Halebian v. Berv, No. 07-3750 (2d Cir. 2009)

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The court issued a subsequent related opinion or order on May 6, 2011.

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07-3750-cv Halebian v. Berv 1 UNITED STATES COURT OF APPEALS 2 3 4 FOR THE SECOND CIRCUIT 5 August Term, 2008 (Argued: February 5, 2009 Decided: December 29, 2009) 6 Docket No. 07-3750-cv 7 ------------------------------------- 8 JOHN HALEBIAN, 9 Plaintiff-Appellant, 10 - v. - 11 12 13 ELLIOT J. BERV, DONALD M. CARLTON, A. BENTON COCANOUGHER, MARK T. FINN, STEPHEN RANDOLPH GROSS, DIANA R. HARRINGTON, SUSAN B. KERLEY, ALAN G. MERTEN, R. RICHARDSON PETTIT, 14 Defendants-Appellees, 15 CITIFUNDS TRUST III, 16 Nominal Defendant-Appellee.* 17 ------------------------------------- 18 Before: 19 SACK and PARKER, Circuit Judges, and STANCEU, Judge.** Appeal from a judgment of the United States District 20 Court for the Southern District of New York (Naomi Reice 21 Buchwald, Judge) dismissing a three-count complaint arising from 22 the renegotiation of certain investment advisory agreements. 23 reserve decision while certifying to the Supreme Judicial Court 24 of Massachusetts a question as to the circumstances under which * The Clerk of Court is directed to amend the official caption as set forth above. ** The Honorable Timothy C. Stanceu, of the United States Court of International Trade, sitting by designation. We 1 the business judgment rule may be asserted in response to a 2 shareholder derivative suit under the Massachusetts Business 3 Corporation Act. 4 Question certified; decision reserved. 5 6 7 JOEL C. FEFFER (Daniella Quitt, James G. Flynn, on the brief) Harwood Feffer LLP, New York, NY, for Plaintiff-Appellant. 8 9 10 11 12 JAMES S. DITTMAR, Goodwin Procter LLP, Boston, MA (Michael K. Isenman, Matthew Hoffman, Goodwin Procter LLP, Washington, DC, on the brief) for Defendants-Appellees. 13 14 SACK, Circuit Judge: John Halebian, a shareholder of an investment fund 15 within CitiFunds Trust III ("CitiTrust" or the "Trust"), appeals 16 from a judgment of the United States District Court for the 17 Southern District of New York (Naomi Reice Buchwald, Judge). 18 court dismissed his three-count complaint against members of the 19 Trust's board of trustees, the defendants here, in connection 20 with the sale of an adviser of the Trust and the approval of new 21 investment advisory contracts following that sale. 22 styled as a derivative claim on behalf of the Trust, alleges that 23 the defendants breached their fiduciary duties to the Trust "in 24 considering the . . . transaction and in recommending the new 25 advisory agreements." 26 Civ. 4099 (S.D.N.Y. filed May 30, 2006) (Doc. No. 1) ("Compl."). 27 Claims Two and Three, styled as direct claims, allege that the 28 defendants violated federal and state law by issuing materially The Claim One, Complaint ¶ 54, Halebian v. Berv, No. 06 2 1 false and misleading statements encouraging their shareholders to 2 approve the new investment advisory contracts. 3 We conclude that we cannot decide the propriety of the 4 district court's dismissal of Count One without resolving a 5 question of Massachusetts law which appears to us to be one of 6 first impression. 7 the Massachusetts Supreme Judicial Court in the first instance. 8 Accordingly, we certify that question to the Supreme Judicial 9 Court. We think that issue would best be decided by Although we are of the view that dismissal of Counts Two 10 and Three was proper, in light of our decision to certify a 11 question to the Supreme Judicial Court in connection with Count 12 One and because our resolution of the propriety of the district 13 court's dismissal of Counts Two and Three also involves the 14 application of Massachusetts law, we think it the more prudent 15 course to reserve judgment in this respect, too, pending the 16 Supreme Judicial Court's response to the question certified. BACKGROUND 17 18 The following recitation is based on Halebian's 19 complaint and other documents "integral" to that complaint, see 20 Chambers v. Time Warner, Inc., 282 F.3d 147, 153 (2d Cir. 2002), 21 the factual assertions of which, for purposes of this discussion, 22 we assume to be true, see Ashcroft v. Iqbal, 129 S. Ct. 1937, 23 1949 (2009). 24 relevant times, he owned shares in the Citi New York Tax Free 25 Reserves Fund (the "New York Fund"), one of six "series 26 portfolios," or mutual funds (the "Funds"), contained in the Halebian is a citizen of New York State. 3 At all 1 Trust. See Compl. ¶ 7. CitiTrust is a Massachusetts business 2 trust with its principal place of business in Maryland. 3 CitiTrust is "named as a nominal defendant . . . solely in a 4 derivative capacity." 5 whom is a New York citizen, are members of CitiTrust's Board of 6 Trustees (the "Board"). Id. ¶ 9. Id. ¶ 8. The actual defendants, none of Id. ¶¶ 10-19. 7 The Transaction 8 On June 23, 2005, Citigroup sold substantially all of 9 its asset management business, including a subsidiary that served 10 as an adviser to CitiTrust, to Legg Mason, Inc. 11 connection with this transaction (the "Transaction"), the Funds' 12 existing advisory contracts were terminated and new contracts 13 were executed with the Funds' new advisers, id. ¶ 33, for which 14 the Funds' shareholders' approval was required, id. ¶ 34. 15 August 2005, the Board approved the Funds' new investment 16 advisory agreements with Legg Mason. 17 Board issued a proxy statement to its shareholders describing the 18 advisory agreements and recommending that they vote to approve 19 the new agreements, id. ¶¶ 34-35, which they did, id. ¶ 61. 20 Id. ¶ 39. Id. ¶ 32. In In Thereafter, the Two aspects of the Transaction are relevant to this 21 appeal. First, the new advisory agreements authorize the payment 22 of "soft dollars." 23 court, soft-dollar payments "permit the advisor to select brokers Id. ¶ 43.1 As described by the district 1 The prior advisory agreements also permitted soft-dollar payments. See Halebian v. Berv, 631 F. Supp. 2d 284, 289 (S.D.N.Y. 2007). 4 1 or dealers who provide both brokerage and research services to 2 the Funds, even though the commissions charged by such brokers or 3 dealers might be higher than those charged by other brokers or 4 dealers who provide execution only or execution and research 5 services." 6 2007). 7 Halebian v. Berv, 631 F. Supp. 2d 284, 289 (S.D.N.Y. Second, the voting procedures employ "echo voting," in 8 which Citigroup-affiliated service agents who were record holders 9 of shares for which instructions had not been received would vote 10 those shares "in the same proportion as the votes received from 11 its customers for which instructions have been received." 12 ¶ 45 (internal quotation marks omitted).2 13 The Demand Letter and the Board's Response 14 Compl. On February 8, 2006, Halebian, through counsel, 15 expressed his dissatisfaction with the Transaction by letter to 16 the Board. Compl. ¶ 48. He asserted that in connection with the 2 This practice is described in the Trust's most recent prospectus, in the "Trust Instrument" (the source of the shareholders' contractual rights), and in the relevant proxy statement. Halebian, 631 F. Supp. 2d at 289 n.2. The proxy statement notified the shareholders that: With respect to any shares for which a Citigroup-affiliated service agent (other than a broker-dealer) is the holder of record and for which it does not receive voting instructions from its customers, such service agent intends to vote those shares in the same proportion as the votes received from its customers for which instructions have been received. Id. at 289. 5 1 Transaction and contrary to its fiduciary duty, the Board "placed 2 the interests of Citigroup before those of the Fund and . . . 3 [its] shareholders" and "failed to avail itself of the 4 opportunity presented to seek to negotiate lower fees" on behalf 5 of the Trust "or to seek competing bids from other qualified 6 investment advisers." 