MAZ Partners LP v. Shear

Filing

OPINION issued by Juan R. Torruella, Circuit Judge; Bruce M. Selya, Appellate Judge and Sandra L. Lynch, Appellate Judge. Published. [17-1821, 17-1904]

Case: 17-1821

Document: 00117309325

Page: 1

Date Filed: 07/02/2018

Entry ID: 6181179

United States Court of Appeals
For the First Circuit
Nos. 17-1821, 17-1904
IN RE:

PHC, INC. SHAREHOLDER LITIGATION

MAZ PARTNERS LP, on behalf of itself and
all others similarly situated,
Plaintiff, Appellee/Cross-Appellant,
v.
BRUCE A. SHEAR,
Defendant, Appellant/Cross-Appellee.

APPEALS FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Patti B. Saris, U.S. District Judge]

Before
Torruella, Selya and Lynch,
Circuit Judges.

James H. Hulme, with whom Matthew Wright, Nadia A. Patel,
Arent Fox LLP, Richard M. Zielinski, Leonard H. Freiman, and
Goulston & Storrs, were on brief, for defendant.
Chet B. Waldman, with whom Jeffrey W. Chambers, Patricia I.
Avery, Adam J. Blander, Wolf Popper LLP, Norman Berman,
Nathaniel L. Orenstein, and Berman Tabacco were on brief, for
plaintiff.

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July 2, 2018

Entry ID: 6181179

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SELYA, Circuit Judge.

Date Filed: 07/02/2018

Entry ID: 6181179

The briefs in this case read like

a law school examination covering a curriculum that ranges from
corporate law to the law of equitable remedies.

The questions

presented are intricate, entangled, and in some instances novel.
The most important of them implicate Massachusetts law and include
whether a non-majority shareholder who also serves as a director
can,

under

certain

circumstances,

be

deemed

a

controlling

shareholder; what effect, if any, shareholder ratification may
have with respect to a self-interested transaction; and whether —
in the absence of economic loss — equitable disgorgement can be
ordered as a remedy for a breach of fiduciary duty.

Concluding,

as we do, that the able district judge handled the profusion of
issues appropriately, we leave the parties where we found them,
affirming

both

the

district

court's

multi-million-dollar

disgorgement order in favor of the plaintiff class and the jury's
take-nothing verdict in the favor of the defendant.

The tale

follows.
I. BACKGROUND
We limn the facts and travel of the case, reserving some
details for our subsequent discussions of specific issues.

For

efficiency's sake, we assume the reader's familiarity with our
opinion regarding an earlier phase of this litigation.

See In re

PHC, Inc. S'holder Litig. (MAZ I), 762 F.3d 138 (1st Cir. 2014).

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Until the fall of 2011, PHC, Inc. (PHC) functioned as a
publicly traded corporation focusing on behavioral healthcare.
Defendant Bruce A. Shear was a co-founder of PHC, serving as its
board chairman and chief executive officer.
organized

under

the

laws

of

Massachusetts,

structure featured two classes of stock:
B shares.

The company was
and

its

capital

Class A shares and Class

Class A shares were publicly traded and were entitled

to one vote per share.

Those shares, collectively, had the right

to elect two out of six board members.

Class B shares were not

publicly traded and were entitled to five votes per share.

Those

shares, collectively, had the right to elect the remaining four
board

members.

At

the

times

relevant

hereto,

Shear

held

approximately 8% of the Class A shares and approximately 93% of
the Class B shares.

Given the proportion of Class B shares owned

by Shear, he had the power, practically speaking, to name a
majority of the board of directors (four out of six board members).
After PHC's stock price remained relatively flat for a
protracted period of time, the PHC board grew restless and began
to mull a variety of strategic transactions designed to enhance
shareholder equity. To this end, Shear initiated discussions about
a possible merger with Acadia Healthcare, Inc. (Acadia) in early
2011.
de

Based on conversations with Shear — who was acting as the

facto

lead

negotiator

on

behalf

of

PHC

—

Acadia's

chief

executive officer transmitted a letter of intent, dated March 22,

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2011, to the PHC board.

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The letter delineated the material terms

of a proposed merger.
The merger proposal contemplated that Acadia would be
the surviving company.

PHC shareholders would own 22.5% of the

merged entity and Acadia shareholders would own the remainder.

To

achieve this ratio, holders of both Class A and Class B shares of
PHC would receive one-quarter share of the stock of the merged
entity in exchange for each PHC share, and the difference between
the two classes of PHC stock would evaporate.

In order to

compensate Class B shareholders for relinquishing their enhanced
voting rights, they would receive an additional $5,000,000 as a
premium.

Shear's ownership of approximately 93% of the Class B

shares put him in line to receive most of this premium — roughly
$4,700,000.
The letter of intent spelled out a variety of other
salient features of the proposed transaction (including Acadia's
plan to pay a special dividend to its own shareholders so as to
achieve the desired equity split).

Under another provision of the

letter of intent, Shear would get to select two directors of the
merged

entity

—

and

those

two

directors

would

be

shareholders' sole designees to the new Acadia board.

the

PHC

Finally,

the letter of intent contained a prohibition against shopping
Acadia's offer to other potential merger partners and specified

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that a termination fee would be payable if PHC backed out of the
merger.
Following receipt of Acadia's letter of intent, Shear
asked

William

Grieco

(a

PHC

director)

shareholders' principal merger negotiator.

to

serve

as

the

PHC

Despite naming Grieco

as the point man, Shear continued to play a leading role in
negotiations.

Shear's choice of Grieco was not mere happenstance.

The two men had enjoyed a lengthy professional relationship, and
Shear had previously named Grieco to the PHC board.

Moreover,

Shear had arranged that, once the merger was consummated, he and
Grieco would be the two PHC designees on the new Acadia board.
As part of his new role as principal negotiator, Grieco
assumed

responsibility

for

selecting

a

financial

advisor

to

analyze the merger and to handle stockholder communications.

To

that end, the PHC board retained Stout Risius Ross, Inc. (SRR) —
a firm that proceeded to evaluate the proposed merger and provide
a fairness opinion.

SRR reported that the aggregate consideration

offered to Class A and Class B shareholders, as a combined group,
was fair.

Separately, it concluded that the consideration offered

to the Class A shareholders was fair.

SRR was not asked to analyze

(and did not analyze) whether the $5,000,000 Class B premium was
fair to the Class A shareholders.

The PHC board considered the

transaction in light of SRR's truncated fairness opinion and voted
— with Shear abstaining — to recommend the proposed merger to PHC's

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shareholders.

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None of the five directors who voted for this

recommendation owned any Class B shares.
On

May

23,

2011,

Acadia

and

PHC

signed

agreement, contingent upon shareholder approval.
of

a

shareholder

vote,

PHC

disseminated

a

a

merger

In anticipation
proxy

chronicling the details of the anticipated merger.

statement

Among other

things, the proxy statement disclosed the $5,000,000 premium to be
paid to the Class B shareholders, noting that Shear would receive
the bulk of that payment.

It also disclosed that the PHC board

had opted not to form an independent committee to evaluate the
merger proposal. Finally, it disclosed that Shear and Grieco would
serve as directors of Acadia following the merger.

SRR's fairness

opinion was distributed to the shareholders along with the proxy
statement.
For the merger to be approved, at least a two-thirds
majority of Class A shares, a two-thirds majority of Class B
shares, and a two-thirds majority of Class A and Class B shares
combined

had

to

vote

in

favor.

shareholders approved the merger:

On

October

26,

2011,

PHC

88.7% of the Class A shares and

99.9% of the Class B shares voted in the affirmative. MAZ Partners
LP (MAZ), the owner of over 100,000 Class A shares, voted its
shares against the proposed merger.

