Opinion ID: 200721
Heading Depth: 2
Heading Rank: 2

Heading: Standard for Determining the Enforceability of the Release

Text: 28 In essence, this case involves two claims of fiduciary breach. The first, on which the jury found for the plaintiffs, is that the Redeeming Principals had unjustly enriched themselves from the corporation's coffers. The second claim is that the Redeeming Principals committed a fiduciary breach that renders the Release unenforceable. The plaintiffs argue that the Release is unenforceable at a minimum because the defendants failed to disclose the material details of their unjust enrichment to Mi-Lor's remaining shareholders and directors when seeking the Release. They also argue that the Release is unenforceable because the defendants have not demonstrated that the Release was fair to the company. 29 At issue, then, is the standard for determining the enforceability of a release, executed by a close corporation and its directors and shareholders, of claims later proven to a jury that certain corporate directors and shareholders unjustly enriched themselves at the expense of the corporation. There is no Massachusetts case directly on point. 30 Corporations, whether close or public, have a strong interest in being able to give valid and enforceable releases. A release of claims by a close corporation in particular, even a release of self-dealing claims against its controlling shareholders, may benefit the close corporation by allowing it to resolve internal disputes in a swift and cost-effective manner and by enabling it to facilitate the termination of the involvement of its principals. 12 Close corporations like Mi-Lor also present fewer concerns about possible injury to the investing public from the actions of corporate directors and shareholders than do public corporations or charitable corporations. And where all of the shareholders (as opposed to the directors) of a close corporation execute a release after having received full disclosure, there are self-evident policy reasons to enforce such a release. 31 Even so, within close corporations there are fiduciary duties imposed on directors, officers, and, for some purposes, shareholders, in connection with their respective dealings with, and on behalf of, the close corporation and its shareholders. See Demoulas v. Demoulas Super Mkts., Inc., 424 Mass. 501, 677 N.E.2d 159, 179-80 (1997); Donahue v. Rodd Electrotype Co., 367 Mass. 578, 328 N.E.2d 505, 515-16 (1975). The release transaction involved here was not entered into by two or more independent business entities, but rather, was an entirely intra-corporation transaction — entered into by the close corporation itself (acting through the ratification of its shareholders) with its own principals. The intra-corporation nature of the transaction, the plaintiffs argue, gave rise to certain fiduciary obligations by the Redeeming Principals. 32 In Demoulas, the most recent Massachusetts case about self-dealing, the plaintiff brought a derivative action against the president/director/voting trustee of a close corporation and certain affiliated persons and entities, alleging that the defendants had diverted corporate opportunities and engaged in self-dealing. 677 N.E.2d at 165-66. The Supreme Judicial Court explained that a corporate fiduciary is not entirely barred from pursuing a corporate opportunity or entering into a self-dealing transaction. When such actions are taken, though, the corporate fiduciary has a duty to disclose the details of the opportunity/transaction to the corporate decision-makers and, at least when the decision-makers are interested directors, has the burden of proving that the opportunity or transaction is fair. Id. at 180-82. The court summarized the standard as follows: 33 In short, to meet a fiduciary's duty of loyalty, a director or officer who wishes to take advantage of a corporate opportunity or engage in self-dealing must first disclose material details of the venture to the corporation, and then either receive the assent of disinterested directors or shareholders, or otherwise prove that the decision is fair to the corporation. 34 Id. at 182. 35 It is clear from Demoulas that Massachusetts imposes on corporate fiduciaries a duty of full disclosure of material facts in connection with self-dealing. Material information about the self-dealing transaction is needed to make an educated decision about whether to allow it, and in the case of a self-dealing release, information about the conduct of the potential recipients of the release is necessary for deciding whether to grant the release encompassing such conduct. Thus, the Demoulas rule protects decision-makers by giving them information. 36 But Demoulas does not explicitly address the question of whether full disclosure to interested shareholders suffices in the context of a release given with unanimous shareholder consent. 13 And more generally, Demoulas leaves open the question of the effect of ratification by interested shareholders and the question of what role fairness plays when interested shareholders have ratified. 