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            In Donahue v Rodd Electrotype Company of New England, Inc.[1] the Massachusetts Supreme Judicial Court held that shareholders in a close corporation owe each other a heightened “fiduciary duty” and thus must offer minority shareholders equal opportunity to corporate benefits.  In almost 50 years since the decision, Massachusetts courts have broadened, narrowed and construed that “fiduciary duty.”  This duty is likened to the duty partners owe to one another.

            Does this duty also apply to the members of a closely held limited liability company?

Two cases, Butts v Freedman[2], and Pointer v. Castellani[3] present some difficulties in determining whether the Donahue doctrine extends to limited liability companies.  Factually, the cases involved alleged breaches of fiduciary duties in limited liability companies.  The Courts’ opinions however both mistakenly referred to fiduciary duties in corporations when factually dealing with limited liability companies.  Thus, in discussing fiduciary duty in a limited liability company, the Court in Pointer stated “[i]t is uncontested that FGC [which the Court defined Fletcher Granite Company, LLC] is a close corporation”.[4]  FGC was, however, clearly a limited liability company.  Likewise in Freedman, with respect to an entity clearly an LLC, the Court stated that “we agree with the judge that Freedman, as a member of a closely held corporation owed Butts and BEA a fiduciary duty.” [5] BEA, however, was not a corporation but an LLC.

In Allison v. Eriksson[6] the Supreme Judicial Court recognized that fiduciary duties do in fact exist in limited liability companies pursuant to M. G. L. A. c. 156C, § 63 (b).  In that case, however, the limited liability company provided for fiduciary duties to members akin to the fiduciary duties owed shareholders in a close corporation, in the LLC’s operating agreement.  The Court found that the operating agreement thus required an “analogous relationship and duty among its members, and thus, the close corporation doctrine and the strict fiduciary duty it imposes applies . . .”[7]  Because the Court reached its decision on an provision in the operating agreement which granted fiduciary duty to the members, it did not have to decide the broader question of whether fiduciary duties existed by virtue of the entity in closely held LLCs.

In Butler v. Moore[8], the Federal District Court for the District of Massachusetts noted Pointer and Freedman and suggested:

“In both cases [Pointer and Freedman], the opinions applied the principles of Donahue to an LLC, but erroneously referred to the LLC as a ‘close corporation’. . . As a matter of logic and fairness, there is no reason why the fiduciary duties of members of a closely held LLC should be materially different from those of shareholders of a closely held corporation. The policy considerations underlying the Donahue line of cases appear to be identical when considered in the context of LLCs. Moreover, an LLC is, practically speaking, something of a hybrid of a corporation and a partnership; it would be highly anomalous if members of a closely held LLC had lesser fiduciary duties than those of a closely held corporation or a partnership.[9] “

            I think that the Federal District Court was correct and the closely held LLC is an equivalent of a close corporation.  A Massachusetts court should find that LLC members owe to each other a fiduciary duty.  This result however is not free from doubt and, because of that doubt, a colleague of mine has expressed concern about using limited liability companies in certain situations.

[1]                367 Mass. 578, 328 N. E. 2d 505 (1975).

[2]                98 Mass. App. Ct. 827, 140 N. E. 3d 486 (2020).

[3]                455 Mass. 537, 918 N. E. 2d 805 (2009).

[4]                455 Mass. 537 at 568 918 N. E. 2d 805 at 815. 

[5]                96 Mass. App. Ct. 827 at. 828, 140 N. E. 3d 466, at 468, 469. see also One to One Interactive, LLC v. Landrith, 76 Mass. App. Ct. 142 920 N. E. 2d 303 (2009). 

[6]                479 Mass. 626, 98 N. E. 3d 143 (2018),

[7]                479 Mass. 626 at 636, 98 N. E. 3d 143 at 152. 

[8]                2015 WL 1409676 (D. Mass. 2015).

[9]           2015 WL 1409676, at 61.

          In an asset sale, the buyer purchases assets of the seller but often does not assume some or all its debts and liabilities.  Prior law generally permitted buyers to assume none of seller’s liabilities or pick and choose which liabilities buyer would assume, but recently Massachusetts have begun to look more favorably on the rights of creditors.  Now, if there is a potential for successor liability, buyers should in many circumstances: (1) hold back part of the purchase price, (2) secure significant indemnities, (3) carefully structure the purchase and sale agreement and (4) of course, conduct careful due diligence among other things.  

In my November 8, 2021 post, I discussed the four areas where a court will ascribe successor liability—even if liabilities are specifically excluded in the deal.  A court will do so if it finds (1) there is an assumption, express or implicit, of liability, (2) there has been a “defacto merger,” (3) the buyer is a “mere continuation” of the seller or (4) the transaction was fraudulent.   As promised more than a year ago—at long last—is part II, a discussion of the second area where a court finds successor liability—where it finds the asset sale a “defacto merger.”

I have tried to remove as much legal jargon from the discussion below as I could, but if something is unclear, please email me at and I’ll try to clarify.

Though the term, “defacto merger” had been earlier mentioned, the 1997 case of Cargill Incorporated v. Beaver Coal & Oil Co., Inc.[1]  is the leading Massachusetts case.  There, Seller, who had distributed home heating oil, sold its assets to Buyer for cash, a promissory note and the assumption of certain liabilities. Seller had purchased inventory from a wholesaler, Northeast, and at the time of the asset sale Seller owed a significant amount of money to Northeast.  This outstanding debt of Northeast was not assumed by Buyer in the deal.  Plaintiff was the successor of Northeast and sued Buyer to recover the amount Seller owed.

