Adelson v. Adelson

Citations: 60 Mass. App. Ct. 753; 806 N.E.2d 108; 2004 Mass. App. LEXIS 357Docket: No. 01-P-1790

Court: Massachusetts Appeals Court; April 5, 2004; Massachusetts; State Appellate Court

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The appeal involves a case initiated by Mitchell and Gary, sons of Sheldon Adelson, against Sheldon Adelson and Charles Forman, alleging fraud and breach of fiduciary duties. They sought monetary damages and equitable remedies, including a constructive trust and rescission. A judge decided to reserve the issue of equitable relief for later determination and posed specific questions to the jury regarding other claims. Both the jury and the judge ruled against Mitchell and Gary. Mitchell's appeal argues that the judge improperly denied his motion for judgment notwithstanding the verdict on the fraud and breach of fiduciary duty claims, and erred in his equitable relief rulings and the denial of a new trial. The judgment was ultimately affirmed.

The factual background reveals that in 1989, Interface Group, Inc. was reorganized into two corporations: Interface Group, Nevada, Inc. and Interface Group, Massachusetts, Inc., each with 100,000 shares. Sheldon Adelson is identified as the founder, director, and majority shareholder of Interface, alongside three other shareholders known as the "older generation shareholders." Forman served as vice-president and general counsel. Interface primarily organized trade shows, including the Comdex trade show. In 1988, the older generation shareholders established Las Vegas Sands, Inc. to acquire the Sands Hotel and Casino, intending to develop a convention center for Comdex. Interface entered into loan agreements that restricted shareholder distributions, using loan proceeds to lend to LVSI or the older shareholders, who provided unsecured demand notes in return. On June 1, 1989, Interface transferred 15,000 shares of treasury stock to the children of the older generation shareholders for $265 per share. Mitchell received 2,941 shares, representing 2.941% of Interface, and issued a demand note to Interface for $779,399.

Sheldon intended to distribute his treasury stock among his three children and siblings but ultimately agreed to the wishes of older generation shareholders. He conditioned the sale of his stock to his children on their promise to share any income from the stock equally with his siblings. On December 12, 1989, Mitchell signed a memorandum of understanding (MOU) agreeing to this condition, committing to distribute fifty percent of any income, net of specified deductions, to Sheldon’s siblings.

Prior to the MOU, Mitchell and other younger generation shareholders formed a voting trust, designating Forman as the voting trustee, and transferred their shares in exchange for certificates of beneficial interest. Mitchell later transferred his certificates to the Mitchell Adelson Trust, where he and his descendants were beneficiaries, with Forman as the disinterested co-trustee holding the discretion for distributions. The trust indenture stipulated that stockholder rights under Massachusetts law were to be exercised solely by the disinterested trustee.

From June 1, 1989, to November 29, 1994, Interface made no distributions to stockholders except for amounts to cover income taxes, resulting in Mitchell receiving no income apart from tax obligations. During this period, Chafetz, an older generation shareholder, expressed concerns about Interface's reliance on a single asset, Comdex, and advocated for its sale. In late 1993, he proposed selling his 15 percent interest in Interface for $30 million, an offer Sheldon declined.

In the fall of 1994, Sheldon, worried about the risks of stock ownership and Mitchell's financial security, offered to buy Mitchell's shares. Discussions occurred on October 20 and in early November, where Sheldon highlighted the risks facing Interface and proposed a purchase price between $3 million and $5 million. He indicated he had rejected multiple offers for Interface but did not plan to sell it soon, suggesting that selling to him might represent Mitchell's best opportunity for a guaranteed return, and encouraged Mitchell to consult an attorney regarding the decision.

Sheldon initiated discussions with Mitchell regarding the purchase of his stock around the same time that Interface was finalizing a refinancing agreement with a third-party lender, allowing for non-cash distributions amounting to approximately $146 million to retire shareholder loans. Both Sheldon and Forman were aware of a July 1994 private placement memorandum detailing Interface's plan to eliminate loans to shareholders by issuing promissory notes representing their obligations. However, these notes were never rewritten as planned, and no payments were made prior to the sale of Comdex.

Although the precise date of Mitchell's acceptance of Sheldon's offer is unclear, on November 9, 1994, Forman arranged a meeting for the following day to finalize the stock purchase. Forman allegedly pressured Mitchell to complete the transaction to avoid potential tax law changes, a claim Forman later denied. During the meeting on November 10, 1994, Forman provided documents for Mitchell to sign, which he did without reading. Despite inquiring about obtaining independent legal counsel, Mitchell was discouraged by Forman, who suggested it would upset Sheldon.