On November 1, the merger was

consummated, resulting in the conversion of all PHC stock into
Acadia stock.

The market reacted favorably to the merger:

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Acadia

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stock began a long upward climb.

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The per-share price of Acadia

stock rose from $8 at the time of the merger to over $80 in less
than four years.

MAZ did not stay aboard but, rather, sold all of

its Acadia stock in January of 2012 (at a profit).
Well before the merger took effect, MAZ repaired to a
Massachusetts state court and sued the PHC directors, seeking to
block the merger.

Invoking diversity jurisdiction, the defendants

removed the action to the federal district court.
§§ 1332(a), 1441(b).
the transaction:

See 28 U.S.C.

MAZ was unsuccessful in attempting to halt

the district court refused to enjoin the merger.

Nevertheless, MAZ continued to press its breach-of-fiduciary-duty
claims, seeking both a remedy at law (money damages) and equitable
relief.
In due course, the district court (O'Toole, J.) granted
summary judgment in favor of the defendants.

MAZ appealed and

succeeded in snatching a partial victory from the jaws of defeat:
it persuaded a panel of this court to vacate the summary judgment.
See MAZ I, 762 F.3d at 145.
Chief Judge Saris.

On remand, the case was reassigned to

See D. Mass. R. 40.1(k).

After some further

skirmishing, the district court certified a class of former Class
A shareholders who had voted against the merger, abstained from
voting, or failed to vote.

MAZ was designated as the class

representative and alleged that the PHC directors, jointly and
severally, had breached their fiduciary duties by orchestrating

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the merger transaction through an unfair process and, of particular
pertinence here, by facilitating the payment of the (allegedly
inflated) $5,000,000 premium to the Class B shareholders.
The legal claims were tried to a jury (the parties
reserving the resolution of the equitable claims).

During the

course of the trial, the Massachusetts Supreme Judicial Court (SJC)
decided International Brotherhood of Electrical Workers Local No.
129 Benefit Fund v. Tucci, 70 N.E.3d 918 (Mass. 2017).

Premised

on their reading of this decision, the defendants moved for
judgment as a matter of law, see Fed. R. Civ. P. 50(a), arguing,
inter alia, that MAZ should have brought its claims derivatively.
The district court granted this motion in part and entered judgment
in favor of all the directors save Shear.

As to the latter, the

court refused to enter judgment as a matter of law, ruling that
there was a jury question as to whether Shear was a controlling
shareholder and, thus, came within one of the Tucci exceptions.
Accordingly, the court submitted the case to the jury on the legal
claims asserted against Shear.
The jury made a series of special findings.
Civ. P. 49.

See Fed. R.

It found, inter alia, that Shear controlled the

board's decision to enter into the merger and that the process
undertaken to negotiate the merger was not entirely fair to the
Class A shareholders.

The jury went on to find, though, that the

proof was insufficient to establish that the Class A shareholders

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had suffered any economic loss.

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Predicated on this finding, the

jury determined that the plaintiff class was not entitled to money
damages and returned a take-nothing verdict.
After the jury returned its verdict, MAZ (on behalf of
the plaintiff class) moved for equitable relief.

Specifically,

MAZ sought disgorgement of the Class B premium based largely on
the jury's findings that Shear was not only a director but also a
controlling shareholder, that he therefore owed the shareholders
a fiduciary duty, and that he had breached that duty by arranging
the merger through a process that was not entirely fair to the
Class A shareholders.

Following a hearing, the district court

agreed with MAZ, adopted the relevant jury findings, ruled that
Shear had breached his fiduciary duty, and determined that the
class was entitled to equitable relief.

See MAZ Partners LP v.

Shear (MAZ II), 265 F. Supp. 3d 109, 118-21 (D. Mass. 2017).
Concluding

that

disgorgement

was

an

available

and

appropriate equitable remedy, the court proceeded to make a series
of calculations.

First, it determined that $1,820,000 of the

$5,000,000 Class B premium represented fair compensation for the
enhanced voting rights carried by the Class B shares.
119.

See id. at

The remainder of the Class B premium ($3,180,000), the court

stated, was unjustified.

See id.

Next, the court determined that

— based on Shear's percentage ownership of the Class B shares —
"Shear's pro rata portion of the unjustified portion of the Class

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B premium" was "93.22% of $3.18 million, or $2,964,396."
120.

Id. at

Finally, the court ordered that Shear disgorge this amount,

and it awarded those funds to the plaintiff class, together with
interest.

See id.
On a parallel track, MAZ challenged the jury verdict and

moved for a new trial with respect to the class's legal claims.
In support, MAZ contended that the district court had permitted
the introduction of unduly prejudicial evidence during the trial.
The district court denied this motion.
timely appeals ensued:

See id. at 121-22.

These

Shear appeals the disgorgement order, and

MAZ appeals the denial of its motion for a new trial.
II. SHEAR'S APPEAL
Shear attacks the disgorgement order on several fronts.
His threshold argument is that MAZ's suit is infirm because it
should have been brought derivatively, not directly.

Next, he

argues that the district court applied the wrong standards in
adjudicating MAZ's claim. Finally, he argues that the disgorgement
order was beyond the district court's authority and, even if it
was not, comprised an abuse of discretion.

We deal with these

arguments sequentially.1

1

Shear has taken a blunderbuss approach and proffered a host
of other arguments. We have considered these other arguments, but
reject them out of hand as patently meritless, insufficiently
developed, or both.

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A. Direct and Derivative Actions.
The first skirmish centers on Shear's asseveration that
this suit should have been brought derivatively, not directly.
The distinction is critically important:

shareholders can bring

a direct claim for their own benefit, but a derivative claim
belongs to the corporation.

See Tucci, 70 N.E.3d at 923.

This

distinction holds even though the law "permits an individual
shareholder to bring 'suit to enforce a corporate cause of action
against officers, directors, and third parties'" in the form of a
derivative action.

Kamen v. Kemper Fin. Servs., Inc., 500 U.S.

90, 95 (1991) (emphasis omitted) (quoting Ross v. Bernhard, 396
U.S. 531, 534 (1970)).

Derivative suits are subject to special

procedural guardrails designed to balance the legitimate exercise
of business judgment by corporate decisionmakers, on the one hand,
with the oversight function of corporate shareholders, on the other
hand.

A claim that is brought directly when it should have been

brought derivatively is not a claim at all and, hence, is subject
to dismissal.
In

See Tucci, 70 N.E.3d at 927.
diversity

jurisdiction,

substantive rules of decision.

state

law

supplies

the

See Erie R.R. Co. v. Tompkins, 304

U.S. 64, 78 (1938). Questions of corporate law — including whether
a claim is properly classified as derivative or direct — are
generally substantive and, thus, governed by state law.

See

Gasperini v. Ctr. for Humanities, 518 U.S. 415, 427 (1996); Kamen,

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500 U.S. at 99.

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Consistent with PHC's status as a Massachusetts

corporation, the parties agree that Massachusetts law controls in
this case.
The starting point for our inquiry is, of course, Tucci.
There, the SJC clearly articulated, for the first time, the
framework for determining which causes of action must be brought
derivatively and which can be brought directly.2

The crux of the

inquiry is "whether the harm [that shareholders] claim to have
suffered resulted from a breach of duty owed directly to them, or
whether the harm claimed was derivative of a breach of duty owed
to

the

corporation."

director's

fiduciary

Tucci,
duties

70

are

N.E.3d

at

generally

923.
owed

Because
only

to

a

the

corporation, any suit to enforce those duties ordinarily must be
brought as a derivative action.

See id. at 925-27.

We say "ordinarily" because the Tucci court identified
at least two situations in which a director's fiduciary duties are
owed to shareholders and can be enforced directly, rather than
derivatively.

