Recent Federal Court Decision Clarifies Fiduciary Duty Interpretation for Delaware Corporations Doing Business In Massachusetts
By: Richard Gauthier
A recent decision by the Massachusetts federal district court held that Massachusetts corporate law relating to fiduciary duty does not apply to Delaware corporations doing business in Massachusetts. As most privately held tech-based companies started in Massachusetts are typically formed in Delaware and qualified here as a foreign corporation, this decision, while not surprising, provided comfort and clarity on this important issue.
Paul Nahass, a shareholder and former director and officer of FlexLite Corporation, sued a group of FlexLite shareholders, for terminating him as an officer and director of FlexLite. Nahass alleged the termination violated their fiduciary duty to Nahass as a minority shareholder in a close corporation and FlexLite’s corporate bylaws. Nahass argued that because FlexLite was a close corporation, under the famous Massachusetts Donohue v. Rodd decision, the other shareholders owed him a fiduciary duty that he claimed was breached.
The Court rejected this argument. Pursuant to the Massachusetts “internal affairs” doctrine, the law of the state of incorporation applies to disputes over the internal workings of a corporation, including allegations that majority shareholders breached a fiduciary duty to shareholders. Because FlexLite is a Delaware corporation, The Court held that Massachusetts law does not apply.
The Court then went on to clarify that, unlike Massachusetts, under Delaware law shareholders in a close corporation do not have a fiduciary duty to each other. Instead, Delaware courts have expressly rejected the Massachusetts Supreme Judicial Court’s reasoning. The Court noted that some Delaware courts have held that “majority stockholders have fiduciary duties to minority stockholders as stockholders …” in certain circumstances, which were not alleged in this case.[1]
The Court also upheld Nahass’ removal from the FlexLite board that was effected by a written consent of stockholders. While he claimed the corporate bylaws entitled him to a stockholder vote, the Court rejected this argument based on the provisions in the DGCL and the corporate bylaws that permitted action by written consent.
[1] The Court noted that under Delaware law, a shareholder may owe a fiduciary duty where it owns a majority interest in or exercises control over the business affairs of the corporation. In appropriate circumstances, multiple stockholders together can constitute a control group, with each of its members being subject to the fiduciary duties of a controller.