7 Trs. of the Citi N.Y. Tax Free Reserves Series of Citi Funds 8 Trust III 1-2 (Feb. 8, 2006). 9 board take action which would include, among other things, the Letter from Joel C. Feffer to the Bd. of The letter demanded "that the 10 institution of an action for breach of fiduciary duty against any 11 and all persons who are responsible for the board's dereliction 12 of its duties in connection with the . . . transaction" and that 13 "appropriate remedial measures . . . be undertaken, including 14 seeking bids for the advisory contract from other qualified 15 investment advisers, negotiating new terms more favorable to the 16 [New York] Fund with Legg Mason, or both." 17 Id. at 2. The demand letter noted that "shareholder approval does 18 not appear to have been obtained properly," presumably a 19 reference to the echo voting practices described in the proxy 20 statement. 21 respect to this purported impropriety because, the letter said, 22 the impropriety "gives rise to direct, rather than derivative, 23 claims." 24 The letter did not, however, make a demand with Id. at 1 n.1. The Board acknowledged receipt of the demand letter. 25 Compl. ¶ 49. It later advised Halebian that it had created a 26 "Demand Review Committee" to review his complaint, and that the 6 1 committee had retained counsel. Id. ¶ 50. Throughout this 2 period of time, counsel for both Halebian and the Demand Review 3 Committee remained in communication with one another. 4 Halebian's Complaint 5 On May 30, 2006, more than ninety days after the date 6 of Halebian's original demand letter, not having received a 7 definitive response from the Demand Review Committee, Halebian 8 filed a three-count complaint in the United States District Court 9 for the Southern District of New York. In it, he alleges that 10 following his demand letter, Halebian waited "the statutory time 11 required" -- ninety days -- before filing his derivative claim;3 12 that such a period "provide[d] more than adequate time" for the 13 Board to have reviewed Halebian's demand and have taken action; 14 and that "[n]ot surprisingly, defendants have failed to take 15 action against themselves." 16 Compl. ¶ 51. Claim One, styled as a derivative claim for breach of 17 fiduciary duty, alleges that members of the Board breached their 18 fiduciary duties of good faith and loyalty under Massachusetts 19 law in their "consider[ation of] the Citigroup/Legg Mason 20 transaction and in recommending the new advisory agreements." 21 Id. ¶ 54. 22 their consideration to whether the . . . transaction would be The complaint alleges that the "[d]efendants limited 3 As discussed in greater detail below, prior to the filing of a derivative claim under Massachusetts law, a shareholder must give the corporation the opportunity to resolve the issue that forms the basis of the claim. See Mass. Gen. Laws ch. 156D, § 7.42. 7 1 worse for CitiTrust's beneficiaries than their current situation" 2 and "made no effort to investigate whether a transaction could be 3 fashioned which would benefit CitiTrust's beneficiaries, either 4 with Legg Mason or another asset manager." 5 contends that the soft-dollar arrangements allow for the payment 6 of "higher than necessary brokerage commissions," id. ¶ 43, 7 referring to those payments as "kickback[s]," id. ¶ 44.4 8 9 Id. ¶ 36. Halebian Claim Two, styled as a direct claim on behalf of Halebian and members of a class of "all persons and entities who 10 held shares of beneficial interest in CitiTrust on August 22, 11 2005 (the 'Class')," id. ¶ 26, alleges that the proxy statement 12 at issue violated section 20(a) of the Investment Company Act of 13 1940 (the "ICA"), 15 U.S.C. § 80a-20(a), because it contained 14 material misstatements and omissions. 15 procedures described in the proxy statement violated federal law 16 -- section 15(a) of the ICA, 15 U.S.C. § 80a-15(a) -- and 17 unspecified provisions of Massachusetts law, and that the proxy 18 statement was misleading because it did not so state. 4 First, the echo voting Compl. ¶¶ In 2006, the SEC issued an Interpretive Release that provides guidance on the use of "soft dollars" under section 28(e) of the Securities Exchange Act of 1934, 15 U.S.C. § 78bb(e)(1). It provides "a safe harbor that allows money managers to use client funds to purchase 'brokerage and research services' for their managed accounts under certain circumstances without breaching their fiduciary duties to clients." Commission Guidance Regarding Client Commission Practices Under Section 28(e) of the Securities Exchange Act of 1934, Exchange Act Release No. 54,165, 71 Fed. Reg. 41,978, 41,978 (July 24, 2006). To qualify under the safe-harbor provision, money managers must "make a good faith determination that the commissions paid are reasonable in relation to the value of the brokerage and research services received." Id. at 41,991. 8 1 47, 60. 2 virtue of the Transaction, assets of CitiTrust were 3 "diver[ted] . . . for the benefit of others," 4 presumably via soft dollar payments. 5 false and misleading information," Halebian alleges, the 6 "[d]efendants secured approval of the new advisory agreements." 7 Id. ¶ 61. 8 9 Second, the proxy statement failed to disclose that by id. ¶ 60, Based on this "material Claim Three, also styled as a direct claim on behalf of Halebian and members of the Class, id. ¶ 26, asserts that the 10 trustees violated Massachusetts law, id. ¶ 64, by failing fully 11 and fairly to disclose in the proxy statement all material 12 information within their control, namely, the "[im]propriety of 13 the[] voting procedures" and "the diversion of CitiTrust assets 14 for the benefit of others," id. ¶ 65. 15 The complaint seeks declaratory and injunctive relief 16 and compensatory damages. 17 See Compl. at 20-21, "Prayer for Relief." 18 Board's Post-Complaint Conduct 19 By resolution dated July 12, 2006, some six weeks after 20 the timely filing of Halebian's complaint, the Board expressly 21 declined to accede to Halebian's demand, effectively rejecting 22 it. 23 (July 12, 2006). 24 volume of information on the quality and costs of the adviser's 25 services, including a study that indicated the Fund's management 26 fee was in the lowest quintile measured against fees for similar See Res. of the Bd. of Trs. of CitiFunds Trust III 27 The Board stated that it had "studied a large 9 1 funds, and concluded that the fees were reasonable." 2 The Board further "found no authority for the proposition that 3 the 1940 Act or Massachusetts law forbids the use of echo voting 4 by a record holder of shares in a vote to approve an advisory 5 contract with a registered mutual fund" and noted that "[e]cho 6 voting is a common practice in the financial industry [the] 7 utility [of which practice] has been recognized both by the 8 Securities and Exchange Commission and the New York Stock 9 Exchange." Id. at 25. Id. at 22. According to the Board, "the balance of 10 the Trust's interests weighs against taking the action requested 11 in the Demand Letter." 12 declined to institute any action against its members. 13 directed its counsel to move to dismiss Halebian's derivative 14 claim instead. 15 Id. at 26. On that basis, the Board It Id. at 27-28. On October 24, 2006, defendants' counsel moved 16 pursuant to, inter alia, Federal Rule of Civil Procedure 12(b)(6) 17 to dismiss the complaint. 18 The District Court Opinion 19 By Memorandum and Order dated July 31, 2007, the 20 district court granted the defendants' motion to dismiss. 21 Halebian, 631 F. Supp. 2d at 303. 22 See In addressing Count One, the court acknowledged that 23 Halebian had satisfied Massachusetts's statutory universal demand 24 requirement for derivative actions by demanding that the Trust 25 rectify the alleged improprieties in the Legg-Mason transaction 26 and then waiting the requisite 90 days before filing his suit. 10 1 See Mass. Gen. Laws ch. 156D, § 7.42. 2 nonetheless dismissed Count One on two other bases. 