The

first

of

these

exceptions

involves

close

corporations, see id. at 926, and is plainly inapposite (PHC stock,
after all, was publicly traded, and PHC can by no stretch of even
the most lively imagination be considered a close corporation).

2

MAZ argues that Tucci does not apply since the injury it
alleges is unique to a particular class of shareholders. We do
not reach this argument because — as we explain below — MAZ
prevails on a less exotic ground.

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The second exception hits closer to home:

Entry ID: 6181179

it involves situations

in which a "controlling shareholder who also is a director proposes
and

implements

a

self-interested

transaction

detriment of minority shareholders."

Id.

that

is

to

the

The case at hand

requires us to explore the parameters of this exception and decide
whether Shear fits within it.
To begin, Shear does not contest the self-interested
nature of the corporate transaction that gave rise to the Class B
premium.

Nor can he gainsay that the jury made a special finding

of detriment:

the merger was not entirely fair to the Class A

shareholders.

The question, then, reduces to whether the district

court supportably determined that Shear possessed a sufficient
degree of control to be considered a controlling shareholder.3
Answering

this

question

matters of first impression:
attributes

that

are

requires

us

to

delve

into

Tucci did not elaborate on the

necessary

to

distinguish

shareholder from a non-controlling shareholder.

a

controlling

Faced with terra

incognito, we must "endeavor to predict how [the state's highest]
court would likely decide the question."

Butler v. Balolia, 736

F.3d 609, 612-13 (1st Cir. 2013). We are mindful that, when making
such an informed prophecy, "[a] federal court should consult the

3

Unless otherwise specifically indicated or when describing
Delaware cases, we use the term "controlling shareholder"
throughout this opinion to mean a controlling shareholder who is
also a director.

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types of sources that the state's highest court would be apt to
consult, including analogous opinions of that court, decisions of
lower

courts

in

the

state,

precedents

and

trends

in

other

jurisdictions, learned treatises, and considerations of sound
public policy."

Id. at 613.

At the outset, we reject out of hand Shear's insistence
upon a bright-line rule that only majority shareholders can be
controlling

shareholders

under

Massachusetts

little to support such a proposition.

law.

He

offers

And while Shear is correct

that the SJC sometimes uses terminology reminiscent of the majority
shareholder/minority shareholder dichotomy, it has done so only in
the abstract or in cases in which those terms accurately describe
the relationship between the relevant parties.

See, e.g., Tucci,

70 N.E.3d at 923-27; Coggins v. New England Patriots Football Club,
Inc., 492 N.E.2d 1112, 1119 (Mass. 1986).

The SJC has given no

meaningful indication that the employment of such language was
meant to be a guiding principle for determining "controller" status
in the mine-run of future cases.
A contrary hypothesis is more compelling.

The SJC's use

of the adjective "controlling" to modify "shareholder" strongly
suggests a desire to encompass a category of shareholders broader
than majority shareholders.

If "controlling shareholder" meant no

more than "majority shareholder," there would be no reason at all
for the SJC to resort to the "controlling shareholder" parlance.

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Cf. United States v. Thomas, 429 F.3d 282, 286 (D.C. Cir. 2005)
(explaining that a court's obvious choice to use one phrase over
another in authoring a decision should be given interpretive weight
in applying that decision).
Another clue points in the same direction.

Although the

SJC has not opined as to who might qualify as a controlling nonmajority shareholder, it has expressed a concern for the protection
of

minority

shareholders

when

influence or in character."

a

director

"is

dominating

Coggins, 492 N.E.2d at 1118 (quoting

Lazenby v. Henderson, 135 N.E. 302, 304 (Mass. 1922)).
concern

would

not

be

in

palliated

by

restricting

Such a

controlling

shareholder status to majority shareholders.
The sockdolager, we think, is that Massachusetts courts
often look to Delaware law in analyzing corporate issues.

See,

e.g., Brigade Leveraged Capital Structures Fund Ltd. v. PIMCO
Income Strategy Fund, 995 N.E.2d 64, 72 (Mass. 2013); Billings v.
GTFM, LLC, 867 N.E.2d 714, 722 & n.24 (Mass. 2007); Piemonte v.
New

Bos.

Garden

Corp.,

387

N.E.2d

1145,

1150

(Mass.

1979).

Delaware law has long been hospitable to interpretations of the
term

"controlling

shareholders.

shareholder"

that

include

non-majority

In what is generally regarded as a landmark case in

the area of corporate governance, the Delaware Supreme Court
recognized that although a non-majority shareholder usually will
not be deemed a controlling shareholder, there are exceptions.

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See Kahn v. Lynch Commc'n Sys., Inc., 638 A.2d 1110, 1114 (Del.
1994).

Such

a

status

can

be

established

by

showing,

say,

"domination [of the corporation] by a minority shareholder through
actual control of corporat[e] conduct."

Id. (quoting Citron v.

Fairchild Camera & Instrument Corp., 569 A.2d 53, 70 (Del. 1989));
see Weinstein Enters., Inc. v. Orloff, 870 A.2d 499, 507 (Del.
2005).

Ultimately,

"the

analysis

of

whether

a

controlling

stockholder exists must take into account whether the stockholder,
as a practical matter, possesses a combination of stock voting
power and managerial authority that enables him to control the
corporation, if he so wishes."

In re Cysive, Inc. S'holders

Litig., 836 A.2d 531, 553 (Del. Ch. 2003).

We conclude that the

SJC would follow such a rule and would hold that a non-majority
shareholder who dominates a corporation through actual control of
corporate conduct may be deemed a controlling shareholder.

Cf.

Butler, 736 F.3d at 612-13 (explaining that "precedents and trends
in

other

jurisdictions"

appropriately

may

be

consulted

in

determining what a state's highest court might rule).
This gets the grease from the goose. The record contains
ample evidence to ground the conclusion that Shear dominated PHC
and had pervasive control over its affairs.

As the co-founder,

board chairman, and chief executive officer, Shear was a ubiquitous
force within the company.
control

in

filings

Indeed, PHC itself acknowledged his

submitted

to

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the

Securities

and

Exchange

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Commission (SEC). For example, in a 2011 filing, PHC stated (under
the heading "Management Risks") that "Bruce A. Shear is in control
of the Company . . . . [He] can establish, maintain and control
business policy and decisions by virtue of his control of the
election of the majority of the members of the board of directors."
Such representations are entitled to weight in determining whether
an individual is a controlling shareholder.

See In re Primedia

Inc. Derivative Litig., 910 A.2d 248, 258 (Del. Ch. 2006).
While the percentage of the corporate stock that an
individual owns is surely a relevant integer in the calculus of
control, a party who dominates a corporation and has actual control
over it should not be allowed to hide behind mere arithmetic.
Shear, however, would have us place more weight on raw numbers.
He implores us to accord decretory significance to ownership
percentages, pointing out that his stock accounted for only 20% or
so of the overall voting power.

But this is too myopic a view:

there is no formulaic rule regarding what percentage of outstanding
shares

is

sufficient

to

render

a

shareholder

"controlling."

Moreover, the case law is hostile to Shear's absolutist position.
For instance, Delaware courts have found minority shareholders to
be controlling shareholders under particular circumstances.

See,

e.g., In re Cysive, 836 A.2d at 535, 553.
In the end, everything depends on context.

Here, the

numerical fraction of PHC's voting power conferred by Shear's

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shares — hardly an insubstantial portion — does not fairly reflect
salient facts regarding his domination of the company and his
formidable

ability

to

steer

fundamental

corporate

decisions.

Control has a distinctly practical dimension and, as a practical
matter, Shear had control of PHC.
For one thing, Shear's near-complete ownership of, and
concomitant voting control over, the Class B stock guaranteed him
the power to veto corporate decisions that were not to his liking.
The power to block certain corporate paths by veto is the power to
direct the corporation to take the route preferred by the vetowielder.

