Opinion ID: 216284
Heading Depth: 3
Heading Rank: 1

Heading: Operation of Section 7.44

Text: As stated by the Supreme Judicial Court, the business judgment rule embodied in section 7.44 protects a corporation's decision that prosecution of [a] claim demanded by [a] shareholder is not in the best interests of the corporation where the decision is made in good faith by independent decision makers after reasonable inquiry. [4] Id. at 627 n. 11, 931 N.E.2d at 991 n. 11. As applicable to this case after certification, section 7.44 provides that a derivative proceeding commenced either before or after rejection of a demand shall be dismissed by the court on motion by the corporation if the court finds that. . . a majority vote of independent directors present at a meeting of the board of directors . . . has determined in good faith after conducting a reasonable inquiry upon which its conclusions are based that the maintenance of the proceeding is not in the best interests of the corporation. Mass. Gen. Laws ch. 156D, § 7.44(a), (b)(1) (emphases added). Upon filing its motion to dismiss, the corporation must show by a written filing with the court setting forth facts that the corporation has established independence, good faith, and the conduct of a reasonable inquiry. Id. § 7.44(d). The court shall then dismiss the suit unless the plaintiff has alleged with particularity facts ... in its complaint or an amended complaint or in a written filing to the court rebutting the corporation's filing. Id. (emphasis added). The statute further provides that if the independence requirement in subsection (a) is met, the plaintiff bears the burden of proving a lack of good faith and reasonable inquiry on the part of the directors; by contrast, if the independence requirement is not satisfied, the corporation must prove that those two elements are present. Id. § 7.44(e). In ruling on Claim One, the district court adverted to the fact that the plaintiff did not plead or otherwise proffer any reason why the Board's decision to reject the demand was illegitimate. Halebian I, 631 F.Supp.2d at 296. But we think that relying solely on the failure of the plaintiff to contest the corporation's filing omits a crucial statutory step. The statute requires a court to find[] that various conditions have been satisfied: that the Board is independent, and that it in good faith determined after a reasonable inquiry that the plaintiff's suit was not in the corporation's best interests. Mass. Gen. Laws ch. 156D, § 7.44(d). The latter component the existence of a good-faith, reasonable inquiry into the corporation's best interests vis-à-vis the plaintiff's suitis subject to the burden-shifting provisions of subsection (e). See id. § 7.44(e). However, that such burden-shifting turns on the independence of the decision maker unambiguously demonstrates that the court's evaluation of independence is a prerequisite to the operation of the dismissal statute in toto. [5] We see no such finding of independence in Halebian I . [6] Though the court's factual summary and legal discussion appear to assume the Board's independence, see id. at 290, 295-96, the statute by its own terms requires more, see Mass. Gen. Laws ch. 156D, § 7.44(a). Supporting this reading of the statutory text, the Massachusetts Superior Courtin two of only four opinions of which we are aware to discuss the statute at issue here, three of which are part of the same lawsuitdetermined that in evaluating a motion to dismiss under section 7.44, the court must begin[] with an evaluation of the independence of the board or committee charged with responding to a shareholder demand. Blake v. Friendly Ice Cream Corp., No. 030003, 2006 WL 1579596, at , 2006 Mass.Super. LEXIS 241, at  (Super.Ct. Hampden County May 24, 2006); accord Pinchuck v. State St. Corp., No. 09-2930, 2011 WL 477315, at -, 2011 Mass.Super. LEXIS 11, at - (Super.Ct. Suffolk County Jan. 19, 2011). The Blake court then embarked upon a lengthy consideration of the corporation's factual submissions purporting to demonstrate the independence of the members of its special litigation committee (SLC) as well as the propriety of the committee's formation, evaluating their sufficiency against Massachusetts law. See Blake, 2006 WL 1579596, at -, 2006 Mass.Super. LEXIS 241, at -; accord Pinchuck, 2011 WL 477315, at -, 2011 Mass.Super. LEXIS 11, at - (conducting a factual inquiry into the independence of the special committee that rejected the plaintiffs' demand). Having rejected the SLC's assertion of independence based on the court's evidentiary review, the Blake court next assessed the SLC's burden under section 7.44(e) of proving that its determination was in good faith and after a reasonable inquiry upon which its conclusions were based. Blake, 2006 WL 1579596, at , 2006 Mass.Super. LEXIS 241, at ; accord Pinchuck, 2011 WL 477315, at -, 2011 Mass.Super. LEXIS 11, at -. In light of the requirement that a deciding court, in ruling on a motion brought under section 7.44 to dismiss a derivative suit, must evaluate the movant's evidentiary submissions to determine whether the corporate entity rejecting a plaintiff's demand is independent, and because the district court did not do so in evaluating the defendants' motion under Federal Rule of Civil Procedure 12(b)(6), we vacate the court's judgment as to Claim One.