3 The district court First, the court concluded that the complaint failed to 4 comply with Rule 23.1 of the Federal Rules of Civil Procedure 5 because it "asserts no basis for 'plaintiff's failure to obtain 6 the action' from the board as required by Rule 23.1." 7 631 F. Supp. 2d at 297-98 (quoting Fed. R. Civ. P. 23.1 (2006)). 8 9 Halebian, Second, the court concluded that dismissal was appropriate pursuant to a then-recently enacted provision of 10 Massachusetts law authorizing the dismissal of derivative actions 11 based on the corporation's good-faith business judgment that 12 prosecution of the action would not be in its best interests. 13 See Mass. Gen. Laws ch. 156D, § 7.44(a). 14 acknowledged that section 7.44, by its terms, applies only to 15 derivative proceedings "commenced after rejection of a demand" 16 and that Halebian's suit had been filed before any rejection of 17 his demand. 18 dismissal pursuant to section 7.44 would be required "as long as 19 [CitiTrust] rejected the demand after a good faith review," 20 irrespective of whether that rejection post-dated the timely 21 filing of a derivative claim. 22 Upon concluding that section 7.44 applied, the district court 23 dismissed Count One based on its finding that the section's 24 various preconditions had been met -- "an independent group [of 25 the Trust's leadership] has determined in good faith after 26 conducting a reasonable inquiry that the maintenance of the See id. The district court Nonetheless, the court concluded that Halebian, 631 F. Supp. 2d at 294. 11 1 proceeding is not in the [Trust's] best interest." 2 295-96 (citing Mass. Gen. Laws ch. 156D, § 7.44(a)). 3 See id. at The district court then addressed Counts Two and Three 4 in tandem, concluding that although Halebian had styled both as 5 direct claims they were in fact derivative claims "because they 6 seek to redress an alleged injury to the Funds." 7 light of Halebian's failure to make a demand on the corporation 8 with respect to either of these claims, as is required under 9 Massachusetts's law for any properly filed derivative claim, see Id. at 302. In 10 Mass. Gen. Laws ch. 156D, § 7.42, the district court dismissed 11 both of them, Halebian, 631 F. Supp. 2d at 303. 12 alternative basis for dismissal, the court concluded that Counts 13 Two and Three "sound[ed] in fraud" and failed to meet the 14 "heightened standard of pleading for claims which sound in fraud" 15 as required by Rule 9(b) of the Federal Rules of Civil Procedure. 16 Id. 17 As an The district court also concluded that Claim Two -- 18 Halebian's "direct" claim for violation of section 20(a) of the 19 ICA -- failed because, under Alexander v. Sandoval, 532 U.S. 275 20 (2000), and its progeny, see, e.g., Olmstead v. Pruco Life Ins. 21 Co., 283 F.3d 429 (2d Cir. 2002), no federal private right of 22 action is available for a violation of section 20(a). 23 631 F. Supp. 2d at 298-301. 24 Halebian appeals. Halebian, We reserve judgment pending a 25 response by the Supreme Judicial Court of Massachusetts to a 26 question of Massachusetts law that we certify to it. 12 DISCUSSION 1 2 I. Standard of Review 3 We review dismissals pursuant to Rule 12(b)(6) of the 4 Federal Rules of Civil Procedure de novo. See Velez v. Levy, 401 5 F.3d 75, 84 (2d Cir. 2005). 6 sufficiency of allegations of futility depends on the 7 circumstances of the individual case, the standard of review for 8 dismissals based on Fed. R. Civ. P. 23.1 is abuse of discretion." 9 Scalisi v. Fund Asset Mgmt., L.P., 380 F.3d 133, 137 (2d Cir. Where "determination of the 10 2004) (internal quotation marks omitted). 11 challenge is made to the legal precepts applied by the district 12 court in making a discretionary determination, plenary review of 13 the district court's choice and interpretation of those legal 14 precepts is appropriate." 15 16 II. A. Where, however, "a Id. Federal Procedural Requirements Rule 12(b)(6) 17 In accordance with the Supreme Court's decision in Bell 18 Atlantic Corp. v. Twombly, 550 U.S. 544 (2007), we apply a 19 "plausibility standard" to evaluate whether dismissal pursuant to 20 Rule 12(b)(6) of the Federal Rules of Civil Procedure is 21 appropriate. 22 working principles." 23 (2009). 24 allegations contained in a complaint" but need not accept "legal 25 conclusions." 26 the elements of a cause of action, supported by mere conclusory Id. at 560. That standard is guided by "[t]wo Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949 First, "a court must accept as true all [factual] Id. For this reason, "[t]hreadbare recitals of 13 1 statements, do not suffice" to insulate a claim against 2 dismissal. 3 claim for relief." 4 complaint [does so] will . . . be a context-specific task that 5 requires the reviewing court to draw on its judicial experience 6 and common sense." 7 B. Second, a complaint must "state[] a plausible Id. at 1950. "Determining whether a Id. Rule 23.1 8 9 Id. In addition to meeting the generally applicable rules for pleading under the Federal Rules of Civil Procedure, the 10 pleading of derivative actions must satisfy the requirements set 11 forth in Rule 23.1 of the Rules. 12 23.1 applies "when one or more shareholders or members of a 13 corporation or an unincorporated association bring a derivative 14 action to enforce a right that the corporation or association may 15 properly assert but has failed to enforce." 16 23.1(a). 17 particularity . . . any effort by the plaintiff to obtain the 18 desired action from the directors or comparable authority and, if 19 necessary, from the shareholders or members; and . . . the 20 reasons for not obtaining the action or not making the effort." 21 Fed. R. Civ. P. 23.1(b)(3). 22 Fed. R. Civ. P. 23.1. Rule Fed. R. Civ. P. Complaints asserting derivative claims must "state with Rule 23.1 is a "rule of pleading that creates a federal 23 standard as to the specificity of facts alleged with regard to 24 efforts made to urge a corporation's directors to bring the 25 action in question." 26 1318, 1330 (2d Cir. 1991). RCM Secs. Fund, Inc. v. Stanton, 928 F.2d It does not "'abridge, enlarge or 14 1 modify any substantive right.'" Kamen v. Kemper Fin. Servs., 2 Inc., 500 U.S. 90, 95 (1991) (quoting 28 U.S.C. § 2072(b)). 3 underlying demand requirement, by contrast, "in delimiting the 4 respective powers of the individual shareholder and of the 5 directors to control corporate litigation[,] clearly is a matter 6 of 'substance,' not 'procedure.'" 7 Income Fund, Inc. v. Fox, 464 U.S. 523, 543-44 & n.2 (1984) 8 (Stevens, J., concurring in judgment)). 9 by state law. The Id. at 96-97 (citing Daily It is therefore governed See Shady Grove Orthopedic Assocs., P.A. v. 10 Allstate Ins. Co., 549 F.3d 137, 141-42 (2d Cir. 2008) 11 ("[F]ederal courts . . . apply state substantive law and federal 12 procedural law . . . . to any issue or claim which has its source 13 in state law."(internal quotation marks omitted)), cert. denied, 14 129 S. Ct. 2160 (2009). 15 III. Massachusetts Substantive Requirements 16 Even where an underlying cause of action is based on 17 the ICA, as Claim Two is, whether the action is properly 18 classified as derivative or direct is ordinarily determined by 19 state law. 20 Cir. 2002) ("We must fill a gap in the ICA with rules borrowed 21 from state law unless . . . application of those rules would 22 frustrate the specific federal policy objectives underlying the 23 ICA."); id. at 176 ("The expectations of private parties that 24 state law will govern their corporate disputes is even higher 25 when the federal statute invoked does not on its face provide 26 notice to the parties of a possibility of a federal private suit See, e.g., Strougo v. Bassini, 282 F.3d 162, 169 (2d 15 1 and thereby suggest that federal law may be applied."); see 2 also Burks v. Lasker, 441 U.S. 471, 478 (1979) ("Congress has 3 never indicated that the entire corpus of state corporation law 4 is to be replaced simply because a plaintiff's cause of action is 5 based upon a federal statute."); Lapidus v. Hecht, 232 F.3d 679, 6 682 (9th Cir. 2000) (relying on Massachusetts state law to 7 determine whether the plaintiffs' claims brought under the ICA 8 were direct or derivative). 