Murphy v. Inman

• Citation: 509 Mich. 132,983 N.W.2d 354
• Decision Date: 05 April 2022
• Docket Number: 161454
• Parties: Leslie J. MURPHY, Plaintiff-Appellant, v. Samuel M. INMAN, III, John F. Smith, Bernard M. Goldsmith, William O. Grabe, Lawrence David Hansen, Andreas Mai, Jonathan Yaron, and Enrico Digirolamo, Defendants-Appellees.
• Court: Supreme Court of Michigan

509 Mich. 132

983 N.W.2d 354

Leslie J. MURPHY, Plaintiff-Appellant,

v.Samuel M. INMAN, III, John F. Smith, Bernard M. Goldsmith, William O. Grabe, Lawrence David Hansen, Andreas Mai, Jonathan Yaron, and Enrico Digirolamo, Defendants-Appellees.

No. 161454

Supreme Court of Michigan.

Argued on application for leave to appeal December 9, 2021

Decided April 5, 2022

MacWilliams Law, PC, Bloomfield Hills (by Sara K. MacWilliams ) and Monteverde & Associates, PC (by Miles D. Schreiner ) for plaintiff.

Brooks Wilkins Sharkey & Turco PLLC (by Jason D. Killips, Southfield) and Paul Hastings LLP (by Christopher H. McGrath ) for defendants.

Ian Williamson, William Horton, Troy, Justin G. Klimko, Detroit, Douglas L. Toering, Troy, Marguerite Donahue, Southfield, Michael Molitor, Grand Rapids, Jennifer M. Grieco, Birmingham, and Brian P. Markham, for the Business Law Section of the State Bar of Michigan, amicus curiae.

Fatima M. Bolyea, Joel C. Bryant, Ann Arbor, Emily Fields, Troy, and Amanda Rauh-Bieri, for the Litigation Section of the State Bar of Michigan, amicus curiae.

BEFORE THE ENTIRE BENCH

Zahra, J.

This litigation arises from a cash-out merger agreement¹ executed between Covisint Corporation and OpenText Corporation. Leslie J. Murphy, a former shareholder of Covisint, brought this action against the eight named defendants in this case, all of whom are former Covisint directors, alleging that they breached their statutory and common-law fiduciary duties owed to plaintiff with regard to the merger. The questions before this Court are: (1) whether corporate directors owe fiduciary duties directly to the shareholders of the corporation under Michigan law and, if so, what those duties entail with respect to a cash-out merger transaction; and (2) whether a shareholder alleging that corporate directors breached their fiduciary duties in handling a cash-out merger must bring that claim as a direct or derivative² shareholder action.

We hold that corporate directors owe common-law fiduciary duties directly to the shareholders of the corporation. In the context of a cash-out merger transaction in which the decision to sell the target corporation has been made, directors must disclose to the shareholders all material facts within their knowledge regarding the merger and must exercise their fiduciary duties to the shareholders with one goal in mind: to maximize shareholder value by securing the highest value share price reasonably available. We conclude that directors’ common-law fiduciary duties to shareholders were not abrogated by the enactment of the Business Corporation Act (BCA).³ We also hold that a shareholder who alleges that the directors of the target corporation breached their fiduciary duties owed to the shareholder in handling a cash-out merger may bring that claim as a direct shareholder action. The Court of Appeals therefore erred by concluding that plaintiff's claim was derivative. For reasons more fully developed in this opinion, we reverse the decision of the Court of Appeals and remand this case to the Oakland County business court for further proceedings.

I. BASIC FACTS AND PROCEDURAL HISTORY

On June 5, 2017, Covisint, a corporation headquartered in Southfield, Michigan, publicly announced that it had entered into a merger agreement with OpenText. Under this agreement, OpenText acquired all outstanding shares of Covisint stock for $2.45 per share and a wholly owned subsidiary of OpenText merged with and into Covisint.⁴ Covisint issued a preliminary proxy statement on June 15, 2017, and a definitive proxy statement on June 26, 2017, both of which detailed the transaction and the negotiation process leading up to the merger agreement.

On June 30, 2017, before the merger was consummated, plaintiff filed this action in the business court of the Oakland Circuit Court.⁵ Plaintiff alleged that defendants breached their fiduciary duties of care, loyalty, good faith, independence, and candor owed to all Covisint shareholders. Plaintiff sought damages and rescission of the merger agreement.