Significantly, after the sale, Buyer ran Seller’s business under Seller’s name in much the same manner as Seller had, before the closing.  In addition, Seller’s sole shareholder, director and officer became a shareholder of Buyer.  Was the Buyer of the assets liable for the liability Seller had not contractually assumed?

The Supreme Judicial Court said yes and listed four factors to determine whether it would characterize an asset sale a “defacto merger” and impose successor liability:

“Whether (1) there is a continuation of the enterprise of the seller corporation so that there is continuity of management, personnel, physical location, assets, and general business operations; whether (2) there is a continuity of shareholders which results from the purchasing  corporation paying for the acquired assets with shares of its own stock, this stock ultimately coming to be held by the shareholders of the seller corporation so that they become a constituent part of the purchasing corporation; whether (3) the seller corporation ceases its ordinary business operations, liquidates, and dissolves as soon as legally and practically possible; and whether (4) the purchasing corporation assumes those obligations of the seller ordinarily necessary for the uninterrupted continuation of normal business operations of the seller corporation.”[2]

            With respect to the first factor, it was clear from the foregoing facts that there was continuity of the enterprise—the businesses pre- and post-sale were essentially the same. Buyer ran the business in the same manner as Seller under the Seller’s name.

            Justice Marshall’s analysis of the second factor, continuity of shareholders, is troublesome.  The sole shareholder and director of the Seller, became a 12½% owner of the Buyer.  A footnote clarifies that the other shareholder of Buyer owned 13% and the corporation itself 74½%[3]  (apparently as treasury stock). Thus, the Seller’s principal could have had an almost 50% interest in Buyer.  Had this been expressed more clearly in the body of the case’s opinion, the continuity of ownership’s rationale set forth might have been more persuasive. But a 12½% stake in the Buyer as continuity of ownership?  Did the Court mean almost 50%?  In either event, the Court stated:

“While this does not constitute shareholder continuity in its fullest sense, there is no requirement that there be complete shareholder identity between the seller and a buyer before corporate successor liability will attach.”[4]

The third factor was satisfied as Seller ceased its business operations and clearly the Court found the fourth, namely assumption of liabilities to assure Buyer’s uninterrupted operation of Seller’s business, were satisfied as liabilities to transition the business were assumed.

          The Court then stated:

“We recognize that there is often a tension between this goal and our strong interest in respecting corporate structures. Each case must be decided on its specific facts and circumstances. Where, as here, the acquiring enterprise assumed all the benefits of and held itself out to the world as the same enterprise as its predecessor, we conclude that the tension must be resolved in favor of an innocent creditor.[5]“We recognize that there is often a tension between this goal and our strong interest in respecting corporate structures. Each case must be decided on its specific facts and circumstances. Where, as here, the acquiring enterprise assumed all the benefits of and held itself out to the world as the same enterprise as its predecessor, we conclude that the tension must be resolved in favor of an innocent creditor.”[5]

          The Federal Courts applying Massachusetts law key on the second factor, continuity of shareholders. [6]    One Court stated:

“Plaintiff also points to the dicta in Cargill that “no single factor is necessary . . .  to establish a de facto merger,” and argues that shareholder continuity is therefore merely a factor to be considered, not a prerequisite to be satisfied. While the Court acknowledges the breadth of the Cargill dicta, it also observes that no case has ever gone so far as to dispense with the “shareholder continuity” factor altogether.”[7]

          Finally, we consider the case of Milliken v. Duro Textiles, LLC.[8]   The facts there are rather convoluted, but are essentially as follows.  A private equity group (“Group”) owned 51% of the equity and 100% of the secured debt of Old Duro.  The Group sought to wipe out the unsecured creditors of the business of Old Duro and permit the business of Old Duro to continue in a new “clean” entity.  The plaintiff, Milliken, was an unsecured creditor of Old Duro that had obtained a judgment in New York. The secured lenders (the Group) scheduled a foreclosure sale of all Old Duro’s assets other than its real estate assets.  The Group formed New Duro, who purchased the non-real estate assets “clean” of the unsecured lenders debt and operated the same business as Old Duro.  Old Duro retained the real estate, which was a significant asset, leasing it to New Duro.  The Group financed New Duro’s purchase of Old Duro’s non real estate assets.

On appeal, the SJC was asked to overturn a grant of summary judgment. The only issue on appeal was whether the second Cargill factor was met, whether “the seller corporation ceases its ordinary business operations, liquidates, and dissolves as soon as legally and practically possible,” the other three factors apparently satisfied.  Defendants maintained there was no liquidation because Old Duro retained the real estate assets, which it maintained, were significant.

Justice Spina ably discussed successor liability from the standpoint of “defacto merger”  theory and the “mere continuation” theory, noting the similarities of both; “[w]hen analyzing a claim for successor liability under theories of the “defacto merger” or the “mere continuation” of the corporation of the predecessor, our focus is on whether one company has become another for the purpose of eliminating its corporate debt.”[9]

The Court then analyzed the transaction and Old Duro’s retention of its real estate:

“Here, it was undisputed that Old Duro ceased its ordinary business operations following the foreclosure sale, it currently has no offices or employees, and the former chief executive officer of Old Duro is now the chief executive officer of New Duro. Fundamentally, Old Duro, as a dyer, printer, finisher, and distributor of textile products, no longer exists. It sold its operating assets to New Duro, thereby enabling New Duro to maintain the same production capabilities and sell the same goods without any interruption to the business. We recognize that Old Duro did not legally dissolve as a corporate entity. Instead, it changed its name, and now rents to New Duro the real estate that it still owns in Fall River and recovers tax refunds. Notwithstanding this particular fact, only one among several for consideration, we decline to elevate form over substance by concluding that the nature of Old Duro’s corporate existence as Chace Street trumps the existence of New Duro as the successor corporation on whom liability properly should be imposed. The existence of Chace Street simply does not undermine the nonexistence of Old Duro as a going concern. “[10]

