Merriam v. Demoulas Super Markets, Inc.

• Decision Date: 27 March 2013
• Docket Number: SJC–11098.
• Citation: 464 Mass. 721,985 N.E.2d 388
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court
• Parties: Diana D. MERRIAM & others v. DEMOULAS SUPER MARKETS, INC., & others.

464 Mass. 721

985 N.E.2d 388

Diana D. MERRIAM & others ¹

v.DEMOULAS SUPER MARKETS, INC., & others.²

SJC–11098.

Supreme Judicial Court of Massachusetts, Middlesex.

Submitted Sept. 6, 2012.

Decided March 27, 2013.

Michael Kendall (Kevin M. Bolan & Bridget K. O'Connell with him), Boston, for the defendants.

Thomas S. Fitzpatrick (Kendra Kinscherf with him), Boston, for the plaintiffs.

Andrea S. Batchelder, for Arthur T. Demoulas Revocable Trust & others, amici curiae, submitted a brief.

Present: IRELAND, C.J., SPINA, BOTSFORD, GANTS, DUFFLY, & LENK, JJ.

DUFFLY, J.

Demoulas Super Markets, Inc. (DSM), is a closely held Massachusetts corporation whose stockholders' dealings with each other, ^3,4 and with the corporation, have spawned decades of litigation, resulting in four earlier decisions of this court.⁵ In the present case, several minority “Class A” stockholders (sellers), whose offer to sell their shares to DSM was rejected, brought an action in the Superior Court seeking, inter alia, a declaration that, consistent with DSM's articles of organization, the sellers would be “at liberty to dispose of [their shares] in any manner [they] may see fit.” DSM filed counterclaims seeking declarations that the sellers cannot, consistent with their fiduciary duties to DSM and their fellow stockholders, sell their shares to any buyer who would imperil DSM's status as a Subchapter S corporation for tax purposes (S corporation), ⁶ and that the sellers are obligated to reoffer their shares to the corporation before selling them to a third party on more favorable terms. ⁷ On cross motions for judgment on the pleadings, a Superior Court judge declared that the sellers are not bound by fiduciary duty with respect to the disposition of their shares pursuant to the provisions of art. 5 of the articles of organization (art. 5). The judge declared also that, under the terms of art. 5, the sellers need not reoffer their shares to DSM before offering them to a third party on more favorable terms than those arrived at by arbitrators designated in accordance with art. 5.⁸ We affirm the judgment.

Background and proceedings. The essential facts are undisputed. We set forth certain of those facts, drawn from the parties' pleadings and the exhibits attached thereto. See Flomenbaum v. Commonwealth, 451 Mass. 740, 742, 889 N.E.2d 423 (2008) (in deciding motion for judgment on pleadings, well-pleaded factual allegations in adversary's pleadings are assumed to be true). See also Schaer v. Brandeis Univ., 432 Mass. 474, 477, 735 N.E.2d 373 (2000) (in evaluating motion pursuant to Mass. R. Civ. P. 12[b][6], 365 Mass. 784 [1974], we not only consider allegations in complaint but also may take into account “matters of public record, orders, items appearing in the record of the case, and exhibits attached to the complaint”).

Art. 5 restricts DSM stockholders from freely transferring their stock. ⁹ Pursuant to art. 5, a stockholder who seeks to convey shares in DSM is required to “notify the directors of his desire to sell ... in writing, which notice shall contain the price and all other terms at which he is willing to sell.”

In June, 2010, pursuant to art. 5, the sellers notified DSM of their offer to sell the thirty-six per cent of DSM shares they hold and named one of two arbitrators to determine the value of DSM's stock.¹⁰ At that point, pursuant to the terms of art. 5, DSM had thirty days within which to accept or reject the offer. DSM chose to reject the offer and, according to the provisions of art. 5, named a second arbitrator, while at the same time asserting that it had not waived its right to contest the validity of the sellers' notice. At that point, the sellers filed a complaint for declaratory relief in the Superior Court, seeking a declaration that their notice was valid and that, if DSM's directors declined to purchase their shares at the value reported by the arbitrators, the sellers would be free to dispose of the shares “in any manner [they] may see fit.”

DSM filed counterclaims contending that the sellers were nonetheless bound by their fiduciary obligations to DSM and could not dispose of their shares in a manner that would impair DSM's favorable S corporation tax status. See 26 U.S.C. §§ 1361, 1362 (2006) (Subchapter S); note 6, supra. DSM maintained that, in 1986, DSM's stockholders unanimously elected to adopt Subchapter S tax status under provisions of the Internal Revenue Code.¹¹ DSM claimed that, because the corporation would lose this favorable tax status if any of its shares were transferred to a corporate entity, the sellers were constrained by their fiduciary duty to DSM from freely selling their stock. DSM's counterclaims sought declarations that (1) a sale by the sellers to an entity that would defeat DSM's S corporation tax status would constitute a breach of their fiduciary duty to DSM and to their fellow shareholders; and (2) if DSM did not purchase the shares, the sellers could not sell to a third party at a price less than the value reported by the arbitrators without first offering to sell the shares to DSM at the lower price.