9 A. Claim Classification 10 Under Massachusetts law, a claim based on a "duty owed 11 to the corporation, not to individual stockholders[,]" is 12 properly characterized as derivative, not direct. 13 Bessette, 385 Mass. 806, 809, 434 N.E.2d 206, 208 (1982); see 14 also Robertson v. Gaston Snow & Ely Bartlett, 404 Mass. 515, 525 15 n.5, 536 N.E.2d 344, 350 n.5 (1989) (observing that any claim by 16 a shareholder alleging a breach of duty to the corporation must 17 be through a derivative action). 18 claim is one where the plaintiff is not "enforc[ing] any personal 19 rights" and has "no direct or personal interest in the suit, 20 excepting as the value of [the plaintiff's] stock might be 21 enhanced." 22 473 (1940). 23 Bessette v. In other words, a derivative Shaw v. Harding, 306 Mass. 441, 448, 28 N.E.2d 469, Harm to a corporation may manifest itself as harm to 24 its shareholders in the form of a lower stock price. But the 25 "wrong underlying a derivative action is indirect, at least as to 26 the shareholders. It adversely affects them merely as they are 16 1 the owners of the corporate stock; only the corporation itself 2 suffers the direct wrong." 3 Ct. 924, 925, 547 N.E.2d 1146, 1148 (1990) (emphasis in original) 4 (internal quotation marks omitted). 5 direct action under Massachusetts law, a plaintiff must allege an 6 injury distinct from that suffered by shareholders generally or a 7 wrong involving one of his or her contractual rights as a 8 shareholder, such as the right to vote." 9 683.5 10 B. Jackson v. Stuhlfire, 28 Mass. App. Therefore, "[t]o bring a Lapidus, 232 F.3d at Demand Requirement for Derivative Claims 11 Courts have traditionally required "as a precondition 12 for [a derivative] suit that the shareholder demonstrate that the 13 corporation itself had refused to proceed after suitable demand." 14 Scalisi, 380 F.3d at 138 (citations and internal quotation marks 15 omitted).6 As the Massachusetts Supreme Judicial Court 5 Massachusetts law appears to comport with the approach of federal law in this regard. In determining whether a suit is derivative for purposes of the Federal Rules of Civil Procedure, "the term 'derivative action' . . . has long been understood to apply only to those actions in which the right claimed by the shareholder is one the corporation could itself have enforced in court." Daily Income Fund, Inc., 464 U.S. at 529. The Supreme Court has characterized derivative actions as "permit[ting] an individual shareholder to bring 'suit to enforce a corporate cause of action against officers, directors, and third parties.'" Kamen, 500 U.S. at 95 (quoting Ross v. Bernhard, 396 U.S. 531, 534 (1970)) (emphasis in original); accord Cohen v. Beneficial Indus. Loan Corp., 337 U.S. 541, 548 (1949) (Through a derivative action, a stockholder may "step into the corporation's shoes and . . . seek in its right the restitution he could not demand in his own."). 6 A derivative action has been described as an "equitable device" developed "to enable shareholders to enforce a corporate right . . . that the corporation had either failed or refused to assert on its own behalf." Scalisi, 380 F.3d at 138 (internal 17 1 explained, "[t]he rationale behind the demand requirement is 2 that, as a basic principle of corporate governance, the board of 3 directors or majority of shareholders should set the 4 corporation's business policy, including the decision whether to 5 pursue a lawsuit." 6 N.E.2d 859, 865 (2000); accord RCM Secs. Fund, 928 F.2d at 1326 7 ("Whether a corporation should bring a lawsuit is a business 8 decision, and the directors are, under the laws of every state, 9 responsible for the conduct of the corporation's business, Harhen v. Brown, 431 Mass. 838, 844, 730 10 including the decision to litigate. 11 the corporation bring litigation is thus a method by which the 12 appropriate corporate authority may be consulted about litigation 13 to be brought in the name of the corporation." (citations and 14 internal quotation marks omitted)). 15 A shareholder demand that Thus, so long as it is exercising its good faith 16 business judgment, a corporation is ordinarily entitled to decide 17 through its board of directors that refusing, in part or in 18 whole, the demand to take action would be in its best interests. 19 See Harhen, 431 Mass. at 846, 730 N.E.2d at 866 ("It is axiomatic 20 that the decision of a disinterested board to refuse demand 21 receives the protection of the business judgment rule."). quotation marks and citation omitted); cf. Hirshberg v. Appel, 266 Mass. 98, 100, 164 N.E. 915, 915 (1929) ("The law is settled that for such injury to a corporation, a stockholder has no right to maintain an action at law. A suit for redress must be brought by the corporation."). It is "an exception to the normal rule that the proper party to bring a suit on behalf of a corporation is the corporation itself, acting through its directors or a majority of its shareholders." Daily Income Fund, 464 U.S. at 542. 18 1 State law generally determines whether, in an action 2 classified as derivative, a pre-suit demand is necessary, and if 3 so, whether the demand made was adequate. 4 is involved, . . . the source of the demand requirement must be 5 the law of the state of incorporation." 6 at 1327. 7 "contours of the demand requirement . . . are governed by federal 8 law." 9 not follow . . . that the content of such a rule must be wholly "Where a state claim RCM Secs. Fund, 928 F.2d If a federal derivative claim is involved, however, the Kamen, 500 U.S. at 97 (emphasis omitted). But "[i]t does 10 the product of a federal court's own devising." 11 "areas [such as corporation law] in which private parties have 12 entered legal relationships with the expectation that their 13 rights and obligations would be governed by state-law standards," 14 we entertain a strong presumption that "state law should be 15 incorporated into federal common law." 16 incorporate state law governing pre-suit demand if that law is 17 not "inconsistent with the policies underlying" federal 18 securities law. 19 C. Id. Id. at 98. In We will therefore Id. at 107.7 Massachusetts Business Corporation Act 7 As noted, "Rule 23.1 [of the Federal Rules of Civil Procedure] is a rule of pleading [regarding] the specificity of facts alleged with regard to efforts made to urge a corporation's directors to bring the action in question," but "the adequacy of those efforts is to be determined by state law absent a finding that application of state law would be inconsistent with a federal policy underlying a federal claim in the action." RCM Secs. Fund, 928 F.2d at 1330; accord Abramowitz v. Posner, 672 F.2d 1025, 1026 (2d Cir. 1982) (noting that "the authority of disinterested directors to terminate shareholder derivative litigation is governed by applicable state law, provided that such law is consistent with the policies of the federal acts upon which the action is based"). 19 1 Several years ago, the Massachusetts Legislature 2 enacted a comprehensive statute governing Massachusetts 3 corporations. 4 "Act"), enacted on November 26, 2003, see 2003 Mass. Acts ch. 5 127, and made effective as of July 1, 2004, see 2004 Mass. Acts 6 ch. 178, § 49, is codified as Chapter 156D of Title XXII of the 7 General Laws of Massachusetts. 8 Act contains various provisions governing derivative suits, see 9 Mass. Gen. Laws ch. 156D, §§ 7.40-7.47, three of which are 10 11 The Massachusetts Business Corporation Act (the Subdivision D of Part 7 of the pertinent here. First, the Act adopts a "universal demand requirement," 12 Johnston v. Box, 453 Mass. 569, 578 n.15, 903 N.E.2d 1115, 1123 13 n.15 (2009), requiring that a shareholder make a written demand 14 upon the corporation and then wait a specified period of time 15 before filing any derivative action on behalf of the corporation. 