NOTICE: Summary decisions issued by the Appeals Court pursuant to M.A.C. Rule 23.0, as appearing in 97 Mass. App. Ct. 1017 (2020) (formerly known as rule 1:28, as amended by 73 Mass. App. Ct. 1001 [2009]), are primarily directed to the parties and, therefore, may not fully address the facts of the case or the panel's decisional rationale. Moreover, such decisions are not circulated to the entire court and, therefore, represent only the views of the panel that decided the case. A summary decision pursuant to rule 23.0 or rule 1:28 issued after February 25, 2008, may be cited for its persuasive value but, because of the limitations noted above, not as binding precedent. See Chace v. Curran, 71 Mass. App. Ct. 258, 260 n.4 (2008).
COMMONWEALTH OF MASSACHUSETTS
APPEALS COURT
23-P-743
VIJAY BASANI & another 1
vs.
CYGILANT, INC.
MEMORANDUM AND ORDER PURSUANT TO RULE 23.0
This appeal stems from a dispute between the defendant
corporation, Cygilant, Inc. (Cygilant), and two minority
shareholders over the management and direction of the company
and Cygilant's efforts to raise outside capital. The plaintiff
minority shareholders, Vijay Basani and Jayapal Basani, as
trustee of the Reddy Family Living Trust, are the original
founders of Cygilant, which they started in 2003 to develop and
market cyber security software services. They brought this
action in July 2021 alleging that Cygilant had violated certain
contractual rights owed to them. Cygilant counterclaimed,
1 Jayapal Basani, as the trustee of the Reddy Family Living Trust. alleging that the Basanis had violated fiduciary duties owed to
the company. The Basanis filed a motion to dismiss Cygilant's
counterclaim with prejudice, pursuant to Mass. R. Civ. P.
12 (b) (6), 365 Mass. 754 (1974), on the ground that as minority
shareholders they owed no fiduciary duties to Cygilant. The
motion to dismiss was allowed by a judge of the Superior Court.
The judge also denied Cygilant's motion to amend its
counterclaim. 2 At the Basanis' request, their claims were
dismissed without prejudice so that the Basanis could pursue
those claims in a related action in Delaware. 3 A final judgment
of dismissal entered on April 11, 2023. Thereafter, Cygilant
filed a motion for reconsideration, which was denied on May 19,
2023.
2 The judge described Cygilant's motion to amend its counterclaim as "futile" because "the more detailed factual allegations in [the] proposed amended counterclaim [did] not plausibly suggest that the Basanis ever exercised any control over Cygilant's planned refinancing, without which the Basanis would not owe the company a fiduciary duty under Delaware law." Although the judge denied the motion to amend, he analyzed the allegations set forth in both the counterclaim and the proposed amended counterclaim in reaching his conclusion. We do the same. However, we do not consider "legal conclusions cast in the form of factual allegations." Leavitt v. Brockton Hosp., Inc., 454 Mass. 37, 39 n.6 (2009). Stripped of such conclusions, the amended counterclaim still relied on facts associated with the Basanis' exercise of their contractual rights. Accordingly, Cygilant's motion to amend was properly denied.
3 Accordingly, this appeal does not concern any issues with respect to the Basanis' claims.
2 Cygilant appeals, arguing that (1) the motion judge erred
in concluding that Cygilant did not plead facts showing that the
Basanis were controlling shareholders who owed the company
fiduciary duties and (2) to the extent Cygilant's counterclaim
should have been dismissed, the judgment of dismissal should
have been without prejudice. We affirm.
Background. In reviewing the judgment of dismissal, we
accept as true the well-pleaded facts as alleged by Cygilant in
support of its counterclaim and draw all reasonable inferences
in Cygilant's favor. See Shaw's Supermkts., Inc. v. Melendez,
488 Mass. 338, 339 (2021). The Basanis founded Cygilant in 2003
and managed its operations until 2019, at which time they agreed
to separate from the company as officers or directors but
remained shareholders, holding 28.14 percent of Cygilant's
series 1 preferred stock. To protect their interests as
minority shareholders, the Basanis received "enhanced controls
and protections" that were set forth in their stock purchase
agreement and various corporate documents. These protections
gave the Basanis the right to obtain information from the
company, approve debt financing, approve equity financing, and
avoid the dilution of their stock, among other things.
In 2020, Cygilant needed additional operating capital but
was unable to obtain traditional debt financing. Consequently,
Cygilant decided to try to obtain equity financing by offering
3 additional shares of the series 1 preferred stock and, as part
of that process, asked the Basanis to waive some of their
protections. In response, the Basanis demanded information from
Cygilant "under the guise of 'due diligence.'" Cygilant
provided some information, but the Basanis asserted that the
information provided was insufficient. Cygilant alleged that
the Basanis acted out of self-interest by not waiving their
contractual rights and by requiring Cygilant to produce
irrelevant information. Ultimately, the Basanis proposed that
Cygilant raise additional equity financing to buy them out.
Cygilant declined to do so 4 and, instead, obtained debt financing
at premium rates.