          The problem for structuring an asset sale becomes, therefore, how to structure the transaction so as to limit the unwanted assumption of liabilities?  It becomes difficult as a court in this case is a court of equity that may have its own ideas of what is fair and just.  Justice Spina concluded the foregoing analysis Milliken by stating:

“The doctrine of successor liability is equitable in both origin and nature. “Equitable remedies are flexible tools to be applied with the focus on fairness and justice.” Under principles of equity, a court will consider a transaction according to its real nature, looking through its form to its substance and intent. That is the essence of the imposition of principles of successor liability.”[11]

  I had been involved in similar reorganizations like the Duro transactions over the years, but after Milliken, such a deal is going to be difficult, if not impossible.

I discuss the doctrine of successor liability in my book, Business Corporations with Forms §25.5 (Mass. Practice, Vol 13, Thompson Reuters).

[1]           424 Mass. 356, 676 N. E. 2d 815 (1997).

[2]           424 Mass. at 360, 676 N. E. 2d at 818 (citing In re Achushnet River & New Bedford  Harbor Proceedings re Alleged PCB Pollution, 712 F. Supp. 1010 (D. Mass. 1989)).

[3]           424 Mass. at 361, 676 N. E. 2d at 819, fn. 9.

[4]           424 Mass. at 361, 676 N. E. 2d at 819 (Citation Omitted).

[5]           424 Mass. at 362, 676 N. E. 2d at 820.

[6]           E. g. American Paper Recycling Corp. v. IHC Corp., 707 F. Supp. 2d 114 (D. Mass. 2010); Gougen v. Textron, Inc, 476 F. Supp. 2d 5 (D. Mass. 2007)[7]           Gougen v. Textron, Inc, 476 F. Supp. 2d 5 at 14 (D. Mass. 2007).

[8]           451 Mass. 547, 887 N. E. 2d 244 (2008)

[9]           451 Mass. at 556, 887 N. E. 2d at 254.

[10]         451 Mass. at 559, 887 N. E. 2d at 256.

[11]         451 Mass. at 559, 60, 887 N. E. 2d at 257 (Citations Omitted).

            If a corporation acquires all or a substantial part of the assets (property) of a corporation and assumes no liabilities, is the buyer free from the liabilities of the predecessor?  In a Massachusetts corporation, not always. 

            This blog post and the following post will set forth the instances where courts will impose liability on the successor, even if the buyer and seller agree that there is no assumption of liabilities and the agreement transferring assets specifically states that no liabilities are assumed.  A 1991 case, Guzman v. MRM/Elgin set forth four areas where a court will impose successor liability.  The Massachusetts Supreme Judicial Court stated:

Most jurisdictions, including Massachusetts, follow the traditional corporate law principle that the liabilities of a selling predecessor corporation are not imposed upon the successor corporation which purchases its assets, unless (1) the successor expressly or impliedly assumes liability of the predecessor, (2) the transaction is a de facto merger or consolidation, (3) the successor is a mere continuation of the predecessor, or (4) the transaction is a fraudulent effort to avoid liabilities of the predecessor.[1]

Looking at these 4 areas:

  1. Assumption of liability.

            Of course, the parties can expressly agree that the successor will assume some or all of the seller’s liabilities.  In addition, the assumption of liabilities can be implicit.  The First Circuit stated that a prima facie case could be established if the purchaser “manifests its assent to assume [the contract] . .  . where the corporation accepts the benefit of [that] contract with knowledge of its terms.” [2]  Thus, the parties to the deal can, by their actions thereafter manifest an intention that some or all the liabilities of the seller will be assumed, and a court will impose those liabilities of the seller on the buyer.

  • De Facto Merger.

            In this case a court will impose liability because it found that the asset sale had the effect of a merger.  I will discuss this in my next post. 

  • The successor is in fact the “mere continuation” of the seller.

            For the most part, the de facto merger exception and the mere continuation are similar.  A 2020 Supreme Judicial Court case, Smith v. Kelley, is illustrative of the “mere continuation” exception on it own.  A creditor, defrauded by an employee of the owner of a professional corporation (“PC”) was able to proceed against a sole proprietorship started by the owner, a Mr. Kelley.  After a judgment was entered against the PC, Mr. Kelley, the sole shareholder of the PC, opened a sole proprietorship.  He had existing clients of the PC amend their fee agreements so that all future work was done by the proprietorship.  Among other things, the proprietorship worked out of the same office, had the same email address and a similar letterhead.  Not long after the proprietorship was established, the PC filed for bankruptcy.  The bankruptcy court found that equipment, inventory and supplies had been transferred from the PC to the  proprietorship, as had some to the PC’s receivables,  The Court held that in the “unique circumstances” of that case the proprietorship was the mere continuation of the PC:

While we respect the integrity of corporate structures, we nonetheless find it troubling “that by merely changing its form, without significantly changing its substance, a single corporation can wholly shed its debts to unsecured creditors, continue its business operations with an eye toward returning to profitability, and have no further obligation to pay such creditors.” , , , The application of the doctrine of successor liability is “designed to remedy this fundamental inequity.” . . . The “essence” of this doctrine is that, “[u]nder principles of equity, a court will consider a transaction according to its real nature, looking through its form to its substance and intent.”  If the entity remains essentially the same, despite a formalistic change of name or of corporate form, successor liability may be imposed.[3]

  • The court finds the transaction fraudulent.

