SACK, Circuit Judge:
Descriptions of the facts underlying this appeal have now been published in three different reported decisions—in the opinion of the United States District Court for the Southern District of New York, Halebian v. Berv ("Halebian I"), 631 F.Supp.2d 284, 287-91 (S.D.N.Y.2007); in this Court's previous opinion certifying a question of state law to the Supreme Judicial Court of Massachusetts, Halebian v. Berv ("Halebian II"), 590 F.3d 195, 199-203 (2d Cir.2009); and in the opinion of the Supreme Judicial Court answering our question on certification, Halebian v. Berv ("Halebian III"), 457 Mass. 620, 621-24, 931 N.E.2d 986, 987-89 (2010). We see no need to reiterate them here except insofar as we think it necessary to an understanding of our resolution of the narrow issues remaining before us.
On May 30, 2006, John Halebian, a holder of shares in one of six separate investment funds (the "Funds") within CitiFunds Trust III (the "Trust"), a Massachusetts business trust, filed a complaint raising three claims in the United States District Court for the Southern District of New York against members of the Trust's board of trustees (the "Board"). The suit arose in connection with the June 23, 2005 corporate sale (the "Transaction") of investment-adviser subsidiary companies that advised the six Funds. Pursuant to the Transaction, Citigroup, Inc., which owned the adviser subsidiaries, sold substantially all of its asset-management business to Legg Mason, Inc., automatically terminating, under federal law, the Funds' existing investment-advisory contracts. Following the sale and contract termination, the Trust's Board approved new investment-advisory agreements (the "New Agreements") between the Trust and Legg Mason and then issued a proxy statement to Trust shareholders recommending that they vote to approve the New Agreements.
In his complaint, Halebian challenges two principal aspects of the Transaction. First, he questions the New Agreements' authorization of the payment of "soft dollars," which permitted Legg Mason to hire broker-dealers that also perform research services—a combination that often results in higher commissions for the chosen broker-dealer than those paid to standard broker-dealers. Second, he challenges shareholder voting procedures permitting "echo voting," which in this case allows Citigroup-affiliated service agents, as record holders of certain shares of the Funds, to vote their total number of shares in proportion to the votes they received from the shares' beneficial owners, even if the service agents had not received voting instructions from all of their customers. Halebian asserts, in sum, that the "defendants... failed to avail themselves of the opportunity to negotiate lower fees or seek competing bids from other qualified investment advisers" and "utterly ignored their obligations of loyalty and good faith to CitiTrust and its beneficiaries." Complaint ¶¶ 35, 40, Halebian I, No. 06 Cv 4099 (S.D.N.Y. May 30, 2006).
Halebian's Claim One, presented as a derivative claim on behalf of the Trust, alleges that the defendants breached their
On October 24, 2006, the defendants' counsel moved to dismiss Halebian's complaint pursuant to, inter alia, Federal Rule of Civil Procedure 12(b)(6). Regarding Claims Two and Three, the defendants asserted that Federal Rules 12(b)(6) and 23.1, and various provisions of the Investment Company Act (the "ICA"), 15 U.S.C. §§ 80a-15(a), 80a-20(a), required dismissal of the two claims because these claims were derivative in nature, not direct, and as such failed as a matter of law. Specifically addressing their requested dismissal of Claim One, the defendants relied in part on a then-recently enacted provision of Massachusetts law codifying the business-judgment rule permitting a corporation's directors to move to dismiss a derivative lawsuit as to the prosecution of which the leadership concluded would not be in the corporation's best interest.
In Halebian II, we agreed with the defendants and the district court, classifying the second and third claims asserted in the plaintiff's complaint as derivative by looking to Massachusetts law, which all agree is applicable. Halebian II, 590 F.3d at 210. We saw the gravamen of the second and third claims as Halebian's challenge to the use of echo voting. We then reasoned:
Id. (footnotes omitted). We thus expressed our inclination to affirm the judgment of the district court (Naomi Reice Buchwald, Judge) dismissing Halebian's second and third claims, but declined to resolve them at that time. We reserved decision on those claims so that we could consider any commentary or analysis that the Supreme Judicial Court of Massachusetts might offer in answering our certified question regarding Halebian's first claim. Id.
As to Halebian's undisputedly derivative first claim, which alleges a breach of fiduciary duty for failure to investigate alternatives
Proffering an alternative reading,
On August 23, 2010, the Supreme Judicial Court issued an opinion answering our certified question in the affirmative. Halebian III, 457 Mass. at 621, 931 N.E.2d at 987. The court reasoned, inter alia:
Id. at 632-33, 931 N.E.2d at 995.
