Opinion
21-P-560
03-29-2022
ATHRU GROUP HOLDINGS, LLC v. SHYFT ANALYTICS, INC., & others.[1]
Summary decisions issued by the Appeals Court pursuant to M.A.C. Rule 23.0, as appearing in 97 Mass.App.Ct. 1017 (2020) (formerly known as rule 1:28, as amended by 73 Mass.App.Ct. 1001 [2009]), are primarily directed to the parties and, therefore, may not fully address the facts of the case or the panel's decisional rationale. Moreover, such decisions are not circulated to the entire court and, therefore, represent only the views of the panel that decided the case. A summary decision pursuant to rule 23.0 or rule 1:28 issued after February 25, 2008, may be cited for its persuasive value but, because of the limitations noted above, not as binding precedent. See Chace v. Curran, 71 Mass.App.Ct. 258, 260 n.4 (2008).
MEMORANDUM AND ORDER PURSUANT TO RULE 23.0
In early 2016, Athru Group Holdings, LLC (Athru), advised SHYFT Analytics, Inc. (SHYFT), of its intent to sell its one-fifth interest in SHYFT. After Athru organized a sale with a third party, eleven insiders of SHYFT exercised their right of first refusal to buy Athru's stock in November 2017. The terms of the sale were set out in a stock purchase agreement (SPA), which included a "contingent consideration" provision for Athru should SHYFT later be acquired for a higher price. Six months after the stock purchase from Athru, SHYFT was acquired by Medidata Solutions, Inc. (Medidata). Athru subsequently brought suit against Zackary King, SHYFT, and the eleven purchasers of its shares, including Medidata, claiming breach of fiduciary duty, fraud, violation of G. L. c. 93A, and breach of contract. Athru alleged that the defendants purposefully concealed their interests in Medidata's acquisition while arranging to purchase Athru's shares. The defendants filed motions to dismiss the complaint. The judge ruled that the complaint failed to allege such facts plausibly suggesting a breach of fiduciary duty, fraud, or violation of c. 93A, and dismissed these claims with prejudice. The judge dismissed the contract claims without prejudice for resolution through arbitration. We affirm.
Athru was a founding shareholder of SHYFT and is principally owned and operated by John Corcoran. In addition, Corcoran was a member of SHYFT's board of directors.
Discussion.
1. Standard of review.
We review the allowance of a motion to dismiss de novo. See Curtis v. Herb Chambers 1-95, Inc., 458 Mass. 674, 676 (2011). In doing so, we accept the facts asserted in the complaint assuming them to be true and requiring "'allegations plausibly suggesting (not merely consistent with)' an entitlement to relief." Iannacchino v. Ford Motor Co., 451 Mass. 623, 636 (2008), quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 557 (2007).
2. Fiduciary duty claims.
The plaintiff first argues that defendant King, as CEO and director of SHYFT, and defendant Hirschfeld, as a director of SHYFT, breached their respective fiduciary duties to disclose Medidata's interest in acquiring SHYFT. A claim for breach of fiduciary duty to disclose is properly dismissed when the undisclosed information is immaterial as a matter of law. See Malpiede v. Townson, 780 A.2d 1075, 1086-1087 (Del. 2001). Under Delaware law, when a fiduciary directly buys or sells shares from a stockholder, the special facts doctrine imposes a duty to disclose "special knowledge of future plans or secret resources and deliberately misleads a stockholder who is ignorant of them." In re Wayport, Inc. Litig., 76 A.3d 296, 315 (Del. Ch. 2013), quoting Lank v. Steiner, 43 Del. Ch. 262, 266 (1966). Where, as here, there is no allegation that King directly bought shares from Athru, arguably, the special facts doctrine would not even apply. Even if we were to accept the plaintiff's argument that King was a facilitator of the transaction, the plaintiff fails to sufficiently allege purposeful concealment of events rising to the level of material facts, let alone special facts as to King or Hirschfeld. See Wayport, supra at 321 (finding standard for special facts higher than standard for materiality).
The plaintiff argues that the special facts doctrine is applicable to King because he was a "facilitator" of the transaction between Athru and SHYFT. See Wayport, 76 A.3d at 322 (noting duty to disclose may exist for fiduciary with substantial role in transaction process but finding no duty where undisclosed information did not rise to level of a special fact) .
Here, the plaintiff cannot plausibly allege that it was unaware of the possibility of an acquisition, where the signed SPA accounts for such a sale at a premium, at any time, with contingent consideration for the plaintiff. Although the plaintiff now argues the acquisition was more than a mere possibility before November 2017, and that SHYFT and Medidata's negotiations amounted to an agreement in principle, the plaintiff's complaint alleged only "internal analysis and preliminary discussions" amounting to nothing more than an "interest" in an acquisition. In fact, the plaintiff specifically denied making any allegations of undisclosed negotiations in the complaint and has thus waived any such claim at this stage. See Palmer v. Murphy, 42 Mass.App.Ct. 334, 338 (1997) ("claims . . . that have not been raised at the trial level are deemed generally to have been waived on appeal"). Where SHYFT and Medidata did not enter an NDA until February 2018, and did not complete the merger until June 2018, this alleged interest in an acquisition prior to November 2017, was immaterial as a matter of law. See Bershad v. Curtiss-Wright Corp., 535 A.2d 840, 847 (Del. 1987) (finding preliminary negotiations generally become material once parties "have agreed on the price and structure of the transaction"); Alessi v. Beracha, 849 A.2d 939, 948 (Del. Ch. 2004) ("Casual inquiries or mere expressions of interest need not be disclosed"). Therefore, defendants King and Hirschfeld did not have a fiduciary duty to disclose this immaterial information.