As any motorist knows, when access is denied to road

after road, a driver has little choice but to follow the detour
signs.

The existence of this power, then, is a telltale sign that

Shear had significant control over PHC's affairs.
For another thing, Shear had the power to name four of
the six directors (a majority of the board).

Courts often have

found that the power to appoint a substantial portion of the board
is a meaningful indicium of control.

See, e.g., Lynch, 638 A.2d

at 1112-13; see also In re Primedia, 910 A.2d at 258 (finding
number of directors appointed by allegedly controlling shareholder
relevant to "control" inquiry).
In addition, "control over the particular transaction at
issue"

may

be

sufficient

fiduciary-duty purposes.

to

establish

controller

status

In re Primedia, 910 A.2d at 257.

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for

Shear

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had such control:

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he was the primary negotiator of the material

terms of the PHC-Acadia merger; he remained a leading player in
the

negotiations

even

after

Acadia's

letter

of

intent

was

transmitted and he arranged for his ally, Grieco, to be designated
(at

least

nominally)

as

PHC's

principal

negotiator;

and

his

suzerainty over the Class B shares allowed him to dictate board
voting and to scuttle any merger that was not to his taste.

To

cinch the matter, the jury found that "Shear controlled a majority
of the PHC Board of Directors with regard to the Board's decision
to approve the merger."

That finding is amply supported by the

evidence, and we — like the court below — have no reason to
disregard it.

See Jones ex rel. U.S. v. Mass. Gen. Hosp., 780

F.3d 479, 487 (1st Cir. 2015); Ira Green, Inc. v. Military Sales
& Serv. Co., 775 F.3d 12, 18 (1st Cir. 2014).
Shear tries twice over to throw sand in the gears of
this reasoning.

Both attempts hark back to Tucci.

First, he

argues that his control over PHC was less than that of the
defendant in Tucci.

This argument, though, is smoke and mirrors:

the defendant in Tucci was not sued as a controlling shareholder,
see 70 N.E.3d at 923-27, and the SJC had no earthly reason to
determine whether he qualified as such.
Shear's second sortie fares no better.

He notes that

the Tucci court spoke of a controlling shareholder's power to
"propose[] and implement[]" transactions, id. at 926, and says

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that, by himself, he could not have implemented the merger — he
needed the votes of the Class A shareholders.
this argument is problematic.

On its own terms,

The Tucci court gave no hint that

by using the word "implement," it meant "unilaterally implement."
In all events, such an interpretation would be overly rigid
because, among other things, it does not account for the degree of
a fiduciary's pervasive influence within the company.
That

ends

this

aspect

of

the

matter.

indicated, control is a practical concept.
combination of elements.

As

we

have

It is derived from a

See In re Cysive, 836 A.2d at 553.

Taken

in the aggregate, the combination of elements in this case easily
supports the district court's determination that Shear dominated
PHC and had actual control over its affairs (including the merger
transaction).

Accordingly, the district court did not err in

holding that Shear — as the jury had found — was a controlling
shareholder within the Tucci taxonomy.

It follows inexorably, as

night follows day, that MAZ's suit was appropriately brought as a
direct suit against Shear.

See Tucci, 70 N.E.3d at 926.
B. Fairness.

Having found that Shear was a controlling shareholder,
the district court proceeded to determine that he had breached his
fiduciary duty to the Class A shareholders.
Supp. 3d at 118-19.

See MAZ II, 265 F.

In making this determination, the court

adopted a finding by the jury:

that the process through which

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Shear had arranged the merger (and, in particular, the payment of
the Class B premium) was not "entirely fair" to the Class A
shareholders.

Shear challenges both the applicability of the

"fairness" standard and the court's allocation of the burden of
proof on this issue.
We turn first to Shear's argument that the district court
painted with too broad a brush in instructing the jury to apply
the "fairness" standard and then turn to his argument that, in all
events, the plaintiff class should have borne the burden of proof
with respect to fairness.

Since both of Shear's arguments center

on abstract questions of law, our review is de novo.

See San Juan

Cable LLC v. P.R. Tel. Co., 612 F.3d 25, 29 (1st Cir. 2010);
Charlesbank Equity Fund II v. Blinds To Go, Inc., 370 F.3d 151,
158 (1st Cir. 2004).
1.

Scope

of

the

Inquiry.

Endorsing

Delaware's

conception of fairness as "closely related to the views expressed
in [Massachusetts] decisions," the SJC has explained that "where
one stands on both sides of a transaction, he has the burden of
establishing its entire fairness, sufficient to pass the test of
careful scrutiny by the courts."

Coggins, 492 N.E.2d at 1117

(quoting Weinberger v. UOP, Inc., 457 A.2d 701, 710 (Del. 1983)).4

4

The SJC has made plain its
a simple finding of fair price.
1119 (explaining that fairness
totality of circumstances, and

view that fairness extends beyond
See Coggins, 492 N.E.2d at 1117,
inquiry involves examination of
noting that Delaware's fairness

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Coggins thus makes pellucid that fairness is an essential element
in judicial examination of intra-corporate claims involving selfdealing.5

See id. at 1117-19; see also Bos. Children's Heart

Found., Inc. v. Nadal-Ginard, 73 F.3d 429, 433 (1st Cir. 1996)
(applying

Massachusetts

law

and

explaining

that

"fairness"

standard applies to fiduciary's ability to set own salary); Geller
v. Allied-Lyons PLC, 674 N.E.2d 1334, 1338 n.8 (Mass. App. Ct.
1997) (explaining that "fairness" standard applies to contract
promising fiduciary finder's fee).
Shear argues that in this instance the fairness standard
was misplaced because the majority of Class A shareholders voted
to approve the transaction.

He argues, in the alternative, that

even if some judicial review was warranted, the court should have
narrowed its aperture and reviewed the alleged breach not under
the "fairness" standard but, rather, under the highly deferential
"business judgment" rule.

In support of both of these arguments,

inquiry, encompassing "fair dealing and fair price," is compatible
with Massachusetts' inquiry (quoting Weinberger, 457 A.2d at
711)).
5

In Houle v. Low, 556 N.E.2d 51 (Mass. 1990), the SJC
discussed a standard that did not require a reviewing court to
examine fairness.
See id. at 59.
That more generous standard
only applies, though, when an independent committee has decided
not to pursue derivative breach-of-fiduciary-duty claims. See id.
Even then, the altered standard might not be satisfied if the
contested action allowed a "defendant who has control of the
corporation to retain a significant improper benefit." Id. This
case is far removed from any set of facts that might bring the
Houle standard into play.

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he points to section 8.31 of the Massachusetts Business Corporation
Act (the Act). See Mass. Gen. Laws ch. 156D, § 8.31. That statute,
though, simply will not bear the weight that Shear loads upon it.
In relevant part, section 8.31 states that a "conflict
of interest transaction is not voidable by the corporation solely
because of the director's interest in the transaction if . . . the
material facts of the transaction and the director's interest were
disclosed or known to the shareholders entitled to vote and they
authorized,

approved,

§ 8.31(a)(2).

or

ratified

the

transaction."

Id.

Assuming, favorably to Shear, that the merger

transaction at issue here is a "conflict of interest" transaction
within the purview of section 8.31(a)(2) — a matter on which we
take no view — the statute says what it means and means what it
says:

it simply protects such a transaction from voidability.

See id. § 8.31 cmt. 1 ("Section 8.31(a) makes any automatic rule
of voidability inapplicable to transactions that are fair or that
have been approved by directors or shareholders in the manner
provided by the balance of § 8.31.").
Critically,
liability.

section

8.31

is

silent

as

to

director

This silence is especially telling when section 8.31

is juxtaposed with the immediately preceding section of the Act —
section 8.30.