            There has been little case law in Massachusetts in this area and some of it is questionable.   


            When faced with an injured party or creditor, a Massachusetts court has a host of equitable remedies with which to impose successor liability.   The foregoing deal with more obvious impositions of successor liability, but the de facto merger—where courts equate certain asset sales with mergers—which I will discuss in my next post, effect some surprising results.  I discuss successor liability in more detail in §25.4 of my treatise on corporations found here, and which may also be accessed on Westlaw™.

[1]           Guzman v. MRM/Elgin, 409 Mass. 563, 567 (1991).

[2]           Devine & Devine Food Brokers, Inc. v. Wampler Food Brokers, Inc., 313 F. 3d 616,  618 (1st Cir.  2002).

[3]           Smith v. Kelley, 484 Mass. 111 (2020).

            This blog is about business corporations.  In my practice, however, I also do work with not-for-profit corporations.  I recently worked on a merger of two not-for- profits.  Since I found a number of unusual issues in this transaction, I thought it might be helpful if I set forth the steps and attached forms of the plan of merger and directors’ resolution adopting the plan.

            Merging Massachusetts not-for-profit corporations can be a little different in a couple of respects.  In Massachusetts, Chapter 180 of the general laws governs not-for-profit corporations.   The corporate law revision in 2004, which adopted a new business corporation statute, however, did not address the plethora of specific acts covering particular types of corporations, such as those governing insurance companies, many types of banking corporations, and yes, not-for-profit corporations.  Chapter 180, which few operative provisions, makes applicable many provisions, not of the current corporate statute, but of the prior corporate statute, Chapter 156B to govern the corporation’s workings. One must therefore use care as Chapter 156B and current statute often conflict. 

            To effect a merger, Chapter 180 requires a vote of at least 2/3 of the members.  One will, however, encounter many not-for-profits without members.  How then to deal with the requirement of member adoption?  As described below, Chapter 180 has a “fix” for this.

            I will go through the steps necessary to merge two “memberless” Chapter 180 corporations.  I will thereafter set forth the necessary forms I have used.

FIRST:  Although It is not necessary or required by statute or regulation, as a courtesy and because the Attorney General has jurisdiction over “public charities,” it is wise to notify the Attorney General ((617) 727-2200 x 2101) of the upcoming  merger.  This will turn up any issues the Attorney General may have with respect to the merger.

SECOND:  One should check with the corporate records of each of the corporations to discover whether consents or notifications are required (or maybe prohibitions to the transaction appear) under any of the corporation’s licenses, leases, contracts or the like as a result or the merger.  

THIRD: An “Agreement of Merger” should be drafted.  Section 10 (b) of Chapter 180 requires that the agreement contain:

  1. the names of the corporations merging and the survivor thereof, or the name of the resulting corporation,[1]
  2. the purposes of the survivor or resulting corporation,
  3. the terms of the transaction,
  4. The manner of fixing the effective date of the transaction, and
  5. other provisions which could have been included in the articles of organization or other provisions deemed necessary.

Note that if one of the merging corporations is a “public charity,” the surviving corporation must be a “public charity.”

FOURTH: Directors authorize an “Agreement of Merger.” [2] With respect to authorization, M. G. L. c. 180, § 10 (b) requires that the Agreement of Merger must be signed by an “authorized” officer.  Typically, in a business or not-for-profit corporation, the directors authorize an officer to sign on behalf of the corporation.  I therefore recommend that the board of directors authorize the signing officer, though this is not explicit in the statute.

FIFTH:   Chapter 180 requires that the Agreement of Merger be adopted by a 2/3 vote of all members.[3]   As mentioned above, many not-for-profit corporations do not have members and in such a case, the statute allows that the board of directors may adopt the agreement by the same percentage vote as would otherwise have been required by the members (at least 2/3) if the not-for-profit corporation had members.  This can (and should) be done in the same meeting as the authorization in 4 above.

SIXTH:  Articles of Merger are filed with the Corporations Division of the Secretary of State.

SEVENTH:  The survivor files a certified copy of the articles of merger on each registry where any real estate is located, but need not file if the survivor owned that property.

FINALLY: The Attorney General’s website requires a copy of the articles within 30 days of the filing.  I would file a copy certified by the Secretary of State.



VOTED:           That the board of directors hereby adopts the Plan and Agreement of Merger of YYYYYY, Inc. with and into XXXXXX, Inc. (“Agreement”) substantially in the form attached hereto, and further

VOTED:           To authorize, ratify and confirm the execution and delivery of the Agreement on behalf of the Corporation by the president, and further 

VOTED:           To ratify and confirm all that each of the officers of the Corporation has done in connection with the Agreement and the transactions contemplated thereby, and further

VOTED:           To approve and adopt, pursuant to M. G. L. c. 180, § 3, the Agreement and the merger (“Merger”) contemplated by the Agreement, there being no members of the Corporation, and further

VOTED:           That the officers of the Corporation are authorized to execute, deliver and file all such other documents and other instruments as any of them deems necessary, proper or convenient to carry out the transactions contemplated by the Agreement and the Merger and take such further action as any of such officers deems necessary proper or appropriate to effectuate the foregoing.



            AGREEMENT (“Agreement”) entered into as of ______________, 2020 by XXXXXX, Inc. (“XX”) and YYYYYY, Inc. (“YY”).

