Kelleher v. Squires

• Decision Date: 21 January 2016
• Docket Number: SU1584CV03125
• Parties: Madeline Kelleher et al. Each Derivatively as Shareholders of the Squires of Hanover, Inc. [1] v. Paul Squires et al Opinion No. 132630
• Court: Massachusetts Superior Court

Madeline Kelleher et al. Each Derivatively as Shareholders of the Squires of Hanover, Inc. ^[1]
v.
Paul Squires et al

Opinion No. 132630

No. SU1584CV03125

Superior Court of Massachusetts, Suffolk

January 21, 2016

Filed Date January 26, 2016

MEMORANDUM AND ORDER DENYING MOTION FOR APPOINTMENT OF AN INDEPENDENT PANEL

Kenneth W. Salinger, Justice

The Squires of Hanover, Inc., (the " Corporation") is a closely held Massachusetts corporation. Defendant Paul Squires (" Squires") owns one-half of the Corporation. Plaintiffs Madeline, James, Catherine, and Evelyn Kelleher (the " Kellehers") together own or control the other half. Squires has been the only officer and director of the Corporation since the Kellehers' father died in 2011.

The Kellehers filed this action against Squires on behalf of the Corporation. They claim that Squires has been grossly negligent in running the restaurant that is the Corporation's sole business and that he thereby caused the Corporation to suffer economic damage. They also claim that Squires has converted to his own use monies or profits that belong to the Corporation. The Kellehers were required to name the Corporation as a nominal defendant.^[2]

The Corporation has asked the Court to appoint a panel of independent persons pursuant to G.L.c. 156D, § 7.44(f), to determine whether this derivative action is in the Corporation's best interests. The Court DENIES this request because it appears to be merely an attempt by Squires to circumvent normal corporate governance and because the Corporation has not made even a prima facie showing that this action against Squires is not in the Corporation's best interest.

1. Legal Background

" [A]s a basic principle of corporate governance, the board of directors or majority of shareholders should set the corporation's business policy, including the decision whether to pursue a lawsuit." Halebian v. Berv, 457 Mass. 620, 626, 931 N.E.2d 986 (2010), quoting Harhen v. Brown, 431 Mass. 838, 844, 730 N.E.2d 859 (2000). " However, where a shareholder claims that a corporation's directors or officers have engaged in wrongdoing that has injured the corporation, " a shareholder may, " in certain circumstances, . . . initiate a civil suit on behalf of the corporation against the directors or officers. A suit brought in this manner to vindicate a right of the corporation is known as a derivative proceeding" and is governed by G.L.c. 156D, § § 7.40 to 7.47. Halebian, supra, at 625.

The revised Massachusetts Business Corporations Act, which took effect on July 1, 2004, ^[3] " imposes a universal demand requirement on shareholder derivative suits." Id. By statute, a corporate shareholder may not " commence a derivative proceeding" on behalf of a corporation unless it makes " a written demand . . . upon the corporation to take suitable action" and either (a) " the demand has been rejected by the corporation, " (b) 90 days have elapsed with no response from the corporation (this period is extended to 120 days if the corporation chooses to submit the demand to a vote of the shareholders), or (c) " irreparable injury to the corporation would result by waiting for the expiration of such 90-day or 120-day period." G.L.c. 156D, § 7.42. " As a result, in Massachusetts, there is no longer a futility exception to the demand requirement, even if the board members are not independent and disinterested." Johnston v. Box, 453 Mass. 569, 578 n.15, 903 N.E.2d 1115 (2009).^[4]

If one or more shareholders bring a derivative proceeding on behalf of a corporation after complying with the statutory demand requirement, the corporation may force dismissal of the action--and thereby regain control over the decision whether to pursue or forego the lawsuit--if the corporation can show " that the shareholders or an appropriate group 'has determined . . . that the maintenance of the derivative proceeding is not in the best interests of the corporation.'" Halebian, 457 Mass. at 626, quoting G.L.c. 156D, § 7.44(a).

The corporation itself may make such a decision, and thus compel dismissal of the derivative...