In contrast to section 8.31, section 8.30 is

explicit about the circumstances in which a director will be
shielded from liability.

See id. § 8.30(c) ("A director is not

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liable for any action taken as a director, or any failure to take
any action, if he performed the duties of his office in compliance
with this section.").

When a legislature offers protection to a

party under one section of a statute but declines to offer the
party the same protection under a closely related section, it is
usually fair to presume that the legislature did not intend to
afford such protection under the latter section.

See Duncan v.

Walker, 533 U.S. 167, 173 (2001) ("It is well settled that where
Congress includes particular language in one section of a statute
but omits it in another section of the same Act, it is generally
presumed that Congress acts intentionally and purposely in the
disparate inclusion or exclusion."

(internal quotation marks and

alteration omitted)); Citizens Awareness Network, Inc. v. United
States, 391 F.3d 338, 346 (1st Cir. 2004) (stating that the "use
of differential language in various sections of the same statute
is presumed to be intentional and deserves interpretive weight").
So it is here.
Viewed against this backdrop, section 8.31 offers Shear
little shelter.

Fairly read, the statute sets up shareholder

ratification as a potential protection against the voidability of
a transaction, but it does not give a controlling shareholder a
free pass for a breach of his fiduciary duty qua director.

We

hold, without serious question, that section 8.31 does not afford
a conflicted director a safe harbor for a breach of his fiduciary

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See Mass. Gen. Laws ch. 156D, § 8.31 cmt. 1 ("A director

who engages in a transaction with the corporation that is not
voidable . . . is not thereby automatically protected against a
claim of impropriety on his part.").
If more were needed — and we doubt that it is — section
8.31 offers no support for the notion that the Massachusetts
legislature sought to dislodge the "vigorous" level of judicial
oversight available for breach-of-fiduciary-duty claims against
conflicted directors.

Coggins, 492 N.E.2d at 1117.

Section 8.31

was enacted in 2003 — at a time when Massachusetts common law
concerning self-interested fiduciaries was well-developed, and it
is a familiar tenet that when a statute addresses issues previously
governed by common law, an inquiring court should presume that —
except where explicit changes are made — the legislature intended
to retain the substance of preexisting law.

See Kirtsaeng v. John

Wiley & Sons, Inc., 568 U.S. 519, 538 (2013). Shear has identified
no principled basis for refusing to honor this presumption here.6

6

The only Massachusetts cases in which shareholder
ratification appears to have been given a cleansing effect involve
close corporations. See Demoulas v. Demoulas Super Markets, Inc.,
677 N.E.2d 159, 182 (Mass. 1997); see also In re Mi-Lor Corp., 348
F.3d 294, 304 (1st Cir. 2003) (applying Massachusetts law). Such
cases have no bearing here: shareholders in close corporations
have materially different rights and responsibilities than do
shareholders in public corporations. See In re Mi-Lor Corp., 348
F.3d at 305.

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As a fallback, Shear invites us to follow a trail blazed
by the Delaware courts, which under certain circumstances require
less searching judicial scrutiny of transactions that have been
ratified by shareholders.

See, e.g., Singh v. Attenborough, 137

A.3d 151, 151 (Del. 2016); Corwin v. KKR Fin. Holdings LLC, 125
A.3d 304, 309 n.19 (Del. 2015).

We conclude, though, that this

line of cases does not aid Shear's cause.
invitation.

Even

under

the

Hence, we decline his

Delaware

cases,

shareholder

ratification does not change the scope of judicial review in the
context of conflicted transactions engaged in by a controlling
fiduciary.

See In re JCC Holding Co., 843 A.2d 713, 723-24 (Del.

Ch. 2003).

This limitation makes eminently good sense inasmuch as

the coercion inherent in the relationship between a controlling
shareholder

and

the

remaining

shareholders

"undermine[s]

the

fairness-guaranteeing effect of a majority-of-the-minority vote
condition because coerced fear or a hopeless acceptance of a
dominant power's will, rather than rational self-interest, is
deemed likely to be the animating force behind the minority's
decision to approve the merger."

Id. at 723.

We are confident

that the SJC would hue to this limitation and retain the fairness
standard for self-interested transactions even in the face of
shareholder ratification.
To say more on this point would be supererogatory. Given
the self-interested nature of the challenged transaction, we hold

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that the district court did not err in subjecting the transaction
to the "fairness" inquiry elucidated in Coggins and its progeny.
2. Burden-Shifting.

Having concluded that the district

court properly framed the inquiry in terms of the fairness of the
challenged transaction, we turn to Shear's remonstrance that the
court erred in assigning him the burden of proof.
the

general

rule

that,

in

Massachusetts,

We start with

"[a]

controlling

stockholder who is also a director standing on both sides of the
transaction bears the burden of showing that the transaction does
not violate fiduciary obligations."

Coggins, 492 N.E.2d at 1118;

see Geller, 674 N.E.2d at 1338 n.8. Policy considerations buttress
this allocation of the burden of proof.

See Coggins, 492 N.E.2d

at 1118 (noting concern for protection of minority shareholders in
presence of controlling fiduciary).

At first blush, then, the

district court would appear to have been on solid footing in
holding that Shear — as a controlling shareholder and selfinterested director — bore the burden of proving that the process
underlying

the

merger

transaction

was

fair

to

the

Class

A

shareholders.
Despite

this

general

rule,

Shear

contends

that

the

burden of proof should have been shifted to the plaintiff class.
In advancing this contention, he asks us to break new ground:

the

SJC has never addressed what circumstances, if any, might justify
shifting the burden from a conflicted fiduciary to complaining

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shareholders. Shear urges us to hold that shareholder ratification
is one such circumstance.
Shear's

attempt

to

give

a

cleansing

effect

to

shareholder ratification relies in large part on the commentary to
section 8.31 of the Act.

See Mass. Gen. Laws ch. 156D, § 8.31

cmt. 2 (stating that shareholder ratification may shift the burden
of proof to the complaining party with respect to "any challenge
to the acts for which the requisite vote was obtained").
reliance is mislaid.

His

As we already have explained, see supra Part

II(B)(1), the animating purpose of section 8.31 is to curtail the
common

law

voidable.

rule

making

conflicted

transactions

automatically

See Mass. Gen. Laws ch. 156D, § 8.31 cmt. 1.

There is

no issue of voidability in this case and, thus, the commentary
upon which Shear relies does not breathe life into his novel
contention.
Shear has another shot in his sling.

He points to

Delaware case law suggesting that certain facts, such as full
disclosure to disinterested shareholders who subsequently ratify
a transaction, may sometimes justify shifting the burden to the
plaintiff to prove that a transaction is unfair.

See, e.g., Ams.

Mining Corp. v. Theriault, 51 A.3d 1213, 1242 (Del. 2012).
case law simply does not fit.

This

Even in Delaware, such burden-

shifting occurs only when a pretrial determination regarding the
crucial facts can be made.

See id. at 1243 (holding that "if the

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record does not permit a pretrial determination that the defendants
are entitled to a burden shift, the burden of persuasion will
remain with the defendants throughout the trial to demonstrate the
entire fairness of the interested transaction").
determination was possible here:

No such pretrial

the evidence was inconclusive as

to whether the Class A shareholders, prior to ratification, had
been

sufficiently

informed

of

the

material

facts

of

the

transaction.
We do not think that the SJC would depart from its
settled rule and shift the burden of proof on these facts.

No

precedent compels (or even strongly suggests) such a result.
Massachusetts law has long imposed the burden of proving entire
fairness on a director accused of self-dealing, see Coggins, 492
N.E.2d at 1117-18, and this rule has special salience where, as
here, a case involves a controlling shareholder who is dominating
in influence, see id.