            WHEREAS, XX is a corporation formed under M. G. L. c. 180 and having its principal office at ______________________, Blackacre, MA 00000, and

            WHEREAS, YY is a corporation formed under M. G. L. c. 180 and having its principal office at _______________________, Whiteacre, MA 00000, and

            WHEREAS, Section 10 of Chapter 180 of the General Laws of The Commonwealth of Massachusetts permits a merger of any two or more corporations organized under said Chapter 180, and 

            WHEREAS, YY and XX deem it advisable and to the advantage, welfare and best interests of each of said corporations, subject to the authorization, approval and adoption of, this Agreement, by the directors of each, to merge XX with and into YY, pursuant to M. G. L. c. 180,  § 10, upon the terms herein set forth; and

            WHEREAS, Since neither YY nor XX have members, M. G. L. c. 180, § 3 permits any member action, including adoption and approval of this Agreement, to be taken by directors by action of the same percentage of directors of each of YY and XX.

            NOW, THEREFORE, in consideration of the premises and of the mutual agreements and promises of the parties, the undersigned corporations hereby enter into and adopt this Agreement, as follows:

            1.         Pursuant to the provisions of M. G. L. c. 180,  § 10, XX, as the terminating corporation, shall be merged with and into YY, and YY shall be the surviving corporation.  The separate existence of XX shall cease as of the effective date, in accordance with M. G. L. c. 180,  § 10.  The name of “YYYYYY, Inc.” shall remain unchanged after said effective date. 

            2.         The articles of organization of YY, as the same shall be in force and effect as at the effective date of the merger herein provided for, shall continue to be the articles of organization of said surviving corporation, until the same may be amended pursuant to the provisions of M. G. L. c. 180.

            3.         The by-laws of YY, as the same shall be in force and effect as at the effective date of the merger herein provided for, shall continue  to be the by-laws of said surviving corporation, until the same may be amended pursuant to the provisions of M. G. L. c. 180.

            4.         In accordance with the existing articles of organization of YY, unless and until subsequently amended, the purposes of YY shall remain as follows:

To organize a corporation under the provisions of Massachusetts General Laws 180, Section 4(a), __________

______________________________________________________________;  and any and all other purposes authorized under the Massachusetts General Laws Chapter 180; and shall operate as a Federally designated tax exempt organization under the provisions of Section 501 (c) (3) of the United States Internal Revenue Code.

            5.         YY and XX each agree that they shall execute, file and/or record Articles of Merger any other document or documents required by The Commonwealth of Massachusetts and each shall perform all necessary acts within The Commonwealth of Massachusetts and elsewhere in order to effectuate the merger herein contemplated.

            6.         The terms and conditions of the merger are that on the effective date of the merger XX shall be merged with and into YY and that thereafter XX’s independent existence shall cease.

            7.         The president, clerk and each other officer of YY and XX are each individually hereby authorized, empowered and directed to make, execute, deliver, file and record any and all instruments, papers and documents which shall be or become necessary, proper or convenient to carry out or effect any of the provisions of this Agreement or the merger hereby contemplated.

            8.         The effective date on which the merger herein shall become effective shall be the date the Articles of Merger are filed with the Secretary of The Commonwealth of Massachusetts.

            IN WITNESS WHEREOF, this Agreement is hereby signed, on behalf of the constituent corporations, by an authorized officer thereof.



   ______________, president, 

    duly authorized



   _____________, president, 

    duly authorized

[1]. Note that M. G. L. c. 180, § 10 permits the constituent corporations to consolidate as well as merge.  A consolidation is the combination of the constituent corporations into a new corporation—the “resulting” corporation.  A consolidation is no longer permitted in a business corporation governed by M. G. L. c. 156D.

[2]  Or for a consolidation, an agreement of consolidation, of course describing a resulting corporation rather than the survivor.

[3]  The statute is poorly written and should read “the vote of at least 2/3 of the members.”  The drafters did not intend to require a vote of exactly 2/3 of the members but a minimum vote of 2/3 for adoption.

(Now’s the time to update the Investor Questionnaire, if you haven’t already.)

            The Securities and Exchange Commission adopted amendments “to more effectively identify institutional and individual investors that have the knowledge and expertise to participate in private capital markets.”  The amendments were adopted on August 26, 2020 and became effective on December 8, 2020.  The following discusses the expansion of the term “accredited investor” as it applies to individuals.

            Prior to the amendment, the criteria for determining which individuals could be considered accredited investors focused solely on the net worth or income of those persons or in some cases, their spouses.  The amendments expand the list to include the holders of certain professional designations and others, without regard to their net worth or income.

1.  Individuals holding any of the following designations, in good standing.

            a.         Licensed General Securities Representative (Series 7).

            b.         Licensed Investment Adviser Representative (Series 65)

            c.          Licensed Private Securities Offering Representative (Series 82).

            Note that the rule requires that the individuals must be in “good standing” to be accredited investors.  With respect to “good standing,” the SEC gives the example, “a person seeking accredited investor status by passing the Series 65 exam would also need to be licensed as an investment adviser representative in her state and would need to comply with all state-specific licensing requirements (e. g. paying dues, etc.).”

2.         Individuals who are “knowledgeable employees” of certain private fund issuers (i. e. some hedge funds or private equity funds) may invest in that fund.  A “Private fund issuer” is an issuer that would be an Investment Company, but for an exclusion in either § 3(c) (1) or § 3(c) (7) of the Investment Company Act.   “Knowledgeable employees” are defined in SEC Rule 3c-5 (a) (4) of the Investment Company Act and include directors and officers of the private fund and certain employees.   The SEC cautions the individual “qualifying as an accredited investor based on her status as a knowledgeable employee is an accredited investor only for offerings by the private fund and other private funds managed by their employer.  She cannot use her status as a knowledgeable employee to  qualify as an accredited investor in other offerings.”

