Sixth Circuit Finds Strengthened Fiduciary Duty Protections for Shareholders in Closely Held Michigan Corporations
Last week, directors in closely held corporations got a wake-up call from the US Court of Appeals for the Sixth Circuit. In Boyd v. Northern Biomedical Research, Inc., the Court concluded that Michigan law provides greater protections for shareholders of closely held corporations than federal securities law. The key distinction? While under federal law, directors have a duty to disclose only information that has a “substantial likelihood” to affect shareholder behavior (such as to hold or sell shares), Michigan law requires disclosure of any information that “may influence” shareholder behavior. This distinction matters because—as in Boyd—it can be the difference between a claim that fails and one that succeeds.
Case Background
Robert Boyd sold his 16% stake in Northern Biomedical Research (NBR) in December 2020 for approximately $3.4 million, based on an accounting firm’s valuation of the company at roughly $21 million. But just months later, Avista Capital Partners invested $40 million to acquire a 50% interest in NBR, valuing the company at $80 million.
Boyd sued the company and its Directors, alleging they failed to disclose ongoing discussions with Avista and the company’s consideration of private equity financing before he sold his shares. The defendants had been exploring various financing options for expansion but excluded Boyd from these discussions, despite his status as a Shareholder and Board Member.
Federal vs. State Law: Different Standards Applied
The Sixth Circuit’s decision posited a crucial distinction between federal securities law and Michigan state law regarding a director’s disclosure obligations:
Federal Securities Law Standard: The Court affirmed dismissal of Boyd’s federal securities fraud claims, applying the “substantial likelihood” materiality standard. Under federal law, omitted information is only relevant if there’s a “substantial likelihood” that a reasonable shareholder would consider it important. The Court found that Avista’s preliminary interest and NBR’s consideration of equity financing, among other sources of capital, were “too speculative” to clear this high federal bar.
Michigan Common Law Standard: The Court reversed the lower court’s grant of summary judgment on state law fiduciary duty claims, rejecting reliance on Delaware precedent and the application of federal materiality standards to Michigan common law. Instead, the Court opined that Michigan has a heightened standard requiring directors to disclose all material facts within their knowledge that “may influence” shareholder action. The Court found this “may influence” standard to be significantly more protective (of shareholders) than the federal “substantial likelihood” test.
Heightened Fiduciary Duties in Closely Held Corporations
The Sixth Circuit emphasized that Michigan law imposes particularly strong fiduciary duties on directors of closely held corporations: “a higher standard of fiduciary responsibility, a standard more akin to partnership law.” This partnership-like standard demands full disclosure and “not mere honesty but the punctilio of honor most sensitive.”
Under this heightened standard, directors must disclose information that might influence shareholder decisions, even if that information wouldn’t survive federal scrutiny. The Court found that a jury could reasonably conclude that Avista’s interest and NBR’s financing considerations were the type of information that “may influence shareholder action.” In doing so, it remanded the case to the district court for further determinations.
Practical Implications for Corporate Shareholders and Directors
This decision has several important implications for shareholders and directors, particularly in closely held corporations:
- Stronger State Law Protections: Shareholders may have stronger remedies under Michigan fiduciary duty law than under federal securities law, especially in closely held corporations where directors owe heightened disclosure obligations.
- Broader Disclosure Requirements: Directors in closely held corporations must disclose a wider range of information under Michigan law, including preliminary discussions and considerations that might not rise to the level of federal materiality.
- Context Matters: The Court emphasized that fiduciary duties depend heavily upon context, with closely held corporations receiving enhanced protection due to their unique characteristics.
Why This Decision Matters
This decision holds that Michigan law provides stronger shareholder protections regarding disclosure than federal securities law, at least in closely held corporations. While federal securities fraud claims face high materiality thresholds, Michigan fiduciary duty claims based on lack of disclosure may succeed under more protective standards that address the unique dynamics of closely held companies.
The decision also reinforces that transparency isn’t optional when a corporation seeks to acquire its shares from an existing shareholder, especially when directors are considering strategic alternatives or major financing transactions that could significantly impact the value of the shares and may influence the shareholder’s decisions regarding the sale.
Limitations of the Decision
The Court’s opinion construes and applies both federal law and state law. Its ruling regarding federal securities law standards is binding within the Sixth Circuit. However, as a federal court, its holding with respect to Michigan fiduciary law is not binding. Whether Michigan courts would follow its reasoning is uncertain. In finding a heightened fiduciary duty for closely held corporations, the Court relied largely on two Michigan court decisions: Estes v. Idea Engineering & Fabrications, Inc.1 and Murphy v. Inman.2 However, Estes dealt with whether Michigan’s shareholder oppression provisions created a separate cause of action; its language regarding close corporations was taken from the dissent in another case and is arguably dictum. Murphy v. Inman dealt with a publicly held company, not a close corporation. The Boyd Court’s holding that close corporation shareholders have greater fiduciary protections necessarily means that public company shareholders have lesser protections, a principle that Michigan courts may be reluctant to endorse.
Actionable Recommendations
If you’re involved with a closely held corporation—whether as a shareholder, director, or advisor—this decision should prompt a fresh look at disclosure practices and fiduciary obligations. The stakes are too high to leave anything to chance. Based on this decision, we recommend that shareholders and directors consider the following protective measures:
Shareholders
- Due Diligence: Conduct thorough due diligence before selling shares, including specific inquiries about financing discussions, strategic alternatives, and potential transactions.
- Board Participation: If serving on a board, actively participate in meetings and request information about strategic initiatives and financing discussions.
- Legal Counsel: Consult with experienced counsel before major transactions, particularly in closely held corporations where enhanced fiduciary duties may apply.
- Documentation: Maintain detailed records of all communications and disclosures from directors and management.
Directors
Based on this decision, we recommend that directors consider the following protective measures:
- Keep Disclosure Obligations in Mind: Michigan law may require disclosure of preliminary discussions that wouldn’t trigger federal obligations. Consult with counsel to determine when disclosure may be required.
- Context Matters: Fiduciary duties depend heavily on context, with closely held corporations receiving enhanced protection.
- Document Everything: Maintain detailed records of all communications and disclosures.
Questions? Contact Butzel's Corporate and Securities Team to discuss how this decision impacts your rights and what steps you can take to protect your interests.
Jennifer E. Consiglio
248.593.3023
consiglio@butzel.com
George B. Donnini
313.225.7042
donnini@butzel.com
Justin G. Klimko
313.225.7037
klimkojg@butzel.com
Thomas P. Nolan
313.225.7072
nolant@butzel.com
[1] 250 Mich App 270, 649 N.W.2d 84, 91 (Mich. Ct. App. 2002)
[2] 509 Mich 132, 983 N.W.2d 354, 362 (Mich. 2022)