Sheldon purchased Mitchell's stock for $5,298,879, primarily through a ten-year, interest-bearing promissory note of about $3,070,000. The remaining funds addressed tax consequences and Mitchell's obligations to Interface and related parties, which Sheldon assumed—totaling $1,164,419, inclusive of accrued interest. Of the $660,000 received by Mitchell from the sale, $220,000 was paid to each of Sheldon's three siblings, and in return, Sheldon released Mitchell from further obligations under a memorandum of understanding (MOU). The balance of the purchase price was allocated to settle Mitchell’s debts and tax liabilities from the stock sale.

Mitchell transferred Sheldon's promissory note to the Mitchell Adelson Trust, generating approximately $210,000 in annual income. Prior to Sheldon purchasing Mitchell's stock, he had not made payments on a ten-year demand note owed to Interface. Sheldon's offer for the stock was influenced not just by the stock's value but also by his intent for Mitchell to receive a steady income and a future lump sum. At Sheldon's request, O'Connor assessed the offering price against Interface’s estimated net value of $430 million, applying a minority discount and adjustments for obligations under a Memorandum of Understanding (MOU). Chafetz indicated he would have sold his family stock to Sheldon at the same price as Mitchell. Mitchell, despite holding a college degree, claimed ignorance about the number of shares and their value, acknowledging he had opportunities to inquire but did not do so and felt no pressure to sell. Following the sale, Interface declared $173 million in distributions, which could have resulted in $5.2 million for Mitchell had he retained his shares. Approximately five months later, Interface redeemed minority shares at $6,177 each after selling Comdex, a transaction Sheldon and Forman did not predict. In September 1997, Mitchell sued Sheldon and Forman for damages and sought Forman's removal as trustee, alleging misrepresentation and failure to disclose material information regarding the stock sale. The jury found no evidence of misrepresentation or failure to disclose material facts by Sheldon or Forman.

The jury did not address intent, causation, or damages regarding Mitchell's fraud claims. They concluded that neither Sheldon nor Forman breached any fiduciary duty to Mitchell, despite Forman acting as Sheldon’s agent in the share purchase. The trial judge determined that neither defendant misrepresented or concealed any material facts critical to Mitchell's decision to sell his shares. Consequently, the judge denied Mitchell’s motion for judgment notwithstanding the verdict, leading to a judgment favoring the defendants on all claims. On appeal, Mitchell asserts entitlement to judgment n.o.v. for fraud and breach of fiduciary duty, claiming that important information was withheld during the sale, which should have guaranteed him a favorable judgment. He also argues that if not entitled to judgment n.o.v., a new trial is warranted due to the judge improperly assigning the burden of proof regarding Sheldon’s fiduciary obligations. 

Mitchell contends that he should have been informed about Interface's plans for non-cash distributions and that the purchase price included certain discounts, which he argues are material facts. However, the law stipulates that undisclosed information is only material if it significantly alters the total mix of information available for a reasonable investor's decision-making. The courts have established that merely interesting or desirable information does not meet the materiality standard. Materiality is generally a jury question, but can be resolved as a matter of law if the omissions are so critical that reasonable minds cannot differ on their importance.

Mitchell's claim for judgment n.o.v. is evaluated by considering evidence favoring Sheldon and Forman. He contends that he should have been informed about non-cash distributions declared in late 1994 and early 1995. Evidence indicates that Mitchell was a minority shareholder in a closely held corporation, with no immediate market for his stock and no indication that Sheldon intended to sell the company. During his five-year stockholding, it yielded no income apart from amounts necessary for taxes. The distributions declared were structured as debt-forgiveness through promissory notes, which would not be payable until the sale of Comdex, an event not anticipated when Mitchell sold his stock. Thus, the potential future benefit did not materially influence his decision to sell.

Moreover, Mitchell argues he was entitled to judgment because he was not informed that the purchase price for his stock was not based on its fair value. While this information is relevant, it does not automatically entitle him to judgment as a matter of law. The central issue is whether the evidence allowed jurors to reasonably conclude that the purchase price paid by Sheldon was fair. Mitchell failed to provide evidence of what he believed the true value of his stock was at the time of the sale. Conversely, evidence suggested that the price offered by Sheldon was comparable to what a knowledgeable insider was willing to accept for shares in the same company.