3. An individual may qualify as an accredited investor based upon the individual’s status as a family client of a family office. 

            The individual investor must:

a.         Come within the definition of “family client” in Rule 202 (a) (11) (G)-1 under the Investment Advisers Act,

b.         Be a “family client” of a family office that itself qualifies as an accredited investor, and

c.          Have that investment be directed “by a person who has such knowledge and experience in financial and business matters that such family office is capable of evaluating the merits and risks of the projected investment.

            In addition to the foregoing the SEC modernized the definition or spouse for 

the purpose of computing joint net worth or income test when making a determination of accredited investor.  The new Rule adds “or spousal equivalent” to the term spouse in the Rule.  Spousal equivalent is defined as “a cohabitant occupying a relationship equivalent to that of a spouse.

In the 2020 case, NTV Management, Inc. v. Lightship Global Ventures, LLC,[1]  the Massachusetts Supreme Judicial Court dealt with a financial intermediary (“NTV”) that entered into an agreement with a client (“Client”) to “source capital and structure financing transactions from agreed upon target investors and/or lenders.”  NTV expected “to introduce [to the Client] and facilitate investment from third party sources . . .to finance all level of the transactions (i. e. both equity and debt).”  If  NTV “sourced capital,” it would reap a success fee.  NTV, in fact, did not “source capital” for the Client, but sued the Client for, among other things, collection of an advisory fee under the contract.  A jury found for NTV, but the trial judge vacated the verdict and found for the Client, because NTV had not registered as a “broker” under the federal Securities Exchange Act  or as a “broker-dealer” under the Massachusetts securities’ law, thus rendering, under both statutes, the contract void and unenforceable.

The Supreme Judicial Court reversed and found the contract enforceable.  It agreed that both the state and federal securities laws make it unlawful for any person to transact business as a broker-dealer unless registered and that contracts in violation thereof were unenforceable.  The Court then defined a broker-dealer as one who “effects” transactions in “securities.”  The Court did not focus on the business of NTV but on the contract between NTV and the Client.  The Court held that two issues determine whether a contract requires registration.  First, does the contract require that the transactions “effected” be in securities?  Next, does the contract require a person to “effect” such transaction?  The Court did not consider the second issue  because it held that the contract “on its face, did not require NTV to ‘effect’ transactions in ‘securities’” because the financing contemplated by the contract could have been effected with transactions other than securities. The Court distinguished a 10 year old Appeals Court decision[2] and also observed an “evolution” of  “bespoke” financial transactions at the federal level, noting, with apparent approval, M & A Brokers,[3] a 2014 SEC no action letter that stated that, if certain steps were taken, the SEC would not recommend enforcement action against business brokers who may engage in an occasional stock sale.

There are several take-aways from this case.

  1. One question relates to the scope of the decision.  The case involved a contract between NTV and its Client which involved an advisory fee not to the success fee contemplated which may have involved a “security.”  What would have happened if NTV was successful in placing a “security” and was due a success fee  and sued, not for the advisory fee, but for the success fee?  I would guess that the a Massachusetts court would uphold the contract, following Justice Lenk’s rationale, and focus on the contract (and not the intermediary’s business) assuming the same contractual provisions as in NTV’s contract.
  2. The case involved a state court construing a state and a federal statute. Would a federal court construe the federal statute in the same way as Justice Lenk?  Would another state court in another jurisdiction?
  3. A business-broker is in an analogous position with NTV, only it may be dealing with “securities” in the context of an acquisition involving a sale of stock to the buyer. With the Court’s favorable reference to M & A Brokers, it is likely that a Massachusetts court would apply its ruling to a business broker’s contract for fees.   Must the contract have language consistent with NTV’s contract with the Client? (See fn. 3)
  4. The M & A Brokers no action letter, like all no action letters does not state the SEC’s position but rather states, “without necessarily agreeing with [the requester’s] analysis [the SEC] would not recommend enforcement action” on a set of facts. The M & A Brokers no action letter, however, addresses the general situation of the business broker and would appear to have greater application than the typical no action letter addressed to a specific set of facts and for a particular client.
  5. The M & A Brokers letter notes therein, that to avoid SEC enforcement action when avoiding registration, 10 specific requirements were set forth.  In my practice, I have noted some apparent non-compliance with those requirements, at or in connection with the closing of a stock purchase acquisition, probably through oversight.  I would urge financial intermediaries or investment bankers/business brokers to review their practices in light of NTV’s contract and M & A Brokers.
  6. The Massachusetts securities’ act makes it “unlawful for any person to transact business . . .as a broker-dealer . . .unless. . . registered.”  (emphasis supplied). The federal act has a similar provision.   The Court’s focus on the contract involved rather than the business of NTV leaves open the possibility (however remote) that an intermediary in NTV’s position (or less likely a business broker) could result, depending on the business of the intermediary, in liability for a violation under both statutes, even though a contract with a client might be enforceable.


            Although the NTV and M & A Brokers case appears to go a long way toward permitting financial intermediaries or investment bankers/business brokers avoid the pain of registration, there are still risks.  These risks arise from non-compliance with NTV and M & A Brokers, and also because there may be instances where the SEC or a court may not apply the rationale of NTV and M & A Brokers.

[1]                 484 Mass. 235 (2020).