Viewed through this prism, we conclude that

the Class A shareholders' approval of the merger package did not
constitute the sort of fully informed ratification that might
cleanse the transaction of the stench of self-dealing so as to
warrant a shifted burden.
C. Disgorgement.
Shear next complains that the district court erred in
ordering disgorgement of so much of the Class B premium as exceeded
what would have been a fair premium for the Class B shares.

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Disgorgement is an equitable remedy, and we review the award of an
equitable remedy "under a bifurcated standard."

State St. Bank &

Tr. Co. v. Denman Tire Corp., 240 F.3d 83, 88 (1st Cir. 2001).
The availability of an equitable remedy presents a question of law
engendering de novo review, while the decision either to award or
to refrain from awarding an available equitable remedy is reviewed
for abuse of discretion.

See id.

Shear's plaint implicates both

prongs of this bifurcated standard.
1.

Availability.

To

begin,

Shear

asserts

that

disgorgement was not an equitable remedy available to MAZ.

In

support, he offers a hodge-podge of theories, all of which draw
their essence from a fundamental misunderstanding of breach-offiduciary-duty claims: he insists that such claims are essentially
legal, not equitable.
A

claim

for

originating in equity.

Shear is wrong.
breach

of

fiduciary

duty

is

a

claim

See In re Evangelist, 760 F.2d 27, 29 (1st

Cir. 1985) (Breyer, J.) ("Actions for breach of fiduciary duty,
historically speaking, are almost uniformly actions 'in equity' —
carrying with them no right to trial by jury."); see also Coggins,
492 N.E.2d at 1117 ("The court is justified in exercising its
equitable power when a violation of fiduciary duty is claimed.").
For decades, Massachusetts courts have recognized that equity
empowers them to examine putative breaches of fiduciary duty,
particularly when evidence of self-dealing exists.

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Coggins, 492 N.E.2d at 1117; Winchell v. Plywood Corp., 85 N.E.2d
313, 316-17 (Mass. 1949); Sagalyn v. Meekins, Packard & Wheat,
Inc., 195 N.E. 769, 771 (Mass. 1935).

If a breach of fiduciary

duty is found, equity allows the court to order appropriate
equitable relief.

See Allison v. Eriksson, 98 N.E.3d 143, 154

(Mass. 2018); Demoulas v. Demoulas, 703 N.E.2d 1149, 1169 (Mass.
1998).

This remains true even when a remedy at law is also

available.

See Cosmopolitan Tr. Co. v. Mitchell, 136 N.E. 403,

409 (Mass. 1922); see also Demoulas v. Demoulas Super Markets,
Inc., 677 N.E.2d 159, 178 n.32 (Mass. 1997) (explaining that even
though breach of fiduciary duty can, under certain circumstances,
form the basis for an action at law for money damages, it generally
forms the basis for an equitable cause of action).
The hallmark of equitable relief is its protean nature
and — within wide limits — a court sitting in equity may tailor
relief to fit the circumstances of a particular case. See Allison,
98 N.E.3d at 154; Demoulas, 703 N.E.2d at 1169.

Within this

remedial realm, it is standard fare for a court to fashion remedies
that deny a breaching fiduciary undue gain or advantage received
by virtue of his position.

See Chelsea Indus., Inc. v. Gaffney,

449 N.E.2d 320, 327 (Mass. 1983); Sagalyn, 195 N.E. at 771; Geller,
674 N.E.2d at 1337; see also Haseotes v. Cumberland Farms, Inc.
(In re Cumberland Farms, Inc.), 284 F.3d 216, 229 (1st Cir. 2002)
(applying Massachusetts law).

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Examples abound and we invoke one to illustrate this
point.

In Sagalyn, the SJC considered a series of votes by

directors who were also corporate officers, which had the effect
of raising salaries for one another.

See 195 N.E. at 771.

Finding

that the directors had breached their fiduciary duty, the court
upheld a decree directing that each of them must refund to the
corporation "the excess of salary [received as a result of the
vote] beyond the fair value of his services" as determined by a
special

master.

Id.

at

771-72.

The

court

explained

that

fiduciaries have a "responsibility to refrain from taking an undue
advantage of the corporation" and that a breach of fiduciary duty
may lie "even in the absence of moral turpitude."
Viewed

against

this

backdrop,

Id. at 771.

Shear's

claim

disgorgement was not an available remedy goes up in smoke.

that
His

most loudly bruited argument — that a claim of breach of fiduciary
duty requires a showing of damages — runs headlong into a wall of
precedent.

The case law holds with conspicuous clarity that when

a fiduciary has secured an undue advantage by virtue of his
position, equitable relief is available even in the absence of
direct economic loss to the complaining party.7

7

See Chelsea

Groping for support, Shear directs us to a few cases that
list "damages" as an "element" of a claim for breach of fiduciary
duty. See, e.g., Qestec, Inc. v. Krummenacker, 367 F. Supp. 2d
89, 97 (D. Mass. 2005); Hanover Ins. Co. v. Sutton, 705 N.E.2d
279, 288 (Mass. App. Ct. 1999).
Once again, Shear fails to
appreciate that breach-of-fiduciary-duty claims can have both
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Indus., 449 N.E.2d at 327; Sagalyn, 195 N.E. at 771; see also In
re Cumberland Farms, 284 F.3d at 229.
The

Massachusetts

decisions elsewhere.

decisions

align

comfortably

with

The better-reasoned view is that harm is

required "only for [the legal remedy of] damages, not for the
equitable remedy of disgorgement."
77 (3d Cir. 2006).

Huber v. Taylor, 469 F.3d 67,

Embracing this principle, the D.C. Circuit has

explained that the equitable remedy of forfeiture does not require
a showing of injury to a victim because forfeiture is aimed at
"deter[ing] . . . misconduct, a goal worth furthering regardless
of whether a particular [person] has been harmed. It also fulfills
a

longstanding

and

fundamental

principle

of

equity

fiduciaries should not profit from their disloyalty."

—

that

Hendry v.

Pelland, 73 F.3d 397, 402 (D.C. Cir. 1996) (internal citations
omitted).
at hand.

This reasoning applies four-square to the circumstances
Requiring a controlling shareholder who had breached his

fiduciary duty to disgorge the fruits of his misconduct serves a

legal and equitable dimensions. In the bargain, he ignores the
SJC's repeated affirmation that equitable relief can be provided
for such claims. See, e.g., Allison, 98 N.E.3d at 154; Chelsea
Indus., 449 N.E.2d at 327.
Billings, cited hopefully by Shear, is not to the contrary.
867 N.E.2d 714. The language to which Shear adverts is from the
court's recitation of the case's procedural history, see id. at
719, and Billings never considered whether equitable relief could
have been available absent a showing of economic harm.

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societal

purpose

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regardless

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of

whether

Entry ID: 6181179

the

innocent

shareholders have been injured by his misconduct.
Relatedly,

Shear

argues

that

disgorgement

is

an

inappropriate remedy for a breach of fiduciary duty and that its
availability should be limited to claims for unjust enrichment.
This is much too crabbed a view.
A breach of fiduciary duty is historically an equitable
claim, see In re Evangelist, 760 F.2d at 29, and a court faced
with such a breach has the authority to choose an appropriate
remedy from the wide armamentarium of equitable remedies, see
Demoulas, 703 N.E.2d at 1169.

Ordering a fiduciary to relinquish

the undue advantage obtained through a breach of his fiduciary
duty is an unremarkable exercise of this authority.

See Chelsea

Indus., 449 N.E.2d at 327; Sagalyn, 195 N.E. at 771; see also Bos.
Children's Heart Found., 73 F.3d at 433.
Shifting gears, Shear argues that the jury's verdict —
specifically, the jury's finding that the plaintiff class suffered
no economic loss — foreclosed any equitable remedy.

