Litigation Trends Analysis
Michigan Supreme Court Clarifies Important Corporate Law and Procedure Issues Concerning Fiduciary Duties and Shareholder Claims
After years of uncertainty regarding critical issues concerning Michigan corporate law and shareholder claims, in Murphy v Inman, --- N.W.2d ---, 2022 WL 1020127 (Mich, April 5, 2022), the Michigan Supreme Court provided definitive guidance. In Murphy, a shareholder of Covisint Corporation brought class action claims against the Covisint directors for breach of common law fiduciary duties of care, loyalty, and candor arising from the sale of Covisint to OpenText Corporation. The shareholder alleged that the directors approved a plan of a merger at an inadequate per-share price, engaged in a flawed sales process that did not maximize shareholder value, were motivated by self-interest in obtaining personal financial benefits, and misled investors in the proxy materials issued for the shareholder vote on the merger. The trial court granted summary disposition, finding that (1) claims concerning a director’s fiduciary duties in the sale of a corporation are derivative and not direct claims; and (2) the plaintiff failed to follow the procedure for derivative claims. The trial court followed a long line of Court of Appeals decisions holding that the shareholder must show a unique injury to bring a direct claim. The Court of Appeals affirmed in an unpublished decision.
In its unanimous decision, the Michigan Supreme Court reversed the Court of Appeals and clarified Michigan law concerning two critical issues: (1) the common law fiduciary duties a director owes to shareholders in a change-of-control transaction, notably a cash-out merger; and (2) the standard for determining whether a claim is direct or derivative. The Court adopted Delaware law to settle both issues.
As it relates to common law fiduciary duties, the Court found that directors’ duties include the duty of candor in their disclosures to shareholders. In a change-of-control transaction, the duty of candor extends to the proxy materials provided to shareholders for their vote on the transaction. This duty requires disclosure of all material facts about the merger. One consequence of this finding is that claims related to misleading proxy materials can be brought in state court under Michigan common law and avoid the more rigorous standards of pursuing such claims in federal court under the Securities Exchange Act of 1934. Further, the Court found that when directors decide to sell a company, they owe the common law fiduciary duty of maximizing shareholder value. The Court explicitly adopted the well-established standards of Delaware law regarding when this duty arises and what its parameters are. While many practitioners have looked to Delaware law in advising their clients, the Court’s decision provided a degree of certainty in relying upon Delaware law regarding the duties of directors of a Michigan corporation.
As it relates to the standard for determining whether a claim is direct (belonging to the shareholder) or derivative (belonging to the corporation), the Court also adopted the Delaware standard, which analyzes: (1) whether the shareholder or the corporation suffered the harm; and (2) whether the shareholder or the corporation will receive the benefit from the recovery. In the past, the Michigan Court of Appeals repeatedly seized upon language in prior out-of-context decisions to find that a claim is derivative unless the shareholder can show a “separate and distinct” injury to the shareholder that is not suffered by all other shareholders. In practice, the newly adopted standard would find that when a shareholder challenges the adequacy of the shareholder’s consideration in a cash-out merger, the claim is direct and not derivative, regardless of whether all shareholders receive the same per-share price.
The Murphy decision will change the framework for evaluating direct versus derivative claims and give clarity to directors as to their fiduciary duties in change-of-control transactions. For further information on the impact of this Michigan Supreme Court decision, please feel free to reach out to Honigman’s Securities and Corporate Governance Litigation Group.