3. Fraud claims.
The plaintiff next argues that King, SHYFT, and Medidata fraudulently deceived the plaintiff by failing to disclose Medidata's interest in acquiring SHYFT. The plaintiff grounds this argument in King's fiduciary duty to disclose material information and argues that the undisclosed information was basic to the transaction. Nondisclosure may constitute fraud where there is a duty to disclose. See Wolf v. Prudential-Bache Securities, Inc., 41 Mass.App.Ct. 474, 476-477 (1996). This duty may arise where there exists "a fiduciary or other similar relation of trust and confidence" or "the nondisclosed fact is basic to, or goes to the essence of, the transaction." Stolzoff v. Waste Sys. Int'l, Inc., 58 Mass.App.Ct. 747, 763 (2003), citing Wolf, supra at 476-477.
Here, the plaintiff failed to allege facts sufficient to establish such a duty to disclose existed. As discussed above, King did not owe a fiduciary duty to disclose mere expressions of interest between SHYFT and Medidata. These alleged preliminary discussions similarly do not go to the essence of the plaintiff's transaction because the plaintiff acknowledged in the SPA that a future sale could occur at any time. Although the plaintiff contends disclosure of these discussions would have changed its desire to sell its shares, this is not enough to make the undisclosed information basic to the transaction. See Wolf, 41 Mass.App.Ct. at 475, 477-478 (finding undisclosed information not basic to transaction even when it would have influenced plaintiff's decision to enter transaction). The plaintiff further acknowledged it had "received all the information it considers necessary or appropriate for deciding whether to sell the [s]hares" and had determined to sell the shares "notwithstanding its lack of knowledge" of any excluded information with respect to SHYFT. See Restatement (Second) of Torts § 551 comment j (1977) ("If the parties expressly or impliedly place the risk as to the existence of a fact on one party or if the law places it there by custom or otherwise the other party has no duty of disclosure"). The plaintiff's claim therefore fails as a matter of law.
The plaintiff's additional claim that King and SHYFT had a duty to update prior statements about the status of discussions with Medidata once those statements became materially misleading need not be addressed in light of the plaintiff's allegations failing to suggest that any undisclosed information rose to a level of materiality.
By relying on the same factual allegations of omission as plead in its fraud claim, the plaintiff has no reasonable expectation of proving a violation of c. 93A. See Macoviak v. Chase Home Mtge. Corp., 40 Mass.App.Ct. 755, 760 (1996) (dismissing c. 93A claim based solely on underlying fraud claim); Underwood v. Risman, 414 Mass. 96, 99 (1993) (c. 93A only requires disclosure of material facts known at time of transaction).
4. Breach of contract claims.
The plaintiff next argues the eleven insiders of SHYFT who purchased the plaintiff's stock breached the SPA by refusing to permit the plaintiff reasonable access to books and records and refusing to pay the plaintiff the full amount of contingent consideration. The motion judge was correct in determining that this claim must be resolved by arbitration, pursuant to section 1.4 of the SPA and under Massachusetts law. See G. L. c. 251, § 1; Commonwealth v. Philip Morris Inc., 448 Mass. 836, 849 (2007).
Under the plain and unambiguous terms of the SPA, the parties agreed that "[i]f there is a dispute with respect to any payment under this Section 1.4" and the parties "cannot agree on the resolution of the dispute . . . [the parties] shall jointly designate an independent certified public accounting firm to resolve the dispute." Here, the dispute over the plaintiff's reasonable access to information, which the plaintiff claims is information necessary to determine the appropriate contingent consideration amount, is a "dispute with respect to any payment." See Acushnet Co. v. Beam, Inc., 92 Mass.App.Ct. 687, 695 (2018), citing California Div. of Labor Standards Enforcement v. Dillingham Constr., N.A., Inc., 519 U.S. 316, 324 (1997) (finding "with respect to" suggests "broad scope"). Moreover, to the extent the plaintiff argues that the defendants violated the SPA by not providing reasonable access to information, that argument itself can be raised in the context of arbitration without prejudicing the rights of the plaintiff. See G. L. c. 251, § 7 (permitting the arbitrator to order and enforce document requests). Therefore, dismissal without prejudice was proper, and the plaintiff can pursue these issues through the agreed upon dispute resolution procedure.
5. Request for relief to replead.
Finally, the plaintiff requests relief vacating the portion of the judgment dismissing his breach of fiduciary duty, fraud, and c. 93A claims with prejudice to provide the plaintiff with an opportunity to replead. A dismissal for failure to state a claim operates as a final judgment on the merits. See Mestek, Inc. v. United Pac. Ins. Co., 40 Mass.App.Ct. 729, 731 (1996). Here, the plaintiff failed to seek leave to amend the original complaint until after judgment was entered and has offered no argument that factual allegations in an amended complaint would not rely on the same events and suffer from the same deficiencies that were fatal to the original complaint. See Mass. R. Civ. P. 15 (a), 365 Mass. 761 (1974) (plaintiff not entitled to amend as a matter of right after order of dismissal); Johnston v. Box, 453 Mass. 569, 582 (2009). Therefore, such an opportunity to replead would be futile, and the motion judge's decision to dismiss the claims with prejudice was proper.
Judgment affirmed.
The panelists are listed in order of seniority.