We now resolve the instant appeal in light of the careful opinion of the Supreme Judicial Court of Massachusetts in response to our certified question.
Because the Supreme Judicial Court said nothing in Halebian III that affects our analysis of Halebian's second and third claims as set forth in Halebian II, we affirm the judgment of the district court dismissing those claims for the reasons set forth in our prior opinion. See Halebian II, 590 F.3d at 207-10.
The Supreme Judicial Court, in agreement with the district court in this case, ruled that a defendant in a derivative suit governed by Massachusetts Law may employ the business judgment rule, codified at Mass. Gen. Laws ch. 156D, § 7.44, to dismiss a shareholder complaint that is filed prior to a corporation's rejection of the demand that serves as the basis for the suit. Halebian III, 457 Mass. at 621, 931 N.E.2d at 987. It does not follow, however, that we can affirm the district court's judgment in its present form.
As stated by the Supreme Judicial Court, the business judgment rule embodied in section 7.44 "protects a corporation's decision that prosecution of [a] claim demanded by [a] shareholder is not in the best interests of the corporation where the decision is made in good faith by independent decision makers after reasonable inquiry."
In ruling on Claim One, the district court adverted to the fact that the plaintiff did not plead or otherwise proffer "any reason why the Board's decision to reject the demand was illegitimate." Halebian I, 631 F.Supp.2d at 296. But we think that relying solely on the failure of the plaintiff to contest the corporation's filing omits a crucial statutory step. The statute requires a court to "find[]" that various conditions have been satisfied: that the Board is independent, and that it in good faith determined after a reasonable inquiry that the plaintiff's suit was not in the corporation's best interests. Mass. Gen. Laws ch. 156D, § 7.44(d). The latter component— the existence of a good-faith, reasonable inquiry into the corporation's best interests vis-à-vis the plaintiff's suit—is subject to the burden-shifting provisions of subsection (e). See id. § 7.44(e). However, that such burden-shifting turns on the independence of the decision maker unambiguously demonstrates that the court's evaluation of independence is a prerequisite to the operation of the dismissal statute in toto.
We see no such finding of independence in Halebian I.
In light of the requirement that a deciding court, in ruling on a motion brought under section 7.44 to dismiss a derivative suit, must evaluate the movant's evidentiary submissions to determine whether the corporate entity rejecting a plaintiff's demand is independent, and because the district court did not do so in evaluating the defendants' motion under Federal Rule of Civil Procedure 12(b)(6), we vacate the court's judgment as to Claim One.
In Halebian II, we noted that the plaintiff also pressed the argument that even assuming section 7.44 did apply to the facts of this case—a question the Supreme Judicial Court has now settled definitively in the affirmative—the district court erred by failing to convert the Board's motion to dismiss into a motion for summary judgment and in barring the plaintiff from seeking discovery before deciding such a motion. Halebian II, 590
As we have noted, section 7.44 sets forth both substantive standards for adjudicating the effectiveness of a board's rejection of a demand and instructions regarding the procedure by which that rejection must be communicated to—and its validity established before—a court. The dismissal procedure requires a defendant to submit various extrinsic evidentiary materials that the plaintiff may not have referenced or included within his complaint. See Mass. Gen. Laws ch. 156D, § 7.44(d).
By contrast, the purpose of Federal Rule of Civil Procedure 12(b)(6) "is to test, in a streamlined fashion, the formal sufficiency of the plaintiff's statement of a claim for relief without resolving a contest regarding its substantive merits." Global Network Commc'ns, Inc. v. City of New York, 458 F.3d 150, 155 (2d Cir.2006) (emphasis omitted); accord LaBounty v. Adler, 933 F.2d 121, 123 (2d Cir.1991). The court therefore does not ordinarily look beyond the complaint and attached documents in deciding a motion to dismiss brought under the rule. Staehr v. Hartford Fin. Servs. Grp., Inc., 547 F.3d 406, 425 (2d Cir.2008).
On the other hand, of course, on a motion for summary judgment under Federal Rule of Civil Procedure 56, the parties test the substantive merits of the claim or claims and their evidentiary support based on "additional supporting material" in their possession or obtained during discovery. Chambers v. Time Warner, Inc., 282 F.3d 147, 154 (2d Cir.2002); see Global Network Commc'ns, 458 F.3d at 155 (Although Rule 12(b)(6) "assesses the legal feasibility of the complaint, [it] does not weigh the evidence that might be offered to support it."). When "matters outside the pleadings are presented to and not excluded by the court, the motion must be treated as one for summary judgment under Rule 56," Fed.R.Civ.P. 12(d), in order to ensure that the party against whom the motion to dismiss is made may respond. Cortec Indus., Inc. v. Sum Holding L.P., 949 F.2d 42, 48 (2d Cir.1991), cert. denied, 503 U.S. 960, 112 S.Ct. 1561, 118 L.Ed.2d 208 (1992).