Discussion. We review de novo the allowance of a motion to
dismiss for failure to state a claim. See Shaw's Supermkts.,
Inc., 488 Mass. at 339. The parties agree that the primary
issue is whether Cygilant pleaded facts showing that the Basanis
were controlling shareholders who owed the company fiduciary
duties. The parties, and the judge, agreed that since Cygilant
is a Delaware corporation, this issue must be resolved under
Delaware law. Under Delaware law, a shareholder owes fiduciary
duties to the corporation and other shareholders "if [the
4 Cygilant alleged that "[t]he company needed any further investment for its operations and growth, not to line [the] Basanis' pockets."
4 shareholder] owns a majority interest in or exercises control
over the business affairs of the corporation" (quotation,
emphasis omitted). Kahn v. Lynch Communication Sys., Inc., 638
A.2d 1110, 1113 (Del. 1994). Thus, for a minority shareholder
to owe fiduciary duties, that minority shareholder must exercise
"actual control" (quotation omitted). Id. at 1114. A
shareholder who does not exercise actual control as a general
matter but who exercises actual control over a particular
transaction owes fiduciary duties for that particular
transaction. See, e.g., id. at 1114-1115. However, the
exercise of contractual rights, without more, does not amount to
the exercise of actual control. See In re KKR Fin. Holdings LLC
Shareholder Litigation, 101 A.3d 980, 992-994 (Del. Ch. 2014).
Cygilant's allegations show nothing more than the Basanis'
exercise of their contractual rights. As alleged, the Basanis
received certain contractual rights to protect their interests
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NOTICE: Summary decisions issued by the Appeals Court pursuant to M.A.C. Rule 23.0, as appearing in 97 Mass. App. Ct. 1017 (2020) (formerly known as rule 1:28, as amended by 73 Mass. App. Ct. 1001 [2009]), are primarily directed to the parties and, therefore, may not fully address the facts of the case or the panel's decisional rationale. Moreover, such decisions are not circulated to the entire court and, therefore, represent only the views of the panel that decided the case. A summary decision pursuant to rule 23.0 or rule 1:28 issued after February 25, 2008, may be cited for its persuasive value but, because of the limitations noted above, not as binding precedent. See Chace v. Curran, 71 Mass. App. Ct. 258, 260 n.4 (2008).
COMMONWEALTH OF MASSACHUSETTS
APPEALS COURT
23-P-743
VIJAY BASANI & another 1
vs.
CYGILANT, INC.
MEMORANDUM AND ORDER PURSUANT TO RULE 23.0
This appeal stems from a dispute between the defendant
corporation, Cygilant, Inc. (Cygilant), and two minority
shareholders over the management and direction of the company
and Cygilant's efforts to raise outside capital. The plaintiff
minority shareholders, Vijay Basani and Jayapal Basani, as
trustee of the Reddy Family Living Trust, are the original
founders of Cygilant, which they started in 2003 to develop and
market cyber security software services. They brought this
action in July 2021 alleging that Cygilant had violated certain
contractual rights owed to them. Cygilant counterclaimed,
1 Jayapal Basani, as the trustee of the Reddy Family Living Trust. alleging that the Basanis had violated fiduciary duties owed to
the company. The Basanis filed a motion to dismiss Cygilant's
counterclaim with prejudice, pursuant to Mass. R. Civ. P.
12 (b) (6), 365 Mass. 754 (1974), on the ground that as minority
shareholders they owed no fiduciary duties to Cygilant. The
motion to dismiss was allowed by a judge of the Superior Court.
The judge also denied Cygilant's motion to amend its
counterclaim. 2 At the Basanis' request, their claims were
dismissed without prejudice so that the Basanis could pursue
those claims in a related action in Delaware. 3 A final judgment
of dismissal entered on April 11, 2023. Thereafter, Cygilant
filed a motion for reconsideration, which was denied on May 19,
2023.
2 The judge described Cygilant's motion to amend its counterclaim as "futile" because "the more detailed factual allegations in [the] proposed amended counterclaim [did] not plausibly suggest that the Basanis ever exercised any control over Cygilant's planned refinancing, without which the Basanis would not owe the company a fiduciary duty under Delaware law." Although the judge denied the motion to amend, he analyzed the allegations set forth in both the counterclaim and the proposed amended counterclaim in reaching his conclusion. We do the same. However, we do not consider "legal conclusions cast in the form of factual allegations." Leavitt v. Brockton Hosp., Inc., 454 Mass. 37, 39 n.6 (2009). Stripped of such conclusions, the amended counterclaim still relied on facts associated with the Basanis' exercise of their contractual rights. Accordingly, Cygilant's motion to amend was properly denied.
3 Accordingly, this appeal does not concern any issues with respect to the Basanis' claims.
2 Cygilant appeals, arguing that (1) the motion judge erred
in concluding that Cygilant did not plead facts showing that the
Basanis were controlling shareholders who owed the company
fiduciary duties and (2) to the extent Cygilant's counterclaim
should have been dismissed, the judgment of dismissal should
have been without prejudice. We affirm.
