In Baldwin v. Connor, Justice Kenneth W. Salinger, sitting in the Business Litigation Session in Suffolk County Superior Court, recently issued a summary judgment decision in which he ruled on issues of first impression involving appraisal rights of stockholders in a closely held Massachusetts corporation, among other issues.  This decision is required reading for lawyers that litigate shareholder disputes involving the fiduciary duty principles that the Supreme Judicial Court announced in its 1975 decision in Donahue v. Rodd Electrotype Co. of New England, Inc.    

The Court held that a modification of an existing stock restriction that has a material adverse effect on a shareholder’s ability to transfer their shares automatically triggers the shareholder’s appraisal rights and ability to require the company to redeem the shares at the appraised price under Mass. Gen. Laws c. 156D, § 13.02.  The Court’s analysis suggests that any modification that does not clearly loosen an existing restriction will be deemed to have a material adverse effect on the shareholder’s ability to transfer their shares. 

Moreover, Judge Salinger ruled that a close corporation’s failure to give a shareholder required notice of appraisal rights constitutes a breach of fiduciary duty under Donahue by the directors who are also shareholders.  This ruling was consistent with Donahue, which held that all shareholders in a Massachusetts close corporation owe each other a duty of utmost good faith and loyalty.   

In a discussion dropped in a footnote, the Court stated that there is no right to a jury trial on a fiduciary duty claim under Donahue, citing a 1996 Supreme Judicial Court decision holding that such claims are equitable and not legal in nature.  From that premise, the Court ruled, on summary judgment, that defendants had breached their fiduciary duties as a matter of law by failing to notify plaintiffs of their appraisal rights and it fashioned a remedy.  The Court held that plaintiffs had the right to redeem their shares for their fair value as of the date (i) the company should have been provided notice of appraisal rights or (ii) the date the company belatedly did provide such notice, whichever is higher.     

Baldwin v. Connor is an important case because it is the first Massachusetts decision to rule that a modified stock restriction triggers appraisal rights and to mete out consequences for the failure to provide timely notice of such rights.  Directors/shareholders in Massachusetts close corporations will be found to have breached their fiduciary duties if they fail to provide timely notice of appraisal rights.  And that determination will be made by a judge, not a jury.  Litigators and business attorneys who represent Massachusetts corporations and their stakeholders should advise their clients about this decision.

Summer associate Sebastian Peguero co-authored this alert.