He frames

this argument in terms of the Seventh Amendment, which he says
forbids a district court from applying equitable doctrines that
depend to any degree on factual predicates previously rejected by
a jury verdict.

We believe that Shear is trying to fit a square

peg into a round hole.

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In the proceedings below, MAZ sought both legal and
equitable relief.

The district court tried the legal claims to a

jury and reserved ruling on the equitable claims. This bifurcation
was not only agreed to by the parties but also tracked generally
accepted procedures:

when a single issue may be viewed as either

legal or equitable (depending upon what relief is forthcoming),
the issue should first be tried to a jury even though the court,
taking

into

account

the

jury's

findings,

determine whether to grant equitable relief.

may

later

have

to

See Dairy Queen,

Inc. v. Wood, 369 U.S. 469, 479 (1962); Boit v. Gar-Tec Prods.,
Inc., 967 F.2d 671, 677 (1st Cir. 1992); see also 9 Charles Alan
Wright et al., Federal Practice and Procedure § 2306 (3d ed. 2018).
To support his position that disgorgement is unavailable
once a jury has found no damages, Shear pins his hopes to the
decision

in

National

Railroad

Passenger

Corp.

v.

Veolia

Transportation Services, Inc., 886 F. Supp. 2d 14 (D.D.C. 2012).
But there, the court found "[n]o shattered fiduciary relationship
between [the parties that] require[d] the court's protection."
Id. at 19.

Such a finding distinguishes Veolia from this case —

a differentiating circumstance that is made luminously clear by
the Veolia court's careful distinguishing of cases permitting
disgorgement.

See id. at 18-19.

We add, moreover, that the district court's disgorgement
order was not at odds with the jury's verdict. Contrary to Shear's

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importunings, the disgorgement order did not contradict the jury's
finding that the plaintiff class had sustained no economic loss.
Rather, the court accepted that finding and relied on the jury's
other findings — particularly its findings that Shear was a
controlling shareholder and that the process leading up to the
merger had not been entirely fair — to form an acceptable predicate
for equitable relief.

See MAZ II, 265 F. Supp. 3d at 119.

This

process accorded with the procedure endorsed by the SJC.

See

Demoulas, 703 N.E.2d at 1172-73 (upholding order for equitable
relief when jury had made determinations regarding wrongdoing).
The

Seventh

Amendment

figures

asseverational array in yet another way.

into

Shear's

He urges us to find that

the disgorgement order is an unconstitutional additur.

Here, too,

Shear is foraging in an empty cupboard.
The prohibition against unconstitutional additurs is
rooted in the Seventh Amendment's guaranty of the right to trial
by jury.

See Dimick v. Schiedt, 293 U.S. 474, 485 (1935).

As

such, the prohibition only applies to jury awards on legal claims.
See Haskins v. City of Boaz, 822 F.2d 1014, 1015 (11th Cir. 1987)
(per curiam).

It follows inexorably that the Seventh Amendment

has no application to an equitable remedy (such as a dollars-andcents

disgorgement

violation.

order)

issued

See id.

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to

remediate

an

equitable

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That ends this aspect of the matter.

Entry ID: 6181179

Exercising de novo

review, we conclude that, in the circumstances of this case, the
equitable remedy of disgorgement was available in principle.
2. Appropriateness.

Our holding that disgorgement was

an available remedy does not speak to whether the district court's
crafting of the disgorgement order was an appropriate exercise of
its discretion.

We turn next to that question.

The baseline premise is that "[e]quitable remedies are
flexible tools to be applied with the focus on fairness and
justice."

Demoulas, 703 N.E.2d at 1169.

Acting in accordance

with this premise, the district court purposed to fashion a twostep disgorgement order.

First, the order stripped Shear of the

unfair advantage — his share of the inflated portion of the Class
B premium — gained through his breach of fiduciary duty.

Second,

the order redistributed those gains to the plaintiff class.
court's

methodology

is

not

in

issue.

Based

on

The

comparable

transactions, the court identified the portion of the $5,000,000
Class B premium that represented fair compensation for the enhanced
voting rights carried by the Class B shares ($1,820,000).

The

remainder of the Class B premium ($3,180,000), the court found,
was unjustified.

Based on Shear's percentage ownership of the

Class B shares, the court calculated that Shear had received
$2,964,396 in unjustified compensation.

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The court ordered that

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Shear disgorge this amount and, at the same time, awarded those
funds to the plaintiff class, together with interest.
Chaffing
disgorgement,

even

under
if

this

regime,

theoretically

Shear

asseverates

available,

was

that

wholly

inappropriate in this instance and, thus, an abuse of discretion.
We reject this asseveration and conclude that, in the circumstances
at hand, the disgorgement order was well within the compass of the
district court's discretion.
We need not tarry.

Given Shear's breach of fiduciary

duty, forcing him to disgorge the fruits of his inequitable
behavior seems an altogether fitting remedy.

Indeed, when a

conflicted fiduciary gains an unfair advantage through a breach of
his fiduciary duty, it is hard to imagine equitable relief more
appropriate than an order compelling him to disgorge the fruits of
his breach.

It is, therefore, unsurprising that the SJC has

approved the use of disgorgement as a remedy in highly analogous
circumstances.

See Sagalyn, 195 N.E. at 771 (upholding order that

fiduciaries refund portion of compensation in excess of fair value
as determined by special master).
Shear's rejoinder is unavailing.

He says that the

plaintiff class sustained no loss and, accordingly, did not need
disgorgement in order to be made whole.

That is true as far as it

goes — but it does not take Shear very far.
dealt effectively with this argument.

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The district court

It acknowledged that the

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disgorgement order resulted in something of a windfall for the
plaintiff

class

avoided.

and

that

such

windfalls

should

See MAZ II, 265 F. Supp. 3d at 120.

generally

be

Refusing to order

disgorgement, though, would have resulted in a windfall to Shear.
See id.
that

Faced with this quandary, the court reasonably determined

it

was

more

equitable

that

any

windfall

accrue

to

plaintiff class rather than to the self-dealing fiduciary.

the
See

id. at 120-21.
We think that this choice was a supportable exercise of
the district court's broad discretion.

If a windfall is in

prospect, time-honored principles of equity favor bestowing the
windfall

upon

the

wronged

wrongdoer to retain it.

party

as

opposed

to

allowing

the

See Lawton v. Nyman, 327 F.3d 30, 45 (1st

Cir. 2003) (explaining that it is "more appropriate to give the
defrauded party the benefit even of windfalls than to let the
fraudulent party keep them" (quoting Janigan v. Taylor, 344 F.2d
781, 786 (1st Cir. 1965))); cf. Law v. Griffith, 930 N.E.2d 126,
132 (Mass. 2010) (stating that, under collateral source rule,
"avoiding a windfall to a tortfeasor is preferable even if a
plaintiff

thereby

receives

an

excessive

recovery

in

some

circumstances").
Shear's citation to Brodie v. Jordan, 857 N.E.2d 1076
(Mass. 2006), for the proposition that a "remedy should neither
grant

the

minority

a

windfall

nor

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excessively

penalize

the

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majority" does not undermine this conclusion. Id. at 1080. Brodie
is inapposite:

that case did not involve the disgorgement of a

financial benefit improperly gained by a fiduciary through his
position.
The short of it is that the disgorgement order was
comfortably within the district court's authority and was suitably
tailored to redress Shear's inequitable conduct.

Consequently, we

find the disgorgement order to be an appropriate exercise of the
district court's discretion.
D. Recapitulation.
To

recapitulate,

we

conclude

that

this

suit

was

appropriately brought directly against Shear as a "controlling
shareholder who also is a director."

Tucci, 70 N.E.3d at 926.

Given Shear's controller status, the district court correctly
applied the fairness standard to his course of conduct and quite
properly allocated the burden of proving fairness to him.