16 See Mass. Gen. Laws ch. 156D, § 7.42; accord Forsythe v. Sun Life 17 Fin., Inc., 417 F. Supp. 2d 100, 110 n.13 (D. Mass. 2006). 18 Section 7.42 prohibits, without exception, the filing of any 19 derivative action absent such written demand. 20 Laws ch. 156D, § 7.42; accord ING Principal Prot. Funds 21 Derivative Litig., 369 F. Supp. 2d 163, 170 (D. Mass. 2005). 22 Section 7.42 therefore abrogates prior common law exceptions to 23 the demand requirement. 24 Corp., 376 Mass. 212, 218, 382 N.E.2d 1030, 1034 (1978) 25 (reflecting previous common law doctrine that demand is See Mass. Gen. See, e.g., Pupecki v. James Madison 20 1 unnecessary "if it is clear that [such a demand] would be 2 futile"). 3 Second, the Act authorizes a court to stay any 4 derivative proceeding to allow a corporation to conclude its 5 inquiry into the allegations made in the demand or complaint. 6 See Mass. Gen. Laws ch. 156D, § 7.43. 7 "[i]f the corporation commences an inquiry into the allegations 8 made in the demand or complaint, the court may stay any 9 derivative proceeding for a period as the court considers 10 11 appropriate." Section 7.43 provides that Id. Third, the Act sets forth a procedure by which a 12 corporation can seek dismissal of derivative actions that it 13 concludes would not be in its best interests to prosecute. 14 id. § 7.44. 15 proceeding commenced after rejection of a demand" by motion of 16 the corporation if the court finds that the corporation, by 17 "majority vote of independent directors present at a meeting of 18 the board of directors," concluded "in good faith after 19 conducting a reasonable inquiry" that the derivative proceeding 20 "is not in the best interests of the corporation." 21 7.44(a), (b)(1). 22 See Section 7.44 mandates dismissal of any "derivative Id. § The corporation must support such a motion with a 23 written filing "setting forth facts" that demonstrate that "a 24 majority of the board of directors was independent at the time of 25 the determination by the independent directors" and that the 26 decision was made "in good faith after . . . a reasonable 21 1 inquiry." Id. § 7.44(d). Upon the filing of a proper motion, 2 "[a]ll discovery proceedings shall be stayed" pending the court's 3 resolution of that motion, except that "the court, on motion and 4 after a hearing and for good cause shown, may order that 5 specified discovery be conducted." 6 pleadings are proper, the court must dismiss the derivative 7 action "unless the plaintiff has alleged with particularity facts 8 rebutting the corporation's filing in its complaint or an amended 9 complaint or in a written filing with the court." Id. Where the corporation's Id. 10 IV. Counts Two and Three 11 We first address Halebian's argument that the district 12 court erred in characterizing Counts Two and Three as derivative, 13 despite the fact that the complaint styles them as direct, and 14 dismissing both for failure to comply with Massachusetts's 15 universal demand requirement. 16 concluded that the claims were derivative because they "fail[] to 17 articulate a theory by which the alleged harm to shareholders 18 which resulted from the [allegations] was separate and 19 independent from the harm allegedly resulting to the Fund 20 itself." 21 22 See id. § 7.42.8 The court Halebian, 631 F. Supp. 2d at 303. One aspect of both Counts Two and Three is undoubtedly derivative -- that the Board violated its fiduciary duties by 8 Halebian does not contest that, assuming the claims are in fact derivative, they fail to comply with section 7.42. Nor does he contest the district court's conclusion that "[t]he nature or character of a claim against a corporation is determined according to the law of the state of the corporation, and not dictated by the form the plaintiff chooses to plead in his or her complaint." Halebian, 631 F. Supp. 2d at 301. 22 1 failing to disclose "the diversion of CitiTrust assets for the 2 benefit of others." 3 attempt to restate a classic derivative claim -- that the 4 corporation was harmed because its assets were diverted, thereby 5 harming the corporation's shareholders. 6 Demoulas Super Mkts., Inc., 424 Mass. 501, 517, 677 N.E.2d 159, 7 172 (1997); P'ship Equities, Inc. v. Marten, 15 Mass. App. Ct. 8 42, 50, 443 N.E.2d 134, 138 (1982). 9 err in rejecting Counts Two and Three insofar as they contain 10 Compl. ¶¶ 60, 65. This is plainly an See, e.g., Demoulas v. The district court did not such allegations. 11 The counts, insofar as they relate to the "propriety of 12 the[] voting procedures," Compl. ¶ 65; see also id. ¶ 60, are 13 more difficult to classify. 14 statement was "materially false and misleading because it 15 fail[ed] to advise beneficial holders that the use of echo voting 16 to approve an investment advisory agreement violate[ed] both the 17 ICA and Massachusetts law." 18 claims as "paradigmatic direct claims because they involve a 19 beneficial holder's right to cast an informed vote." 20 He insists that "the harm caused by a violation of a holder's 21 right to cast an informed vote is inherently 'separate and 22 independent' from any harm caused [to] CitiTrust simply because 23 CitiTrust has no right to cast any vote, much less an informed 24 vote." 25 statement, he says, it could not be harmed by a misrepresentation 26 in that statement. Halebian contends that the proxy Halebian Br. 36. He describes these Id. at 35. Because CitiTrust issued the allegedly improper proxy Id. at 43-44. 23 1 Indeed, Massachusetts's highest court has long 2 recognized corporations' shareholders' "right to vote" their 3 shares. 4 405 N.E.2d 131, 135 (1980); Ky. Package Store, Inc v. Checani, 5 331 Mass. 125, 129, 117 N.E.2d 139, 142 (1954). 6 Massachusetts law provides, as a general default rule, that "each 7 outstanding share, regardless of class, is entitled to 1 vote on 8 each matter voted on at a shareholders' meeting, . . . each 9 fractional share is entitled to a proportional vote," and "[o]nly See Seibert v. Milton Bradley Co., 380 Mass. 656, 662, By statute, 10 shares are entitled to vote." 11 § 7.21(a). 12 corporation itself, are entitled to vote. 13 are "owned . . . by another entity of which the corporation 14 owns . . . a majority of the voting interests" are not entitled 15 to vote. 16 constitute voting by the corporate entity itself, which is 17 forbidden.9 18 Mass. Gen. Law ch. 156D, Therefore, shareholders of a corporation, not the Id. § 7.21(b). Relatedly, shares that In effect, voting those shares would Federal courts interpreting Massachusetts law have 19 observed that although injuries that are not distinct to each 20 affected shareholder generally give rise to derivative claims, 21 not all indistinct injuries do so. 22 pointed out, to assert a direct claim, "it is unnecessary to 23 allege an injury distinct from that suffered by shareholders 24 generally if the alleged injury is predicated upon a violation of 9 As the Ninth Circuit has A corporation is, however, entitled to "vote any shares, including its own shares, held by it, directly or indirectly, in a fiduciary capacity." Mass. Gen. Laws ch. 156D, § 7.21(c). 24 1 a shareholder's voting rights." 2 district court in the District of Massachusetts has explained: 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Lapidus, 232 F.3d at 683. A [W]hat differentiates a direct from a derivative suit is neither the nature of the damages that result from the defendant's alleged conduct, nor the identity of the party who sustained the brunt of the damages, but rather the source of the claim of right itself. If the right flows from the breach of a duty owed by the defendants to the corporation, the harm to the investor flows through the corporation, and a suit brought by the shareholder to redress the harm is one "derivative" of the right retained by the corporation. If the right flows from the breach of a duty owed directly to the plaintiff independent of the plaintiff's status as a shareholder, investor, or creditor of the corporation, the suit is "direct." 