The jury had the option to accept Gary's testimony regarding his satisfaction with the stock sale price to Sheldon, which was contingent on the unexpected sale of Comdex. The evidence also supported Mitchell’s claims against Forman, the cotrustee of the Mitchell Adelson Trust, who presented expert testimony stating he did not breach his fiduciary duty. The expert's review included Forman's reliance on O’Connor’s valuation, the anticipated financial benefits of the stock sale, and the distribution of shares to Mitchell for sale. The expert suggested that if there was any breach of fiduciary duty, it would be Mitchell’s due to his failure to evaluate Sheldon’s offering price independently. Consequently, the court upheld the denial of Mitchell’s motion for judgment notwithstanding the verdict (n.o.v.) regarding claims of intentional misrepresentation or nondisclosure by Sheldon and Forman.

The general rule established is that a fiduciary must prove the transaction was advantageous to the beneficiary. The judge instructed the jury on Sheldon's fiduciary responsibilities, emphasizing that he did not need to prove his fulfillment of that duty until Mitchell demonstrated that Sheldon profited from the transaction. Mitchell contended that the judge erred by not instructing the jury that Sheldon bore the burden to prove the transaction’s fairness without requiring Mitchell to first provide evidence of any profit. Sheldon argued that since his transaction with Mitchell was unrelated to his corporate duties, he had no fiduciary obligations, thus placing the burden of proof on Mitchell as instructed by the judge.

In Cleary v. Cleary, it is established that a contestant must provide proof unless a fiduciary relationship is demonstrated. The case hinges on whether the judge correctly assigned the burden of proof to Mitchell instead of Sheldon, specifically regarding whether Sheldon owed a fiduciary duty to Mitchell. It is affirmed that Sheldon did owe such a duty concerning the operation of Interface, a closely held corporation, as established in Donahue v. Rodd Electrotype Co. However, there is no indication in relevant case law that shareholders within a closely held corporation have a duty of utmost good faith and loyalty in dealings outside corporate operations. Mitchell does not allege that Sheldon breached any duty related to corporate governance; instead, the evidence indicates a personal transaction between Sheldon and his son, Mitchell, who could have sought information from corporate insiders regarding the stock's value but chose not to. The general principle states that directors do not have special obligations to individual stockholders when purchasing stock unless special circumstances exist, which were not present in this case. Additionally, the jury found that Sheldon neither misrepresented nor failed to disclose any important information regarding his stock purchase from Mitchell. Consequently, any alleged error in the judge's jury instructions did not impact Mitchell's rights and was deemed harmless. The judge’s findings of fact are upheld, leading to the affirmation of the dismissal of Mitchell’s claims for equitable relief and the order denying postjudgment relief.

Gary Adelson, a named plaintiff in the litigation, dismissed his appeal after it was filed. His siblings, Mitchell and Shelley Adelson, did not participate in the lawsuit. Sheldon Adelson, who adopted Mitchell, Gary, and Shelley upon marrying their mother, expressed agreement with the jury's findings, though he was not bound by them. The trial involved disputes regarding the legal implications of an agreement related to Interface shares held in a voting trust, which Mitchell claimed was not enforceable. Mitchell also denied any recollection of an agreement to share stock proceeds and argued that Sheldon aimed to limit his financial gain from Interface stock.

Evidence suggested Sheldon had a history of generosity towards his children, but Mitchell claimed Sheldon never advised him to consult an attorney. Sheldon employed independent legal counsel for the necessary documentation related to the stock transactions, treating all three children equally. The terms for purchasing Mitchell’s stock were consistent with those for Gary and Shelley’s stocks. Mitchell received substantial income from a promissory note and rental income from a trust, with potential future earnings from a building sale.

The valuation of Interface did not account for planned non-cash distributions, and Sheldon covered educational expenses for all three children. While the purchase price of Mitchell's shares included a minority discount, such discounts are not inherently inappropriate when a majority shareholder is involved but may indicate fraud or self-dealing. Sheldon was not required to offer more than the market value for minority shares, and Mitchell did not contest the judge’s instruction regarding Sheldon’s fiduciary duties as a director and majority shareholder. The discussion acknowledged the complexities of burden shifting in equity cases, referencing relevant cases for illustrative purposes without directly applying their principles.