In a recent decision, the Massachusetts Supreme Judicial Court ruled that directors of a corporation owe a fiduciary duty to the corporation itself, and not to the stockholders of the corporation (as is the case in Delaware, among other states). In Int’l Brotherhood of Electrical Workers Loc. No. 129 Benefit Fund v. Tucci, SJC-12137 (Mass. Mar. 6, 2017), the Court ruled that the directors of EMC Corporation did not breach their fiduciary duties to the corporation when they approved the sale of EMC as a whole, versus selling off the constituent operations individually, which might have brought a higher price. The Court relied on the plain language of M.G.L ch. 156D, Section 8.30, which provides that a director shall discharge his duties “in a manner the director reasonably believes to be in the best interests of the corporation.”
However, the opinion in Tucci makes it very clear that this standard does not apply in cases where a closely-held business is involved, and that directors of closely-held businesses still owe a fiduciary duty directly to the shareholders. The Court clearly distinguished the situation in Tucci, noting that EMC was a publicly-traded corporation with a significant stockholder base, and stated that “[i]n the case of a close corporation, which resembles a partnership, duties of loyalty extend to shareholders, who owe one another substantially the same duty of utmost good faith and loyalty in the operation of the enterprise that partners owe to one another, a duty that is even stricter than that required of directors and shareholders in corporations generally.”
Massachusetts has a long and well-settled history that directors and controlling stockholders in closely-held corporations owe fiduciary duties to their fellow stockholders, and must act in accordance with their best interests. The Tucci case makes it clear that while those standards may be relaxed where larger companies are involved, when it comes to smaller enterprises the fiduciary duty standard remains in place. Directors and controlling stockholders of closely-held businesses must consider what is in the best interest of all stockholders when considering significant corporate actions, especially where any self-interested transactions are involved. Failing to take these fiduciary duties into account can lead to liability for the directors and controlling stockholders.