21 Stegall v. Ladner, 394 F. Supp. 2d 358, 364 (D. Mass. 2005) 22 (internal quotation marks omitted); accord Blasberg v. Oxbow 23 Power Corp., 934 F. Supp. 21, 26 (D. Mass. 1996); Weber v. King, 24 110 F. Supp. 2d 124, 132 (E.D.N.Y. 2000); cf. Strougo, 282 F.3d 25 at 171 ("To sue directly under Maryland law, a shareholder must 26 allege an injury distinct from an injury to the corporation, not 27 from that of other shareholders."). 28 "[t]hat many investors might have been misled . . . or that the 29 plaintiff might only be minimally injured[] does not [alone] 30 convert the claim to a derivative one." 31 at 26. 32 For these reasons, the fact Blasberg, 934 F. Supp. Based on these principles, Halebian asserts that any 33 claim of the use of improper voting procedures necessarily states 34 a direct rather than a derivative claim. 35 law, see Sarin v. Ochsner, 48 Mass. App. Ct. 421, 423, 721 N.E.2d 25 Relying on Delaware 1 932, 934-35 (2000) (applying Delaware law to determine whether 2 claims were direct or derivative), he also insists that 3 Massachusetts shareholders have not only the right to vote, but 4 the "right to cast an informed vote." 5 Co. S'holder Litig., 906 A.2d 766, 772 (Del. 2006); accord In re 6 Tyson Foods, Inc., 919 A.2d 563, 601 (Del. Ch. 2007) ("Where a 7 shareholder has been denied one of the most critical rights he or 8 she possesses [as a shareholder] -- the right to a fully informed 9 vote -- the harm suffered is almost always an individual, not 10 In re J.P. Morgan Chase & corporate, harm.").10 11 Halebian points us to no appellate court in 12 Massachusetts that has specifically embraced Delaware law in this 13 regard, and our research has revealed none. 14 Tutor, 24 Mass. L. Rptr. 343 (Mass. Super. Ct. 2008) (noting that 15 "a shareholder's right to make an informed vote may, in some 16 circumstances, provide a basis for injunctive relief" (citing 17 Eisenberg v. Chicago Milwaukee Corp., 537 A.2d 1051, 1062 (Del. 18 Ch. 1987))); Sealy Mattress Co. of N.J., Inc. v. Sealy, Inc., 532 19 A.2d 1324, 1342 (Del. Ch. 1987). 20 Massachusetts law tracks Delaware law in this regard, however, we 21 would remain unpersuaded that Counts Two and Three can stand as 22 individual claims. 10 Cf. Weitman v. Even were we to conclude that We do not think that Halebian has alleged an Delaware courts have also recognized, as a corollary, that shareholders have the "right not to attend a meeting" and the "right not to vote on any matter," i.e., the "right to withhold [the shareholder's] vote on any particular proposal." Berlin v. Emerald Partners, 552 A.2d 482, 493 (Del. 1988) (emphasis added) (internal quotation marks omitted). 26 1 actionable non-disclosure claim under either Massachusetts or 2 federal law. 3 The essence of Halebian's claim is not that the 4 defendants failed to inform him and others similarly situated 5 that the voting procedures incorporated echo voting, but that 6 echo voting is unlawful. 7 to conclude that a proxy statement is misleading "when it fail[s] 8 to disclose a legal theory with which the corporation did not 9 agree and which was never called to its attention." Many courts have expressed reluctance Ash v. LFE 10 Corp., 525 F.2d 215, 220 (3d Cir. 1975); see also Bolger v. First 11 State Fin. Servs., 759 F. Supp. 182, 194 (D. N.J. 1991) 12 ("[C]ompanies have no duty to disclose legal theories as to how a 13 given transaction violated the law."); Freedman v. Barrow, 427 F. 14 Supp. 1129, 1144 (S.D.N.Y. 1976) ("Failure to disclose a legal 15 theory with which those soliciting do not agree and which was not 16 called to their attention at the proper time does not violate" 17 federal rules prohibiting untrue statements of material fact); 18 Goldberger v. Baker, 442 F. Supp. 659, 667 (S.D.N.Y. 1977) 19 (noting that "the allegation that the [proxy] statement failed to 20 disclose the 'legal significance' of the [proposed] option plan" 21 at issue was "so vague as to defy analysis"); Voege v. Magnavox 22 Co., 439 F. Supp. 935, 941 (D. Del. 1977) ("A proxy statement, 23 based upon the opinion of properly qualified outside 24 counsel . . ., even if the opinion is wrong, cannot be deemed to 25 be a misrepresentation or concealment of a material 26 fact . . . ."); cf. Maldonado v. Flynn, 597 F.2d 789, 796, 798 27 1 (2d Cir. 1979) (citing Ash and Goldberger with approval, but 2 concluding that the proxy statements at issue were misleading 3 based on nondisclosure of "factual information 'impugning the 4 honesty, loyalty or competency of directors' in their dealings 5 with the corporation to which they owe a fiduciary duty" -- that 6 "senior officers [were able] to avoid the adverse personal tax 7 effect of the [transaction at issue], known to them through 8 inside information, while depriving the Corporation of a 9 corresponding tax benefit"). 10 There is no indication that the alleged unlawfulness of 11 echo voting under section 15(a) of the ICA or Massachusetts law 12 was called to the attention of the Board by Halebian or anyone 13 else prior to the institution of this lawsuit. 14 consistently and strenuously denied that echo voting violates 15 these laws.11 16 nor had it been told, that using a Citigroup-affiliated service 17 agent other than a broker-dealer to echo vote shares violated the 18 ICA or Massachusetts law, or indeed any law, its failure to 11 And the Board has Since the Board was apparently not of the view, In connection with the demand-review process, the corporation found "no authority for the proposition that the 1940 Act or Massachusetts law forbids the use of echo voting by a record holder of shares in a vote to approve an advisory contract with a mutual fund" and noted that "[e]cho voting is a common practice in the financial industry whose utility has been recognized both by the Securities and Exchange Commission and the New York Stock Exchange." See Res. of the Bd. of Trs. of CitiFunds Trust III 25 (July 12, 2006). Although Halebian vehemently insists that echo voting, in this context, is unlawful, we note that he has failed to cite any court decision that has so suggested or held. We do not address the merits of Halebian's claim that echo voting violates section 15 of the ICA and Massachusetts law. 28 1 inform shareholders to the contrary does not appear to us to have 2 been potentially false and misleading so as to be cognizable 3 under Massachusetts or federal law.12 4 V. Count One 5 The parties agree that Count One asserts a derivative 6 claim under Massachusetts law, and that the complaint was filed 7 in accordance with section 7.42's universal demand requirement. 8 We therefore must decide whether dismissal of the claim pursuant 9 to section 7.44 was proper. We conclude that dismissal was not 10 required because of Halebian's failure to meet federal procedural 11 requirements. 12 least at this time, however, whether dismissal was required under 13 Massachusetts law. 14 Massachusetts law, which is critical to the resolution of this 15 appeal, to the Supreme Judicial Court of Massachusetts. 16 A. We decline to resolve in the first instance, at Instead, we certify that question of Federal Procedural Law 17 The district court decided that the complaint required 18 dismissal because it did not comply with Rule 23.1 of the Federal 19 Rules of Civil Procedure. 20 have no need to address the court's alternate conclusion that 12 Were this conclusion correct, we would We note that Halebian's contention that the proxy statement should also have disclosed that the Securities Exchange Commission and the New York Stock Exchange ("NYSE") have ruled that NYSE member broker-dealers may not echo vote shares to obtain shareholder approval of an investment company's investment advisory contract with a new investment advisor is utterly without merit, as the proxy statement explicitly contains this information. See Finn Declaration Exhibit D ("Schedule 14A"), at 8, Halebian v. Berv, No. 06 Civ. 4099 (S.D.N.Y. filed May 30, 2006) (Doc. No. 22). 