Ropes & Gray Litigation Team Wins Dismissal for State Street Corporation in First Ruling Under Pivotal Massachusetts Statute
Ropes & Gray secured the full dismissal of a derivative action brought by two shareholders of State Street Corporation against a number of the company’s current and former officers and directors, in the first court opinion to address the standard for a motion to dismiss a derivative action brought under the 2004 Massachusetts Business Corporations Act. The plaintiffs claimed that investments in mortgage-related securities made by bond funds managed by State Street’s investment management division caused substantial harm to State Street itself, as a result of claims brought by investors and government regulators. The plaintiffs demanded that State Street’s board of directors investigate and pursue potential lawsuits against individual officers and directors for alleged breaches of fiduciary duty and related claims. The board conducted a substantial investigation in response to this demand, eventually concluding that any such lawsuits would not be in the corporation’s best interest. Dissatisfied with this response, the plaintiffs brought suit in an attempt to pursue such claims on the company’s behalf in the Business Litigation Session of Massachusetts Superior Court.
The 2004 statute enacted sweeping revisions to the Commonwealth’s law governing shareholder derivative suits. The changes to prior law include (i) a “universal demand” requirement, which foreclosed a shareholder’s ability to pursue a derivative claim without first making a demand on the board; (ii) a requirement that the defendants make an affirmative “written filing” supporting the rejection of the demand, which replaced the traditional motion to dismiss standard based exclusively on the plaintiffs’ complaint; and (iii) codification of the respective burdens on the parties.
No prior cases had tested these standards governing a motion to dismiss. The plaintiffs sought to weaken the traditional business judgment rule, whereby courts show deference to the business decisions of corporate boards, and proposed a heightened level of judicial scrutiny of board decisions -- even in cases where the majority of the board was composed of independent directors. Judge Stephen Neel rejected this argument, holding that the statute maintained the common law protections of the business judgment rule for an independent board, and that the State Street board’s investigation and resulting decision met this standard. The court also rejected the plaintiffs’ attacks on the independence of the directors, the composition of the special committee that considered the demand, and the company’s unrelated prior work with Ropes & Gray.
As the first opinion of its kind, the case embraces important principles by preserving the business judgment rule and its protection over the decisions of independent boards of directors under the new Massachusetts statute. These principles are of pivotal importance to Massachusetts corporations and business trusts, including many mutual funds organized under Massachusetts law. The Ropes & Gray litigation team included partner John Donovan and associates Dan McCaughey and Brad Grossman. The case is captioned Pinchuck v. Logue, Civ. Act. No. 09-2930, (Suffolk Court Superior Court Business Litigation Session, January 16, 2011).