A recent Massachusetts Appeals Court decision impacts businesses that deal with out of state companies, an issue that is much more common today thanks to the advent of e-commerce. Diamond Group, Inc. v. Selective Distribution International, Inc. expands personal jurisdiction and allows a Massachusetts business lawsuit to move forward against a Long Island company. The finding is based on the orders placed over emails between the two businesses.

Diamond, a Massachusetts company, sued Selective Distribution in a Massachusetts court for 45 unpaid invoices. Selective Distribution, a Long Island business, filed a motion to dismiss based on a lack of personal jurisdiction. The argument Selective made was the standard “minimum contacts” argument from the 1945 International Shoe case: the business had no presence in Massachusetts, and all deliveries it received came to its warehouses in New York and New Jersey.

The Court examined the International Shoe criteria and based its decision within them, albeit expanding them. First, the Court found that the series of email orders itself constitutes “purposeful availment” of Massachusetts commercial activity. Distinguishing this case from others in which personal jurisdiction was found absent based on the International Shoe standards, the Court explained that this ongoing pattern was far different than cases where single purchases or isolated transactions were involved. In contrast, Selective was a regular and active participant in Massachusetts commercial circles and this deliberate and routine involvement signaled that “traditional notions of fair play and substantial justice” would not be offended by the assertion of personal jurisdiction over the business.

Whether or not the Massachusetts Supreme Judicial Court will accept further appellate review is up in the air. For now, the clear take away is that doing business online with out of state companies can open your business up to liability in other states if this expanded understanding of personal jurisdiction holds up. This case is an important reminder of the benefits of including a governing law and dispute resolution clause in your contract forms to provide for a favorable locale as the exclusive forum for any proceedings to take place.

If you have any questions about this topic, please feel free to email us.

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Since the 1974 landmark decision in Donohue v. Rodd, Massachusetts courts have held that majority stockholders in close corporations owe minority stockholders a fiduciary duty akin to that owed in a partnership. This type of duty has been relied up to protect minority shareholders from squeeze-out or freeze-out scenarios. It has also been used as an offensive tactic to argue for implied rights of shareholders that are not expressly provided in the corporate documents, such as the articles of organization, bylaws or shareholder agreements.

In Merriam, et. al. v. Demoulas Supermarkets, Inc., the Supreme Judicial Court refused to extend the duties provided under Donohue v. Rodd to restrict stock transfers that were not expressly restricted under the Corporation’s governing documents.

While a fiduciary duty may exist, the Court encouraged shareholders of close corporations to enter into a shareholder agreement or specify in the corporate bylaws “rights, protections, and procedures that define the scope of their fiduciary duty in foreseeable situations.” The Court held that good faith compliance with the specific terms will not implicate that fiduciary duty. “A claim for breach of fiduciary duty may arise only where the agreement does not entirely govern the shareholder’s actions.”

In this case the plaintiffs attempted to use the concept of fiduciary duty in a creative way to prevent the transfer of stock because the corporation was an S corporation and the transfer could blow the S election. After reviewing the shareholder agreement and bylaws, the Court held that the challenged actions fell within the scope of those agreements – which did not restrict such a transfer – and that the fiduciary duty was not implicated in this case.

The court also rejected the argument that the fiduciary duty could be used to create an implied right of first offer or co-sale rights on a transfer to a third party. Transfer restrictions are to be construed narrowly in Massachusetts, and the Court reasoned that had the parties intended to create such rights and restrictions, they would have stated so expressly in their shareholder agreement.

Certainly, this decision does not present any major news to most corporate practitioners. While it is nice to know that shareholder agreements are still given weight in Massachusetts, the key takeaway is the importance of having such an agreement in the first place. Close corporations, particularly those with employee shareholders, should be strongly encouraged to enter into detailed shareholder agreements to provide for situations dealing with transfers, rights of first refusal, preemptive rights and potential divorce and dissolution. Majority stockholders may feel some reluctance to spend money and time on such a document, when the protection is often for their fellow stockholders. However, as shown by this decision, not having such an agreement will subject everyone to the vague principles of applicable fiduciary duties, which could have wide-ranging and negative implications.

If you have any questions about this topic, please feel free to email us.

Tags: acquisition, articles of organization, bylaws, change of ownership, close corporations, corporate law, donohue v. rodd, et. al. v. Demoulas Supermarkets, fiduciary duty, freeze-out, good faith, implied right, Inc., M&A, majority stockholders, massachusetts supreme judicial court, Merriam, minority stockholders, partnership, S-corporation, shareholder agreements, squeeze-out, stock transfers