29 1 dismissal of Count One was also required under Massachusetts law. 2 We conclude, however, that the district court erred with respect 3 to Rule 23.1. 4 Rule 23.1 is a "rule of pleading that creates a federal 5 standard as to the specificity of facts alleged with regard to 6 efforts made to urge a corporation's directors to bring the 7 action in question." 8 not the source of any such requirement." 9 U.S. at 543 (Stevens, J., concurring in judgment). RCM Secs. Fund, 928 F.2d at 1330. It "is Daily Income Fund, 464 State law is 10 the source. The federal rule "merely requires that the complaint 11 in such a case allege the facts that will enable a federal court 12 to decide whether such a demand requirement has been satisfied," 13 concerning itself "solely with the adequacy of the pleadings." 14 Id. at 543-44. 15 The district court dismissed Count One for failure to 16 state "the reasons for not obtaining the [desired] action" from 17 the Board as required by Rule 23.1. 18 23.1(b)(3)(B); see also Halebian, 631 F. Supp. 2d at 295-98. 19 Halebian's demand allegations, however, set forth all the 20 information needed to determine whether, as a matter of 21 Massachusetts law, the complaint was filed in accordance with 22 Massachusetts's universal demand rule. 23 156D, § 7.42. 24 Fed. R. Civ. P. See Mass. Gen. Laws Ch. For a derivative proceeding to have been properly filed 25 pursuant to section 7.42, Halebian had to have made "written 26 demand . . . upon the corporation to take suitable action" and 30 1 waited "90 days . . . from the date the demand was made" to file 2 suit. 3 complaint specifically alleges the reason that the corporation 4 declined to accede to his demands -- that the members of the 5 board were motivated by self-interest to reject his demand. 6 Nothing else was required to allow the court to determine 7 whether, as a matter of Massachusetts law, Halebian's complaint 8 was properly filed. 9 heightened pleading requirements of Rule 23.1 on this score. Id. 10 Halebian's complaint alleges both. And Halebian's Halebian's complaint satisfies the Count One therefore stands or falls on whether it was 11 properly dismissed pursuant to Massachusetts substantive law. 12 B. State Substantive Law 13 Halebian contends that the district court erred in 14 concluding that section 7.44 and its protection for a board of 15 directors' good faith decision that litigation is not in the 16 defendant corporation's best interests applied in this case.13 17 He initiated this action following the expiration of the post- 18 demand statutory waiting period set forth in section 7.42, but 19 before the corporation rejected his demand. 20 its terms, applies to "derivative proceeding[s] commenced after 21 rejection of a demand." 22 (emphasis added). 13 And section 7.44, by Mass. Gen. Laws Ch. 156D, § 7.44(a) The district court nonetheless held that He also argues in the alternative that even if section 7.44 applied the district court erred by barring him from seeking discovery and by failing to convert the corporation's motion to dismiss to a motion for summary judgment. At this stage of the proceedings, however, we need only address Halebian's first argument. 31 1 section 7.44 applies, concluding that the section is applicable 2 to derivative proceedings commenced before rejection of a demand 3 "as long as [the corporation's board] rejected the demand after a 4 good faith review." Halebian, 631 F. Supp. 2d at 294. 5 Relying on statutory commentaries, the district court 6 concluded that the state legislature contemplated "that section 7 7.44 could be applicable to cases . . . where a plaintiff has 8 waited the requisite ninety days after the written demand to file 9 a complaint, but the corporation did not reject the demand until 10 after the filing of the complaint" because in some situations "a 11 board would need more than ninety days to evaluate a 12 shareholder's demand before determining whether to pursue the 13 litigation." 14 15 Id. at 295.14 The district court also explained that reading section 7.44 as written, and thereby preventing corporations that "had 14 The decision by a corporation to reject a demand, according to the commentary to section 7.44, "'can be made prior to the commencement of the suit in response to a demand or after commencement upon examination of the allegations of the complaint.'" Halebian, 631 F. Supp. 2d at 295 (quoting Mass. Gen. Law Ann. ch. 156D, § 7.44, cmt. background (emphasis added by the district court)). A related commentary to the neighboring universal-demand-requirement provision in section 7.42 notes that although the statutory waiting provisions set forth in that section had been "'chosen as a reasonable minimum time[] within which the board of directors [or] the shareholders can meet, direct the necessary inquiry into the charges, receive the results of the inquiry, and make its or their decision,'" nonetheless "'[i]n some instances a longer period may be required,'" and that in those instances the corporation "'may request counsel for the shareholder to delay filing suit until the inquiry is completed or, if [the] suit is commenced, the corporation can apply to the court for a stay under § 7.43.'" Halebian, 631 F. Supp. 2d at 295 (quoting Mass. Gen. Law Ann. ch. 156D, § 7.42, cmt. 3). 32 1 not completed a good faith, reasonable inquiry into the efficacy 2 of the maintenance of the derivative proceeding after ninety 3 days" from being "able to avail themselves of Massachusetts' 4 codification of the business judgment rule," would "render[] 5 meaningless" section 7.43, the stay provision. 6 considered this to be a "curious result" that would encourage "a 7 race to the courthouse for shareholder plaintiffs, as filing on 8 the ninety-first day after a written demand would automatically 9 foreclose corporate boards that otherwise were proceeding Id. The court 10 appropriately in response to the demand from availing themselves 11 of section 7.44." 12 Id. We have doubts about the district court's reasoning in 13 this regard. Assuming arguendo that relevant statutory 14 commentary and policy arguments suggest otherwise, it is a well- 15 established principle of Massachusetts law that when "the 16 language of the statute is clear, we must enforce it according to 17 its terms." 18 N.E.2d 732, 735 (2001) (internal quotation marks omitted). 19 the relevant provision of section 7.44 is clear enough -- it 20 applies to "derivative proceeding[s] commenced after rejection of 21 a demand." 22 implication, the section would appear not to apply to derivative 23 proceedings commenced before rejection of a demand. 24 court's reading in effect excised the statutory phrase: 25 "commenced after rejection of a demand." Town of Milford v. Boyd, 434 Mass. 754, 757-58, 752 Mass. Gen. Laws Ch. 156D, § 7.44. 33 Here, By negative The district 1 We recognize, of course, that under Massachusetts law, 2 as elsewhere, context matters. 3 together . . . as part of a carefully-crafted statutory 4 plan . . . must be construed together so as to constitute a 5 harmonious whole consistent with the legislative purpose." 6 Commonwealth v. Renderos, 440 Mass. 422, 432-33, 799 N.E.2d 97, 7 106 (2003) (internal quotation marks omitted). 8 unconvinced that the statutory context required the district 9 court to take the path that it did. 10 "[S]tatutes . . . enacted But we remain To be sure, and as the district court noted, the 11 commentary to section 7.44 clearly anticipates that in some 12 instances, a corporation might require more than ninety days to 13 investigate and respond to the shareholder's demand. 14 district court explained, section 7.43 might be rendered 15 meaningless if section 7.44 were categorically inapplicable to 16 corporations that did not complete their investigations prior to 17 institution of the derivative proceeding. 18 terms of section 7.44 may need to bend to accommodate contrary 19 statutory provisions. 