The parties filed cross motions for judgment on the pleadings. In January, 2011, while the cross motions were under advisement, DSM filed a “notice of mootness” concerning many of the pending claims. DSM stated that the arbitration process set forth in art. 5, which was the subject of the initial dispute, had concluded, but that the claims regarding the corporation's Subchapter S status and the sellers' fiduciary duty remained for the court's consideration. The sellers did not oppose DSM's notice as to their claims against DSM but reserved the right to pursue their claims against the individual defendants.

The judge dismissed the claims against the individual defendants and issued a memorandum of decision and a declaration on the sellers' obligations under art. 5 and on their fiduciary duty in regard to the Subchapter S issue. The judge declared:

“1. The plaintiffs are not bound by fiduciary duties with respect to their disposition of their shares in accordance with Article 5, even if the consequence of such disposition is that it causes DSM to lose its Subchapter S status. However, the plaintiffs must exercise their Article 5 rights in a manner that comports with the implied covenant of good faith and fair dealing.

“2. Article 5 does not require the plaintiffs to re-offer their shares to DSM before selling them to third parties on terms more favorable than those set by the designated arbitrators.”

DSM appealed, and we granted the sellers' application for direct appellate review.

Discussion. 1. Standard of review. The purpose of declaratory judgment is to “remove, and to afford relief from, uncertainty and insecurity” before an impending controversy reaches the point of breach and litigation. G.L. c. 231A, § 9. See School Comm. of Cambridge v. Superintendent of Schs. of Cambridge, 320 Mass. 516, 518, 70 N.E.2d 298 (1946). A court may rule on a motion for judgment on the pleadings seeking declarations of the parties' rights if the answer admits all material allegations in the complaintsuch that there are no material issues of fact remaining to be determined. See Reporters' Notes to Rule 12, Mass. Ann. Laws Court Rules, Rules of Civil Procedure, at 192 (LexisNexis 2012–2013); Citibank, N.A. v. Morgan Stanley & Co. Int'l, PLC, 724 F.Supp.2d 407, 414 (S.D.N.Y.2010), aff'd, 482 Fed.Appx. 662 (2d Cir.2012). We review de novo a judge's order allowing a motion for judgment on the pleadings under Mass. R. Civ. P. 12(c), 365 Mass. 754 (1974). Wheatley v. Massachusetts Insurers Insolvency Fund, 456 Mass. 594, 600, 925 N.E.2d 9 (2010).

2. Sellers' fiduciary duty. Shareholders in a close corporation ¹² owe each other a fiduciary duty of the “utmost good faith and loyalty.” O'Brien v. Pearson, 449 Mass. 377, 383, 868 N.E.2d 118 (2007), quoting Donahue v. Rodd Electrotype Co. of New England, Inc., 367 Mass. 578, 593, 328 N.E.2d 505 (1975)( Donahue ). The imposition of a higher duty than that imposed on stockholders in publicly traded corporations reflects both the lack of a ready market for close corporation shares and the reliance by close corporation shareholders on one another for the success of the enterprise. Donahue, supra at 587, 592–593, 328 N.E.2d 505. As we have recognized, the close corporate form “supplies an opportunity for the majority stockholders to oppress or disadvantage minority stockholders,” id. at 588, 328 N.E.2d 505, and vice versa. Id. at 593 n. 17, 328 N.E.2d 505.

However, we have encouraged parties in close corporations to negotiate for rights, protections, and procedures that define the scope of their fiduciary duty in foreseeable situations. By way of example, when a close corporation reacquires shares from its directors or controlling shareholders, the duty of utmost good faith and loyalty requires that the corporation offer to each shareholder an equal opportunity to sell a ratable number of his shares to the corporation at the same price. Donahue, supra at 597–598, 328 N.E.2d 505. Nonetheless, “a close corporation may purchase shares from one stockholder without offering the others an equal opportunity if all other stockholders give advance consent to the stock purchase arrangements through acceptance of an appropriate provision in the articles of organization, the corporate by-laws ..., or a stockholder's agreement.” Id. at 598 n. 24, 328 N.E.2d 505.

Agreements in a corporation's articles of organization or bylaws are treated as contracts between the shareholders and the corporation. Chokel v. Genzyme Corp., 449 Mass. 272, 275, 867 N.E.2d 325 (2007)( Chokel ), citing Jessie v. Boynton, 372 Mass. 293, 303, 361 N.E.2d 1267 (1977). The existence of a contract “does not relieve stockholders of the high fiduciary duty owed to one another in all their mutual dealings,” but where the parties have defined in a contract the scope of their rights and duties in a...