[2]                 I was a little puzzled why Justice Lenk did not overrule or decline to follow her earlier decision, as an Appeals Court Justice, in Indus Partners, LLC v. Intelligroup, Inc., 77 Mass. App. Ct. 793 (2010).  With respect to NTV’s contract, she stated that “it is undisputed that the contract [in Indus] required a transaction in securities.  .  .”  NTV Management, Inc. v. Lightship Global Ventures, Inc.,  494 Mass at 448.   The contract in Indus does not require a transaction in securities but in fact states:

“The Agreement provided in relevant part that Indus was to consult with and advise Intelligroup regarding “a possible Transaction … involving [Intelligroup] and any other party.” “Transaction” was defined to include, among other things, the “sale or other transfer, directly or indirectly, of all or any portion of the assets or securities, (whether outstanding or newly issued) of [Intelligroup].”Indus Partners, LLC v. Intelligroup, Inc., 77 Mass. App. Ct. 793, 794, fn,1. (Emphasis supplied)

Clarification would have been helpful to business brokers and like intermediaries in drafting engagement letters.

[3]                 SEC No Action Letter M & A Brokers, January 31, 2014, revised February 4, 2014.

I am returning to my long neglected blog and starting a series about legal issues encountered in forming a new business.

I will start with a post about concerns the founder of a new business should have before leaving his or her job and continue posts through one about the financing of the new business. I will place emphasis on formation of a technology driven start up.

What then are the issues the new company’s founder must consider prior to quitting his or her job?

  1. The founder, no doubt, had to sign or became subject to a number of agreements with his or her current employer. These agreements may be contained in a single contract, separate contracts or in an “employee handbook.”  Wherever contained, they must be carefully reviewed.
  2. Non Disclosure Agreements—NDAs. The founder probably signed a non disclosure agreement with the employer.  Such agreements generally prohibit the use or disclosure of the employer’s confidential information.  The founder must be careful not to have even the appearance of appropriating confidential information because, if in fact there is evidence of misappropriation, litigation by the employer can move to quickly shut down the new enterprise.  NDAs take various forms.  In certain agreements, making a determination as to what, in fact, is confidential information may be difficult.
  3. Misappropriation of Trade Secrets. Wholly apart from the foregoing agreements, the employer may get injunctive relief and/or damages for “misappropriation of trade secrets.”   To prevail, the employer must show that there is in fact a trade secret, that the employer took reasonable steps to preserve it and that the employee used improper means in breach of a confidential relationship to get and/or use the trade secret.  In addition, there may be criminal prosecution for the misappropriation of trade secrets.
  4. Non-Competition Agreements. Many employment agreements contain non-competition agreements. Non-competition agreements are currentlyenforceable if they are necessary to protect the “legitimate business interests” of the employer and if they are reasonable in geographic scope and in time of enforcement.  Courts have held that non-competition agreements that were designed simply to protect the employer from ordinary competition did not serve the aforesaid “legitimate business purpose,” and are thus unenforceable.  I say these agreements are now “currently enforceable” because there is pending legislation to drastically curtail the effect of non competition agreements.  Attempts, however, by the Massachusetts legislature to limit the scope of non competition agreements[1]have met with no success (see my posts of August 2, 2016, June 15, 2015, September 14, 2013 and December 14, 2011, which discuss the merits of some of those proposals). In the event the founder is subject to a non competition agreement, he or she must carefully analyze the agreement to determine whether the founder and the new business are subject to its prohibitions and, if so, whether the employer can enforce the agreement.
  5. Non Solicitation Agreements. The founder may also be subject to agreements preventing solicitation of customers, vendors or employees, etc. of the employer.  Care must be taken to avoid running afoul of these agreements when staffing or ramping up a new business.
  6. Assignment of Invention Agreements. Many employment agreements contain a provision requiring assignment to the employer of know how and inventions.  Some of these agreements may even provide that employees must disclose futureinventions developed for a certain time after termination of employment.  Any know how, invention or process, etc. to be used in the new business should be carefully examined by an IP lawyer to determine whether such an agreement will be breached.  This will be crucial to the success of future funding of the business because ownership and protection of the new company’s intellectual property will be carefully scrutinized by any funding source.
  7. Prohibition of Outside Activities Agreements.Certain agreements prohibit work on outside business activities during business hours, or prohibit outside activities, period.   If it is determined that such an agreement is effective, the founder must find a way to deal with this prohibition.  Even if no such agreement exists, the founder should be careful.  Work should be undertaken on a new business while in the employ of another only after seeking the advice of an attorney.
  8. Other Restrictive Agreements. Employers are creative when attempting to protect confidential information and trade secrets and, of course, when attempting to stifle competition.   The types of devices are limitless and an employer’s otherwise innocuous clause or agreement may give rise to serious consequences in the new enterprise.  Care and thoroughness pay off here.
  9. Many employment agreements require return of the employer’s property. Prior to the founder’s exit he or she should carefully examine files, plans, equipment, hard drives and other retention devices for the employer’s property.  Even an inadvertent retention, if discovered (and it will be!), may result to the founder’s detriment in a law suit by the former employer.
  10. Finally, on exit from the employer, the exit or severance documents should be carefully looked at to make sure that the employer did not add additional agreements that might affect the founder’s new business. A severance payment, for example, may be linked to a non competition or non solicitation agreement.  Prior to leaving, the founder of the new business should also attempt to maximize his or her benefits, such as vacation time, sick time, stock options and the like.

Plan carefully your exit.


[1]          The current bill couples the limitation on the scope of non competition agreements with the Uniform Trade Secrets Act.