The procedure contemplated by section 7.44 of the Massachusetts statute does not easily fit within the constraints of Rule 12(b)(6), even as it has been broadened by occasional judicial glosses on its terms.
According to the statute, then, the corporation first must file its motion to dismiss and "make a written filing with the court setting forth facts to show . . . whether a majority of the board of directors was independent at the time of the determination by the independent directors." Id. § 7.44(d). If, as discussed in Part II(A), above, the trial court determines that the board is independent, the plaintiff bears the burden of demonstrating that the independent directors did not make the determination "in good faith after conducting a reasonable inquiry upon which their conclusions are based."
Insofar as the section 7.44 procedure encourages or requires the parties to submit, and under which it is expected that the court will review, evidentiary materials outside the scope of what the plaintiff has already included or incorporated into his or her complaint, the section 7.44 procedure appears to be incompatible with a federal court's limited powers to grant a Rule 12(b)(6) motion to dismiss. Although we cannot foreclose the possibility that there may be cases in which the two regimes would not conflict,
Although Halebian contended in the district court, and does so again on appeal, that he should have been afforded the opportunity to conduct additional discovery in order to rebut the Board's filing, under both Federal Rule 56 and section 7.44, the availability of further discovery is a matter within the district court's discretion. Cf. Fagin, 432 F.3d at 285 (noting that the appellate panel remanding to the district court for resolution by summary judgment "d[id] not intrude on the [district c]ourt's discretion as to the extent of discovery it needs to decide the issue"). While we decline to decide the question, the district court may well have acted within its discretion in denying the plaintiff's request for discovery, particularly in light of the defendants' submission of "thousands of pages detailing the backgrounds of the directors at issue, as well as the extensive efforts made by the independent counsel in preparing its review of the demand for the committee and the Board." Halebian I, 631 F.Supp.2d at 298. We nonetheless think that a reevaluation of any such application by the plaintiff for more discovery in light of Rule 56 case law and procedures would be advisable on remand.
In rejecting the plaintiffs' discovery request, the district court wrote: "Absent a specific allegation in the complaint as to why the Board was not disinterested, nor why the demand was refused, and absent a specific argument from plaintiff as to what more discovery would yield, we decline to allow plaintiff to avail himself of a premature opening of the floodgates to discovery in an effort to cure the deficiencies in the complaint."
For the foregoing reasons, we affirm the judgment of the district court dismissing Claims Two and Three of the complaint. We vacate that portion of the district
To be sure, the plaintiff devoted much of his memorandum of law in opposition to the 12(b)(6) motion to argument for additional discovery, rather than to a direct refutation of the defendants' section 7.44 filing. Pl.'s Mem. in Opp. to Def.'s Mot. to Dismiss Compl., Halebian I, No. 06 Cv 4099 (S.D.N.Y. Dec. 7, 2006). But the plaintiff made clear that his goal in seeking additional discovery was precisely to rebut the Board's assertions. See, e.g., id. at 11 (asserting that defendants are "simultaneously acting as defendants, judge, and jury"), 12 (arguing that "discovery is necessary to address the danger of allowing the [Board] to appoint a few `good ol' boys' as a special litigation committee [("SLC")] and have legitimate claims `whitewashed' through the relative ease of constructing a record of apparently diligent investigation" (internal quotation marks omitted)), 13 (expressing concern about the "strong potential for structural bias in" SLCs), 14 (articulating the "very serious danger that the [Board] . . . would be inherently biased and fail to investigate plaintiff's allegations against them and their fellow trustees in good faith").
Those statements are not factual assertions, and insofar as the district court rejected their value as such, the court clearly did not err. However, in our view, the plaintiff's opposition here did not constitute an "explicit" refusal or "unwillingness" to contest the Board's assertions under section 7.44.
In this case, though, the district court necessarily relied on the defendants' extrinsic submissions in granting dismissal to the defendants. Although the court was careful to disclaim any consideration of materials improperly before it on a 12(b)(6) motion, see Halebian I, 631 F.Supp.2d at 287 n. 1, we conclude that on the instant facts, the dictates of section 7.44 made such a task impossible.
Halebian I, 631 F.Supp.2d at 296 n. 8.