Background. In reviewing the judgment of dismissal, we
accept as true the well-pleaded facts as alleged by Cygilant in
support of its counterclaim and draw all reasonable inferences
in Cygilant's favor. See Shaw's Supermkts., Inc. v. Melendez,
488 Mass. 338, 339 (2021). The Basanis founded Cygilant in 2003
and managed its operations until 2019, at which time they agreed
to separate from the company as officers or directors but
remained shareholders, holding 28.14 percent of Cygilant's
series 1 preferred stock. To protect their interests as
minority shareholders, the Basanis received "enhanced controls
and protections" that were set forth in their stock purchase
agreement and various corporate documents. These protections
gave the Basanis the right to obtain information from the
company, approve debt financing, approve equity financing, and
avoid the dilution of their stock, among other things.
In 2020, Cygilant needed additional operating capital but
was unable to obtain traditional debt financing. Consequently,
Cygilant decided to try to obtain equity financing by offering
3 additional shares of the series 1 preferred stock and, as part
of that process, asked the Basanis to waive some of their
protections. In response, the Basanis demanded information from
Cygilant "under the guise of 'due diligence.'" Cygilant
provided some information, but the Basanis asserted that the
information provided was insufficient. Cygilant alleged that
the Basanis acted out of self-interest by not waiving their
contractual rights and by requiring Cygilant to produce
irrelevant information. Ultimately, the Basanis proposed that
Cygilant raise additional equity financing to buy them out.
Cygilant declined to do so 4 and, instead, obtained debt financing
at premium rates.
Discussion. We review de novo the allowance of a motion to
dismiss for failure to state a claim. See Shaw's Supermkts.,
Inc., 488 Mass. at 339. The parties agree that the primary
issue is whether Cygilant pleaded facts showing that the Basanis
were controlling shareholders who owed the company fiduciary
duties. The parties, and the judge, agreed that since Cygilant
is a Delaware corporation, this issue must be resolved under
Delaware law. Under Delaware law, a shareholder owes fiduciary
duties to the corporation and other shareholders "if [the
4 Cygilant alleged that "[t]he company needed any further investment for its operations and growth, not to line [the] Basanis' pockets."
4 shareholder] owns a majority interest in or exercises control
over the business affairs of the corporation" (quotation,
emphasis omitted). Kahn v. Lynch Communication Sys., Inc., 638
A.2d 1110, 1113 (Del. 1994). Thus, for a minority shareholder
to owe fiduciary duties, that minority shareholder must exercise
"actual control" (quotation omitted). Id. at 1114. A
shareholder who does not exercise actual control as a general
matter but who exercises actual control over a particular
transaction owes fiduciary duties for that particular
transaction. See, e.g., id. at 1114-1115. However, the
exercise of contractual rights, without more, does not amount to
the exercise of actual control. See In re KKR Fin. Holdings LLC
Shareholder Litigation, 101 A.3d 980, 992-994 (Del. Ch. 2014).
Cygilant's allegations show nothing more than the Basanis'
exercise of their contractual rights. As alleged, the Basanis
received certain contractual rights to protect their interests
as minority shareholders when they agreed to step down from
operating the company. As alleged, the Basanis then exercised
some of those contractual rights when Cygilant decided to try to
obtain equity financing by offering additional shares of the
series 1 preferred stock. While Cygilant's "pre-existing
contractual obligations with [the Basanis] . . . constrain[ed]
the business or strategic options available to [Cygilant]," In
5 re KKR Fin. Holdings LLC Shareholder Litigation, 101 A.3d at
994, they do not show that the Basanis exercised actual control.
While Cygilant argues that it pleaded other factors showing
that the Basanis exercised actual control, we are not persuaded.
Cygilant argues that the Basanis "misused" their contractual
rights for their unilateral benefit and that the Basanis'
requests for information amounted to "harassment." These
arguments go to the fact that Cygilant objected to how the
Basanis exercised their contractual rights, but their alleged
manner of exercising those rights does not establish the sort of
"other factors" demonstrating actual control, such as a minority
shareholder's control or influence of the board, that are
present in the cases on which Cygilant relies.
Lastly, Cygilant has not advanced any persuasive reason why
the judgment of dismissal should have been without prejudice.
Cygilant argues that the parties are litigating a related case
in Delaware, see note 2, supra, and that the judgment of
dismissal with prejudice "could affect other arguments and
defenses that Cygilant has in Delaware" as a result of claim
preclusion. As the motion judge explained, if Cygilant thinks
it has arguments and defenses "that are not properly precluded
by the dismissal of its breach of fiduciary duty
counterclaim . . . it will need to make that argument in the
jurisdiction where it seeks to assert [those arguments and
6 defenses]. But Cygilant is and should be bound by the rules of
claim preclusion if and when it does so."
Judgment affirmed.
Order denying motion for reconsideration affirmed.
By the Court (Vuono, Massing & Toone, JJ. 5),
Assistant Clerk
Entered: June 4, 2024.
5 The panelists are listed in order of seniority.