37 The law in this area is a tangled web. Language from cases in both the Supreme Judicial Court and in this court could, if lifted out of context, be taken to mean that a showing of fairness is always a requirement. See Winchell v. Plywood Corp., 324 Mass. 171, 85 N.E.2d 313, 316-17 (1949) (requiring a self-dealing corporate fiduciary to prove full disclosure and fairness to the corporation); Boston Children's Heart Foundation, Inc. v. Nadal-Ginard, 73 F.3d 429, 433-34 (1st Cir.1996) (same, applying Massachusetts law). This language in modern opinions, which seems to invoke a universal requirement of showing fairness, is at odds with older cases saying that transactions between corporations and their fiduciaries that are open and informed may be approved by the express consent of all the stockholders. Warren v. Para Rubber Shoe Co., 166 Mass. 97, 44 N.E. 112, 113 (1896) (holding that a corporation could contract with directors when the contract was made openly and with the assent of all the stockholders and the stockholders were not ignorant of the terms of the contract or of the self-dealing relationship between the contracting parties). Until Massachusetts addresses these questions directly, we are left to work out the issue. 38 On balance, we conclude the wiser rule is that where there is unanimous and fully informed shareholder approval in a close corporation, such approval suffices (subject to special rules for insolvency). If there is not full disclosure and unanimous approval, the question arises whether a showing of fairness alone would suffice to validate the Release. This appears to be the rule in most jurisdictions, Gevurtz, Corporation Law 324 (2000); yet a very literal reading of Demoulas' language quoted above might suggest the need for both full disclosure and fairness — although this variation was not decided there. Quite possibly the question need not be answered in the present case (and we do not seek to do so) because, if the transaction embracing the Release was fair, arguably this means that the corporation has already been properly compensated for its unjust enrichment claim. 39 The rule we adopt is close to the non-exclusive rule in the Delaware statute 14 that a self-dealing transaction may be approved by the consent of all shareholders — whether interested or not — so long as there is disclosure to those shareholders of all material facts concerning the self-dealing. 15 See Del.Code Ann. tit. 8, § 144(a); R. Clark, Corporate Law 168 (1986). That statutory rule is modified by Delaware case law, but the case law regarding the effect of the fully informed consent of shareholders in various contexts 16 has been described by the Delaware Chancery Court as not a model of clarity. Solomon v. Armstrong, 747 A.2d 1098, 1113 (Del.Ch.1999). 40 Here, there was unanimous shareholder approval, so the case does not present the question of what to do where a majority of shareholders approve but that majority is controlled by or composed of the defendants. If fully informed shareholder approval were simply by a majority, then different rules and shifting burdens might apply, see, e.g., Wachsler, Inc. v. Florafax Int'l, Inc., 778 F.2d 547, 552 (10th Cir. 1985), because then, even an informed shareholder vote may not afford the minority sufficient protection to obviate the judicial oversight role. In re Wheelabrator Techs., Inc. S'holders Litig., 663 A.2d 1194, 1204 (Del.Ch.1995). That rationale for requiring an additional fairness showing — the protection of dissenting minority shareholders who, perforce, have brought a derivative action — is inapplicable where the fully informed shareholder owners of a close corporation, even if interested, unanimously consent to the giving of a release. 41 As a practical matter, many close corporations are family corporations and/or do not have any disinterested shareholders or disinterested directors. Because the shareholders are the owners, if all of the owners, interested or not, of a close corporation agree to allow a release of claims of self-dealing after receiving full information about it, then they have had the opportunity to protect their own interests and there are no dissenting shareholders who may need further protection. It would ordinarily be unwise to involve courts in reviewing the informed and unanimous decisions of the owners, absent special circumstances. 42 Massachusetts, of course, may choose a different path in the future. It may, for example, feel that creditors of close corporations deserve protection against the mutual looting of corporate assets by all of a close corporation's shareholders. The law, however, already provides a degree of such protection. As the district court aptly recognized, a corporation may not act to release claims when that action would cause the corporation to go into insolvency or would take place during insolvency. See Mass. Gen. Laws ch. 109A, § 5; In re Tufts Elecs., Inc., 746 F.2d 915, 917 (Mass.App.Ct.1984) (explaining that prejudice [to creditors] arises where the transaction is a fraudulent conveyance or one which led to corporate insolvency). 43 If there has not been adequate disclosure to the remaining Mi-Lor shareholders, then there may be defenses available such as lack of causation or lack of damages, the availability or force of which we need not determine. 44