 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 future.

         In October, 2015, Tucci announced that Dell agreed to acquire all of EMC for approximately $67 billion.[6] 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 bid.

         Under 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.

         The 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.[7]


         The 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).

         1. Derivative ...

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