MCM Argues Case of First Impression
MCM attorneys recently briefed and argued a case of first impression before Maine’s highest court: whether corporate directors and officers, accused of fraud in connection with the redemption of selling shareholders’ stock, may enforce a general disclaimer of reliance in deal documents associated with the purchase of the stock. The case follows others around the United States, examining whether, and to what extent, such “big-boy” no-reliance provisions are enforceable by corporate fiduciaries, when the fiduciaries are accused of fraud. MCM represents two former shareholders of Bushmaster Firearms, Inc., who allege that after selling their stock, they discovered that that the company’s corporate officers and directors had misrepresented and withheld key information about the company in order to buy the stock for less than it was worth. Substantially all of the company’s assets were later sold to outside investors at a price far in excess of the overall valuation of the company based on the shareholders’ sale price. The settlement agreement contained a provision in which the sellers disclaimed reliance on certain information or representations by the buyers. In this case, Justice A. Mark Horton of the Business and Consumer Court found that the selling shareholders had established a prima facie case of fraud and breach of fiduciary duty, but held that the so-called “big-boy provision” prevented the plaintiffs from proving reliance, which is a necessary element of any fraud case. Oral argument in the Law Court, held on May 9, illustrated the way “big-boy provisions” pit important values against each other. The justices recognized that it has long been the rule in Maine that fraud vitiates all that it touches—even a settlement agreement and a release procured by fraud—and also that corporate fiduciaries hold solemn duties to shareholders, including the obligation to be truthful, even to the fiduciary’s detriment. Chief Justice Leigh Saufley asked whether, in light of recent history in the area of corporate governance, more emphasis should be placed on honesty. On the other hand, the justices wrestled with the notion that sophisticated parties represented by able counsel should be able to resolve a dispute once and for all, and utilize a “big-boy” provision to try to limit future disputes. To listen to an audio recording of the oral argument, click on the links below. The Law Court must now decide whether big-boy provisions should be permitted to bar claims for fraud and breach of fiduciary duty, where such provisions appear in the very agreement that the shareholders allege was the subject of the fraud and breach of fiduciary duty. The case is Barr et al. v. Dyke et al., Maine Supreme Judicial Court, Law Court Docket No. BCD-11-525, on appeal from the Maine Business and Consumer Court.MCM attorneys George Marcus, Daniel Rosenthal, and Andrew Helman handled the matter for the shareholders. Learn more about George, Dan and Andrew by clicking on their names.