On July 25, 2017, a majority of Covisint shareholders voted to approve the merger, which was consummated the next day. Plaintiff then filed an amended complaint, raising the same claim for breach of fiduciary duty. More specifically, plaintiff alleged, in relevant part, that defendants failed to maximize shareholder value when they sold Covisint at an inadequate and unfair price; engaged in a flawed sales process by favoring OpenText, neglecting other bidders, and failing to adequately pursue higher offers; acted in their self-interest and received personal financial benefits as a result of the merger; and breached their duty of candor when they issued a materially incomplete and misleading proxy statement that omitted information necessary to enable the shareholders to cast an informed vote.⁶

Defendants moved for summary disposition, arguing that plaintiff lacked standing because his claim was derivative in nature and he did not satisfy the requirements for bringing a derivative shareholder action under MCL 450.1493a.⁷ Plaintiff responded that he was permitted to bring a direct shareholder action under MCL 450.1541a⁸ and, additionally, that defendants owed common-law fiduciary duties to plaintiff as a shareholder such that he could bring a direct shareholder action. Defendants replied that plaintiff's action is derivative regardless of how he characterized his claim.

The trial court granted defendants’ motion for summary disposition, holding that plaintiff lacked standing to bring a direct shareholder action. The trial court determined that plaintiff's allegations—that defendants’ breach of their fiduciary duties in handling the merger resulted in plaintiff receiving an inadequate and unfair price for his shares—affected both plaintiff and Covisint in the same manner. The trial court held that because plaintiff could not demonstrate an injury to himself without showing injury to the corporation, nor could he show harm separate and distinct from that of other Covisint shareholders, plaintiff's action was derivative. The court also rejected plaintiff's common-law theory because it arose out of the same alleged injury as his statutory claim. Because plaintiff failed to comply with the requirements for bringing a derivative action, the trial court dismissed his claim.

In an unpublished per curiam opinion, the Court of Appeals affirmed, agreeing with the trial court that plaintiff's action was derivative under both MCL 450.1541a and the common law.⁹ Plaintiff sought leave to appeal in this Court. We directed the Clerk to schedule oral argument on the application to address:

(1) whether, with respect to Covisint Corporation's cash-out merger with OpenText Corporation, corporate officers and directors owed cognizable common law fiduciary duties to the corporation's shareholders independent of any statutory duty; and (2) whether the appellant has standing to bring a direct cause of action under either the common law or MCL 450.1541a.^{[10 ]}

II. STANDARD OF REVIEW AND APPLICABLE RULES OF STATUTORY INTERPRETATION

This Court reviews de novo a trial court's decision on a motion for summary disposition.¹¹ Whether a party has standing is a question of law reviewed de novo.¹² This case also requires us to interpret applicable provisions of the BCA and determine whether the Legislature has abrogated, amended, or preempted the common law. These are also questions of law reviewed de novo.¹³

"The role of this Court in interpreting statutory language is to ascertain the legislative intent that may reasonably be inferred from the words in a statute."¹⁴ Our analysis must focus on "the statute's express language, which offers the most reliable evidence of the Legislature's intent. When the statutory language is clear and unambiguous, judicial construction is limited to enforcement of the statute as written."¹⁵

III. ANALYSIS

Our analysis proceeds in four parts. First, we discuss the mechanics of a cash-out merger transaction. Second, we identify the fiduciary duties at issue and their source under Michigan common law. Third, we explain our conclusion that the Legislature's enactment of the BCA did not abrogate those common-law fiduciary duties. Finally, we clarify the distinction between direct and derivative shareholder actions under Michigan law and, applying that framework, conclude that plaintiff has standing to bring a direct shareholder action against defendants for an alleged breach of their common-law fiduciary duties owed to him in their handling of the cash-out merger agreement with OpenText.

A. CASH-OUT MERGER TRANSACTION

This case involves a "cash-out merger," in which the shareholders of the target corporation must accept cash for their shares and lose their ownership interest in the target corporation.¹⁶ To initiate a merger under the BCA, the board of directors for each constituent corporation must adopt a merger plan.¹⁷ The plan must include, among other things, "the manner and basis of converting the shares of each constituent corporation into shares, bonds, or other securities of the surviving corporation, or into cash or other consideration ...."¹⁸ This conversion constitutes the consideration used to facilitate the merger, i.e., the "merger consideration." The amount and form of the merger consideration is a matter of negotiation between the directors of the corporations being merged. After the plan's adoption by each corporation's board of directors, the plan is generally submitted to the shareholders of each corporation for approval.¹⁹ Once the plan is approved and the merger takes effect, the target corporation ceases to exist and the outstanding shares of the target corporation are converted into the merger consideration provided for in the merger plan.²⁰ All property and rights of the target corporation, including any existing derivative claims, pass to the surviving corporation once the merger is consummated. ²¹

In this case, plaintif...