Earlier this month, Berman Tabacco secured an appellate victory, upholding a trial win that required a CEO to disgorge $3 million in ill-gotten gains.
On July 2, 2018, the First Circuit Court of Appeals affirmed the Massachusetts District Court’s ruling that Bruce Shear, the Chief Executive Officer and President of PHC, Inc. (“PHC”), disgorge $3 million of his “ill-gotten gains” to a class of former PHC shareholders. The First Circuit ruled that the trial court appropriately found that a shareholder can control a company without being a majority shareholder and disgorgement is an appropriate equitable remedy—even after a jury concluded that there is no economic loss to plaintiffs.
In bringing this case, Berman Tabacco teamed up with another law firm to represent plaintiff MAZ Partners LP in a securities class action arising out of state statutory and common law claims for breach of fiduciary duty, alleging that Shear used his position as PHC’s controlling shareholder to obtain benefits for himself at the expense of PHC’s other shareholders. The case stems from Acadia Healthcare, Inc.’s 2011 acquisition of PHC.
After a two-week trial, the jury returned a special verdict finding that Shear was PHC’s controlling shareholder and that he breached his fiduciary duty to PHC’s minority shareholders, but that the breach of fiduciary duty did not cause damage to the class. Subsequently, after post-trial briefing, the trial court ordered disgorgement so as to deprive Shear of “the fruits of his wrongdoing.”
The First Circuit opinion is significant in that it affirmed the principal that a non-majority shareholder can be a controlling shareholder under Massachusetts law. The First Circuit also opined that the Massachusetts courts would likely follow Delaware law in finding that shareholders cannot ratify a self-interested transaction “because of the coercion inherent in the relationship between a controlling shareholder and the remaining shareholders.” Finally, the Court established that even where a plaintiff is not damaged, “equitable disgorgement can be ordered as a remedy for a breach of fiduciary duty.
The ruling is a victory for investors enforcing their rights and a positive development in Massachusetts fiduciary law. Boston partners Norman Berman and Nathaniel Orenstein worked on this case for the firm.