After

a supportable finding of breach of fiduciary duty, disgorgement
was well within the wide armamentarium of equitable remedies
available to the district court.

Last but not least, we conclude

that the district court did not abuse its discretion in crafting
a disgorgement order designed to ensure that Shear would not be
allowed to enjoy the fruits of his breach.

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III. MAZ'S APPEAL
There is one last leg to our journey.

MAZ appeals the

district court's denial of its motion for a new trial. In support,
MAZ submits that the district court abused its discretion in
allowing Shear, during the jury-trial phase of the case, to
introduce evidence of Acadia's "more than ten-fold" increase in
its stock price post-merger (over the course of nearly four years).
MAZ objected to the stock-price evidence below, and this claim of
error is preserved for purposes of appeal.
Where, as here, the denial of a motion for new trial
hinges on a preserved challenge to an evidentiary ruling, we review
the underlying evidentiary ruling for abuse of discretion.
Ira Green, 775 F.3d at 18.

See

Even if we find that an abuse of

discretion occurred, we will not order a new trial unless we also
find that "the error in admitting evidence 'had a substantial and
injurious effect or influence upon the jury's verdict.'"

Id.

(quoting Gomez v. Rivera Rodríguez, 344 F.3d 103, 118 (1st Cir.
2003)).

Here, however, we discern no abuse of discretion in the

admission of the challenged evidence, so our consideration stops
short of any harmless-error inquiry.
To be admissible, evidence must be relevant, that is, it
must have a "tendency to make" the existence of any fact that is
of consequence to the determination of the action "more or less
probable than it would be without the evidence."

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Fed. R. Evid.

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401.

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Even so, a court may preclude the admission of relevant

evidence "if its probative value is substantially outweighed by a
danger of . . . unfair prejudice, confusing the issues, [or]
misleading the jury."

Fed. R. Evid. 403.

When the balancing of

probative value and unfair prejudice ends in equipoise, Rule 403
tilts the decisional calculus in favor of admissibility.

See

United States v. Whitney, 524 F.3d 134, 141 (1st Cir. 2008).
The court below determined that the stock-price evidence
was

relevant

to

the

issues

raised

determination was unimpugnable:

during

the

trial.

This

among other things, the evidence

was relevant to the reasonableness of the directors' judgment in
pursuing the merger as a means of creating value for shareholders.
And as the district court supportably found, this evidence was
also relevant because the plaintiff class was challenging both the
reasonableness of the stock-for-stock swap and the structure of
the merger. Finally, as in Gonsalves v. Straight Arrow Publishers,
Inc., 701 A.2d 357, 362 (Del. 1997), the challenged data was
relevant to "show that plans in effect at the time of the merger
[had] born fruition."
Of course, the finding of relevance gets us only halfway
home.

Even relevant evidence may be excluded if it is unfairly

prejudicial.

The emphasis on unfair prejudice (as opposed to

prejudice simpliciter) is not an idle formality.

After all,

"[v]irtually all evidence is meant to be prejudicial, and Rule 403

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only guards against unfair prejudice."
885 F.3d 27, 38 (1st Cir. 2018).
unfair prejudice:

Entry ID: 6181179

United States v. Sabean,

And it is no easy task to show

we have made pellucid that, once a district

court overrules a Rule 403 challenge and admits relevant evidence,
"[o]nly rarely — and in extraordinarily compelling circumstances
— will we, from the vista of a cold appellate record, reverse [the]
district court's on-the-spot judgment concerning the relative
weighing of probative value and unfair effect." Freeman v. Package
Mach. Co., 865 F.2d 1331, 1340 (1st Cir. 1988).
In the case at hand, MAZ asserts that the admission of
the stock-price evidence was unfairly prejudicial because it may
have tainted the jury's perception of whether Shear's alleged
breach of fiduciary duty caused the plaintiff class to sustain any
economic loss.

In effect, MAZ suggests that the admission of this

evidence allowed Shear to make what amounted to a "no harm, no
foul"

argument

even

though

foreclosed such an argument.

the

district

court

explicitly

As MAZ sees it, this enabled Shear

to introduce through the back door a line of defense that the
district court had forbidden him to introduce through the front
door.
There is, however, a clearly visible fly in the ointment:
Shear never made a "no harm, no foul" argument to the jury.

MAZ

suggests, though, that given the stock-price evidence and what it
showed about the profit that inured to the shareholders, the "no

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harm,

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no

foul"

argument

Page: 45

was

the

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elephant

in

the

Entry ID: 6181179

room

(and,

therefore, the jury likely gave it weight).
We do not dismiss MAZ's suggestion lightly.

At a

minimum, there was some risk that the jury might have thought along
"no harm, no foul" lines without any prompting from Shear.

The

district

not

court

concluded,

however,

that

this

risk

did

substantially outweigh the probative value of the stock-price
evidence.
Where Rule 403 is in play, battles over how to strike
the

balance

between

unfairly

prejudicial

effect are usually won or lost in the district court.

This is not

a mere fortuity:

probative

value

and

a trial court is in the best position to evaluate

both the force of particular evidence and the likelihood of unfair
prejudice. See Galarneau v. Merrill Lynch, Pierce, Fenner & Smith,
Inc., 504 F.3d 189, 206 (1st Cir. 2007) (noting that district court
"observ[es] first-hand the nuances of trial" and, thus, merits
substantial

discretion

prejudicial effect).

when

balancing

probative

value

and

In this instance, we do not think that the

risk of unfair prejudice loomed so disproportionately large as to
warrant second-guessing the district court's on-the-spot balancing
of probative worth and prejudicial effect.
This conclusion is fortified by what transpired when the
specter of prejudice from the stock-price evidence was brought
front and center during a sidebar conference.

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After hearing from

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the

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parties,

the

Page: 46

district

court

Date Filed: 07/02/2018

offered

to

give

the

Entry ID: 6181179

jury

a

prophylactic instruction, limiting the permissible use of the
stock-price evidence to relevant issues.

MAZ refused the offer,

opting instead for no instruction.
We
instructions.

long

have

recognized

the

value

of

limiting

See, e.g., Rubert-Torres v. Hosp. San Pablo, Inc.,

205 F.3d 472, 479 (1st Cir. 2000); Daigle v. Me. Med. Ctr., Inc.,
14 F.3d 684, 690 (1st Cir. 1994).

Such instructions, skillfully

employed by a district court, often will eliminate — or at least
mitigate — a risk of unfair prejudice.
Mehanna, 735 F.3d 32, 64 (1st Cir. 2013).

See United States v.
When a party who objects

to evidence declines the trial court's offer to caution the jury
about the limited utility of that evidence, the objecting party is
in a perilously poor position to complain, after the fact, that
the evidence was unduly prejudicial.

See United States v. Walter,

434 F.3d 30, 35 (1st Cir. 2006); United States v. Cintolo, 818
F.2d 980, 999 (1st Cir. 1987); Dente v. Riddell, Inc., 664 F.2d 1,
6 n.5 (1st Cir. 1981).

So it is here.

We add a coda.

Common sense suggests that MAZ's claim

of prejudice is severely undermined by the jury's finding that the
process undertaken by the directors in structuring the merger was
not entirely fair.

This finding is a telltale sign that, rather

than succumbing to an unstated "no harm, no foul" argument, the
jury found a foul and called it.

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To say more about the challenged evidentiary ruling
would be to paint the lily.

We conclude that the ruling was not

an abuse of the district court's broad discretion.

It follows,

therefore, that MAZ's attack on the denial of its new-trial motion
is without force.
IV. CONCLUSION
We need go no further. For the reasons elucidated above,
the judgment of the district court is

Affirmed.

Two-thirds

costs

shall

plaintiff.

- 47 -

be

taxed

in

favor

of

the