According to a new Michigan Supreme Court’s April 5, 2022 decision, corporate officers and directors can be sued directly for a breach of fiduciary duties. The unanimous opinion clarifies the existing law on whether an individual shareholder can file a lawsuit directly against officers and directors who breach fiduciary duties.
What Was the Case About?
Murphy v. Inman, 507 Mich 906 (2021) involved the 2017 cash-out merger between Covisint Corporation and OpenText Corporation. A former shareholder of Covisint sued the corporation’s former directors, claiming they breached their fiduciary duties by failing to maximize shareholder value and failing to provide material facts about the terms of the offer.
The defendants filed a motion to dismiss, claiming that the plaintiff’s claims were derivative in nature. This would have required the individual shareholder to comply with the Michigan Business Corporation Act’s requirement to send a derivative notice to the company at least 90 days before filing a suit. The circuit court granted the motion, and the Michigan Court of Appeals affirmed the dismissal.
Granting a major victory to shareholders, the Michigan Supreme Court reversed, holding that the shareholder had the standing to bring a direct lawsuit against the directors for breach of fiduciary duties.
The Supreme Court adopted a new framework consistent with Delaware law, holding that the proper analysis for courts to consider is (1) who suffered the alleged harm; and (2) who would benefit from any recovery. If the answer to these questions is that the shareholders would suffer the harm and benefit from the recovery, then shareholders have a right to file the lawsuit.
The case is important for Michigan shareholders for two main reasons:
- It unambiguously states that directors owe common law fiduciary duties to shareholders;
- It allows an individual shareholder to sue the directors if they breach those duties.
This roadmap is crucial for shareholders, providing them and their attorneys with a gateway for future shareholders to secure justice.
Corporate Directors Owe Common Law Fiduciary Duties to Shareholders
Corporate directors owe fiduciary duties to shareholders based on Michigan case law based on both common law and as laid out in the Business Corporation Act. The Michigan Supreme Court held that the duties described in each of these sources are independent of each other. In other words, one does not alter or override the other.
Individual Shareholders Can Sue the Corporate Directors Directly for Breach of Common Law Duties
Murphy expands the rights of individual shareholders of a Michigan corporation to sue the officers and directors for breach of fiduciary duties in certain circumstances. Prior to Murphy, Michigan law often prevented individual shareholders from bringing a lawsuit on their own behalf (called a direct action) for breach of fiduciary duties.
Instead, Michigan law required that if the plaintiff was not uniquely injured compared to other shareholders, they could only bring a lawsuit on behalf of the company, called a derivative action. The old rule was quite cumbersome and limiting because it required that shareholders follow a host of requirements before doing so, including giving the company written notice, 90 days before filing suit, to investigate the claim.
In Murphy, the Supreme Court clarified that shareholders now can bring their own lawsuits for breach of fiduciary duties in certain instances. Murphy advises lower courts that shareholders have the right to bring a direct action against the officers and directors (and not in the name of the company), where (1) the shareholder(s) suffered the harm that is alleged (compared to the corporation), and (2) the shareholder(s) would receive the benefit of any recovery or other remedy.
The Miller Law Firm is a leader in shareholder rights. Since 1996, we’ve been busy advocating for and protecting shareholders’ rights. For example, we secured a $16.5 million arbitration award for an employment dispute about stock options. This is the largest arbitration award in cases of this kind.
In shareholder oppression lawsuits, we have recovered seven-figure judgments on many occasions. We pride ourselves on our ability to litigate even the most complex business disputes. Having been in operation for over 25 years, chances are we have experience handling a similar case. Give us a call or contact us online to discuss your case.