In Baker v. Wilmer Cutler Pickering Hale and Dorr LLP,[1] the Massachusetts Appeals Court held that an attorney for a limited liability company owed a fiduciary duty to its minority members. I believe it’s clear that this ruling would apply to corporations and its shareholders

In Schaefer v. Cohen, Rosenthal, Price, Mirkin, Jennings & Berg, P. C[2]. the Supreme Judicial Court, in dictum, stated that there could be a duty of corporate counsel to the minority shareholders.   The Court stated:

[T]here is logic in the proposition that, even though counsel for a closely held corporation does not by virtue of that relationship alone have an attorney-client relationship with the individual shareholders, counsel nevertheless owes each shareholder a fiduciary duty . . . Just as an attorney for a partnership owes a fiduciary duty to each partner, it is fairly arguable that an attorney for a close corporation owes a fiduciary duty to the individual shareholders.

In Baker, the Appeals Court adopted this rationale and stated whether such a fiduciary relationship to, in the case of individual members of a limited liability company, exists, is “largely a question of fact.” Reversing the granting of a motion to dismiss, the Appeals Court found that when the majority members secretly retained the attorneys to represent the company, then the attorneys worked to assist the majority to extinguish rights of the minority, a claim against the attorneys could exist. The Court held that the complaint stated a claim for the attorneys’ breach of fiduciary duty, as well as a claim for aiding and abetting such breach, conspiracy and violation of M. G. L. c. 93A.

As a practical matter this case may prove troubling for lawyers who represent close corporations and who assist in action at the request of the controlling person or group. While the facts in that case are more than somewhat extreme and the case was positioned upon a motion to dismiss, until some flesh is put on the bones of this case, the lawyer acts at his or her peril. The ruling is salutary, however, and a real benefit to improving corporate governance.

I represent primarily close corporations. I tell its shareholders that I represent the company and that when I believe that a shareholder has an interest adverse to another, I explicitly note the conflict and suggest that the adversely affected shareholder obtain counsel.   This has always been good practice and the Baker decision will only cause me to put the foregoing in writing.   I will also be more insistent on requesting potentially adversely affected shareholders to retain separate counsel.

[1]           91 Mass. App. Ct. 835 (2017).

[2]           405 Mass. 506, 541 N. E. 2d 997 (1989).

Mass. Gen. Laws c. 149, §148 provides that a discharged employee must be paid “in full” his or her wages on the date of discharge. That section also provides that the term “wages” includes “any holiday or vacation payments due an employee under an oral or written agreement.” Thus an employer must pay for accrued vacation time on the date of discharge, along with all other wages earned to that date.  So, if you do not have a clear policy as to how vacation accrues, how much vacation pay do you give an employee on that date? What if you have no defined policy—you merely tell the employee he or she has, say, two weeks vacation?

In the event of no defined policy (which is usually the result of an oversight), I have always counseled the practice of giving the entire year’s vacation time (less any time taken) pay on discharge.   A client of mine wanted a detailed memo about discharge policy and, while researching the subject, I came across the following advisory.   The Massachusetts Attorney General’s Advisory 99/1 Vacation Policies states:

             “Employers can protect themselves by adopting clear and unambiguous vacation                    policies . . .A policy that provides for employees to earn a given amount of vacation “a year, “ “per year” . . . is not clear. Where an employer’s policy is ambiguous, the actual time earned by the employee will be pro-rated according to the time period . . . in which the employee actually works. For example, if an employee is to receive twelve vacation days “in a year,” and the employee voluntarily or involuntarily terminates his or her employment after ten months, the employee would be entitled to ten vacation days or one day per month worked. Discharge prior to one year without pro rata payment constitutes failure to pay wages earned under Section 148.” (emphasis mine)

            Does the above mean that vacation pay may be apportioned if no policy is stated? One employment lawyer with whom I spoke and a person at the Attorney General’s office suggested that the pro ration in the AG’s Vacation Policy above only applied if the employer’s policy was ambiguous.   There is a difference between an ambiguous policy and no stated policy. The thinking was that “no accrual policy” was not ambiguous—it was clear; the entire vacation time accrues at the beginning of the year.

If you want to pro rate vacation pay on discharge, make your vacation policy known (post it or include it in a manual or in a hiring letter) and clear.


To the Editors:

I have been a subscriber of The New York Times off and on for 50 years; a reader for longer.   Though The Times was editorially leftish, I particularly appreciated its independent journalism.   Sadly, those days have passed and the opinion pages appear on page one and the editorial and op ed. pages literally scream with political favoritism for Mrs. Clinton. As a supporter of Sen. Sanders I wrote, a couple of months ago, regarding an article appearing on page 1 but which I believed belonged on the editorial or op-ed page. The “news” article supported Mrs. Clinton and misrepresented Sen. Sanders’s positions. I was disappointed in the paper and made my feelings known (my letter was not printed).

As a progressive, I cannot support Mr. Trump. Recently, The Times, in both of its news and op ed. pieces has taken to misquoting Mr. Trump, in an apparent effort to favor Mrs. Clinton. I find this offensive. One would hope that a well-informed citizenry could make up its mind as to Mr. Trump’s or Mrs. Clinton’s qualifications without a “push” from what purports to be the newspaper of record.

The Times has reached a new low; it had been my paper of record but is no longer. Perhaps in the days of on line journalism, it can’t afford first-rate reporters or editors (or for that matter, in its on line versions, spell and grammar checkers).

I’m disappointed.

Please cancel my subscription.


Edmund Polubinski, Jr.

Boston, Massachusetts