20 And, as the To this extent, the But here, no stay was sought or obtained. And the 21 district court's reading of section 7.44, ignoring its language 22 appearing to limit its application to suits commenced after 23 rejection of a demand by a board directors, seems to leave 24 section 7.43 with little purpose, if any. 25 invoke section 7.44 at any time based on a good-faith rejection 26 of the demand even after the litigation is under way and without 34 If a corporation can 1 a stay in place, then there would appear to be little need for 2 the stay provision of section 7.43. 3 If, by contrast, section 7.43 operates to extend the 4 time period within which a corporation is able to invoke section 5 7.44, then the stay provision would play a critical role in the 6 statutory scheme. 7 well be that 7.44 applies to timely derivative actions filed 8 before the rejection of the demand that serves as the basis for 9 the action not in all circumstances, as the district court's Construing these two sections together, it may 10 ruling suggests, but only when such an action was actually stayed 11 in accordance with section 7.43. This reading, although not without its difficulties,15 12 13 appears to be consistent with other statutory commentary, 14 including commentary that the district court itself identified. 15 According to the commentary to section 7.42, where a corporation 16 needs more time than the provisions of section 7.42 give it to 17 investigate, and perhaps reject, the shareholder demand, it "'may 18 request counsel for the shareholder to delay filing suit until 19 the inquiry is completed or, if [the] suit is commenced, . . . 20 apply to the court for a stay under § 7.43.'" 21 Supp. 2d at 295 (citing Mass. Gen. Law Ann. ch. 156D, § 7.42, 22 cmt. 3 (alteration in original)). 23 section 7.43 notes that the "court may in its discretion stay the 15 Halebian, 631 F. Similarly, commentary to For example, this reading leaves unresolved the issue of whether a stay must be sought or entered within a certain period of time following the filing of the original complaint in order to toll the provisions of section 7.44. 35 1 proceeding for such period as the court deems appropriate" where 2 "the complaint is filed 90 days after demand but the inquiry into 3 the matters raised by the demand has not been completed or where 4 a demand has not been investigated but the corporation commences 5 the inquiry after the complaint has been filed." 6 Law Ann. ch. 156D, § 7.43, cmt. (West 2009). See Mass. Gen. 7 Both passages suggest that the Massachusetts 8 Legislature anticipated that a corporation that had not completed 9 its investigation following the expiration of the period set 10 forth in section 7.42 and which was unwilling or unable to 11 convince the shareholder to refrain from filing suit would seek 12 court approval for further delays to permit further 13 investigation. 14 condition of extending the time within which a demand can be 15 investigated, the legislature seems to have anticipated that the 16 court would "monitor the course of the [corporation's] inquiry to 17 ensure that it is proceeding expeditiously and in good faith." 18 Id. 19 modified by the operation of section 7.43 seems to us to be 20 consistent with this commentary. 21 And as a result of court supervision as a Reading section 7.44 as written except insofar as it is Moreover, such a reading does not, we think, pose an 22 unfair hardship on Massachusetts corporations. 23 appear to facilitate the Massachusetts Legislature's goal, as 24 stated in the statutory commentary, to ensure that derivative 25 actions are dismissed so long as the corporation "promptly 36 Rather it would 1 determine[s]" to reject the demand. 2 Mass. Gen. Law Ann. ch. 156D, § 7.44, cmt. (West 2009). 3 VI. Certification 4 We have endeavored to identify relevant issues raised 5 with respect to the Massachusetts Business Corporation Act and to 6 proffer our best reading of section 7.44. 7 appropriate, however, to reserve judgment and certify a question 8 necessary to the resolution of this appeal to the Supreme 9 Judicial Court pursuant to Massachusetts Supreme Judicial Court We think it 10 Rule 1:03.16 11 significant questions of state law [that] will control the 12 outcome of [the] case." 13 Inc., 438 F.3d 214, 229 (2d Cir. 2006) (internal quotation marks 14 omitted); accord Boston Gas Co. v. Century Indem. Co., 529 F.3d 15 8, 15 (1st Cir. 2008); Nieves v. Univ. of P.R., 7 F.3d 270, 274 16 (1st Cir. 1993). 16 We do so because the appeal presents "unsettled and Colavito v. N.Y. Organ Donor Network, A proper reading of the Massachusetts Business The Rule provides in part: § 1. Authority to Answer Certain Questions of Law. This court may answer questions of law certified to it by the Supreme Court of the United States, a Court of Appeals of the United States, or of the District of Columbia, or a United States District Court, or the highest appellate court of any other state when requested by the certifying court if there are involved in any proceeding before it questions of law of this state which may be determinative of the cause then pending in the certifying court and as to which it appears to the certifying court there is no controlling precedent in the decisions of this court. Mass. S.J.C. R. 1:03. 37 1 Corporation Act is, it seems to us, important to the effective 2 regulation by the Commonwealth of Massachusetts of corporations, 3 and, in this case, business trusts, incorporated under its laws, 4 and to our knowledge, no appellate court has ever discussed 5 section 7.44 or section 7.43, let alone at any length or as they 6 apply to the situation presented in this appeal. 7 Circuit, more intimately familiar than are we with the workings 8 of the Supreme Judicial Court, has observed that the court "has 9 indicated a willingness, under such circumstances, to answer 10 certified questions." 11 The First (1st Cir. 2009). 12 13 Foxworth v. St. Amand, 570 F.3d 414, 437 We therefore certify the following question to the Supreme Judicial Court of Massachusetts for its consideration: 14 15 16 17 18 19 20 Under Massachusetts law, can the business judgment rule, established under Mass. Gen. Laws ch. 156D, § 7.44, be applied to dismiss a derivative complaint filed timely under section 7.42 but prior to a corporation's rejection of the demand that serves as the basis for the suit? 21 We certify that this question is to the best of our 22 understanding determinative of a claim in this case and that it 23 appears to us that there is no controlling precedent in either 24 the decisions or rules of practice of the Supreme Judicial Court. 25 We respectfully invite any additional guidance about 26 relevant Massachusetts law or practice that the Supreme Judicial 27 Court may wish to offer in responding to the certified question. 28 The certified question may be deemed to cover any pertinent 29 further issues of Massachusetts law that the Supreme Judicial 38 1 Court thinks is appropriate and advisable to address, including 2 those issues addressed in the portion of our opinion discussing 3 the propriety of the district court's dismissal of Counts Two and 4 Three. 5 with respect to Counts Two and Three as though they were 6 definitive, we reserve decision on all issues on appeal pending 7 the Supreme Judicial Court's response to our certification. 8 9 For this reason, although we have stated our conclusions This Court will issue a Certification Order pursuant to Massachusetts Supreme Judicial Court Rule 1:03. The Clerk of 10 this Court is directed to forward to the Supreme Judicial Court 11 of Massachusetts, under the official seal of this Court, the 12 Certification Order, this opinion, and the briefs and appendices 13 filed by the parties. 14 Court and this panel shall retain appellate jurisdiction. Pending the receipt of a response, this CONCLUSION 15 16 For the foregoing reasons, we reserve judgment and 17 certify the stated question to the Supreme Judicial Court of 18 Massachusetts. 39

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