A Pernicious Mass. Appeals Court Ruling: Redline Copy of Proposed Bylaw Changes Per Se Renders Misleading Proxy Challenge A Nullity

In Rule v. Massachusetts Mutual Life Insurance Company,[1] our client challenged MassMutual’s 2014 Proxy Statement seeking to change its company bylaws.   The Proxy told the over 1 million policyholder-owners that the proposed bylaw changes were consistent with the company’s current practices, would bring the bylaws in alignment with widely held corporate governance best practices, and would enable management to better serve the policyholders.  However, the bylaw changes were a radical departure from its current bylaws and were the antithesis of best practices (as discussed below).  Nonetheless, a Massachusetts Appeals Court sustained dismissal of the proxy challenge on grounds that the Proxy included a redline showing the changes (of which there were many) and that Plaintiff suffered no injury because she had understood and voted against the Proxy.

To put the legal challenge in perspective, the proposed bylaw changes allow future changes to bylaws by management without prior notice to the policyholder-owners, even though such notice is the essence of best practices.   They also eliminate the requirement of a majority of independent directors for quorum; they impose personal liability on individual policyholder-owners for the costs of any unsuccessful owner initiatives; and in a final indignity, they would allow company management to adjourn meetings for any reason without further notice to the owners.  (Only roughly 40 owners, virtually all insiders, attended the last several annual meetings.) Plaintiff also requested permission to inspect MassMutual’s books and records related to the board conduct around the bylaw changes and Proxy, to which MassMutual claimed the Company’s owners had no legal right.

The Appeals Court decision held that the Proxy was not materially misleading and that the owners of a Massachusetts mutual life insurance company had no common law right to inspect its books and records although such a common law right exists for shareholders of a Massachusetts corporation. It is our view that the Appeals Court misapplied the appropriate standard and therefore mistakenly held that the Proxy could not be materially misleading unless it “caused policy holders to alter their vote.”[2]  The Appeals Court also accepted the erroneous argument that, even assuming a fiduciary duty existed (which decision it did not reach) a proxy that included a mere redlined copy of proposed by-law changes could not be materially misleading as a matter of law, thus undermining disclosure obligations and incentivizing Massachusetts companies to seek/obtain proxy immunity for themselves simply by attaching a red-lined copy showing the changes they recommend – no matter what else they say, omit, or misrepresent — about the proxy matter.  In concluding that a voting owner could not have been harmed by the results of an unfair election based on a materially misleading proxy,[3] so long as that voter realized the proxy was deceptive, the Appeals Court ignored the reality that when a majority of the voters are misled, as occurred here, they will outvote an informed minority and suffer an unfair vote.

In deciding that the contractual right of a policyholder-owner of a mutual life insurer to vote does not impose on the company the implied duty of good faith and fair dealing to disseminate an accurate proxy,[4] the Appeals Court ensured that owners as a matter of law would have no recourse to protect herself from the consequences of votes resulting from a rigged election based on a materially misleading proxy absent a finding of a separate fiduciary duty (which the appeals court declined to decide).  (5) The Appeals Court erroneously declined to overturn the trial court’s holding that the owners of mutual companies did not have the (common law) right to inspect their company’s books and records,[5] where it could have struck a decisive blow for corporate transparency and the accompanying accountability by simply extending the common law that applies to shareholders.

The implications of this ruling for corporate accountability, corporate transparency, and shareholder rights are indeed frightening.  This decision could have a pernicious effect on good corporate governance not only at MassMutual, but throughout the industry if followed by other courts.  Millions of owners could see their rights as a matter of law radically diminished or stripped away altogether if this ruling is allowed to stand.  It will make it virtually impossible for company management to be held accountable when it misleads its owners, so long as it simply includes a redlined document, and thus it will make it far easier for a company’s management to engage in conduct unchecked by the traditional  tools of transparency and oversight by company owners.

ENDNOTES:

[1] 2016 WL 2585756 (Mass. App. Ct. May 5, 2016)

[2] Id. at *2.

[3] Id. at *2.

[4] Id. at *3.

[5] Id. at *3 – *4.

Jason Adkins and John Peter Zavez are members of the law firm Adkins, Kelston & Zavez, P.C. This post is based on their case in Massachusetts state court. Plaintiff will file a Rule 27.1 Request for Further Appellate Review by May 25, 2016 asking the Massachusetts Supreme Judicial Court to exercise its discretion and take this appeal. We are interested in public support in opposition to this ruling.  To contact us: Jason Adkins, jadkins@akzlaw.com; John Zavez, jzavez@akzlaw.com or (617) 367-1040.