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This summary judgment opinion by Judge
Gants provides an extensive discussion of fiduciary
duties and the effect of Board approval of
self-interested transactions. The case involves a
dispute between the estate of a shareholder in a parent
corporation and the directors of a wholly-owned
subsidiary corporation, and arises out the subsidiary’s
decision to lease certain property to two of its
officers and directors.
Beginning in 1957, Boston Sand was owned
and managed by Dan and Dean Boylan. Dan entered into a
Separation Agreement with the company in 1995. The
agreement provided that if Boston Sand were to consider
entering into any related party transactions with Dean
or his children, the company would be required to
provide Dan with written notice of the proposed
transaction no later than 30 days before the company
obtained Board of Director approval of the transaction.
Manchester Sand is a wholly-owned
subsidiary of Boston Sand. One of Manchester’s assets
was a 42-acre parcel of land, which Dean, Jr. and
Jeanne-Marie (children of Dean Boylan and officers of
both Boston and Manchester) proposed to purchase. A
limited appraisal report obtained by Dean, Jr. and
Jeanne-Marie estimated the value of the parcel to be
between $240,000 and $270,000. In February 1996, the two
officers sought approval from the Boston Sand Board to
lease the parcel from Manchester Sand for $2,000 per
month, with an option to purchase the parcel for
$255,000. The Board unanimously approved the transaction
at its next regularly scheduled meeting in May 1996.
Dan, however, learned of the proposed
transaction only days before the May 1996 Board meeting,
and did not receive information regarding its terms
until after the Board gave its approval. Dan promptly
advised the Board of his objections and provided the
directors with a separate appraisal that valued the
parcel at $600,000. The Board discussed Dan’s objections
at its November 1996 meeting, but did not vote to
rescind or ratify the transaction. Some 10 years later,
the Board subsequently ratified the transaction after
Dan’s estate filed a verified complaint challenging the
lease and sale agreement.
On defendants’ motion for summary
judgment, the court held that Dean, Jr. |
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and Jeanne-Marie owed a fiduciary duty to
Boston Sand as directors of the company. If the two
directors wished to enter into a self-dealing
transaction – such as the lease and purchase of the
42-acre parcel owned by Manchester – they were required
to make full and honest disclosure of all material facts
of the proposed transaction and either receive the
assent of disinterested shareholders or otherwise prove
that the decision was fair to the company. Id. at *7.
They breached their duty by failing to inform the Board
that they had not provided notice of the proposed
transaction to Dan as required by the Separation
Agreement. Id. at *8.
The Board’s subsequent ratification
raised issues of fact precluding summary judgment for
the defendants. Ratification is only valid if approved
by the disinterested directors. Judge Gants held as a
matter of law that some of the directors were
interested, while others were not. The court further
held that even where all disinterested directors voted
to ratify, the court would not apply the deferential
“business judgment” rule. Id. at *11. Rather, the
court must independently determine whether the Board
“reached a reasonable and principled decision.” Id.
at *12.
Invoking the SJC’s opinion in Houle v.
Low, Judge Gants held that this determination is to be
made by evaluating: 1) whether the directors who made
the decision were independent, unbiased, and acted in
good faith; and, if so, 2) whether the independent
directors conducted a thorough and careful analysis;
and, if so, 3) whether the decision was contrary to the
great weight of the evidence. Id. at *13. Because
the record did not permit the court to find, as a matter
of law, that this test had been met, the court denied
defendants’ motion for summary judgment.
On a separate count, the court also held
that Boston Sand had breached the Separation Agreement
by entering into a related transaction with Dean’s
children without notice to Dan. However, the estate’s
failure to provide an estimate of damages – even when
confronted with an Order compelling it to do so –
precluded recovery of damages. The estate would
therefore be limited to future injunctive relief if it
were to prevail on this count at trial.
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