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Massachusetts Supreme Judicial Court Rules on Liability of Directors and Investors For Wages to Corporate Employees

Posted on Jan 10th, 2018

Ryan S. Carroll
January 10, 2018

A constant concern for board members and investors is the personal liability to which they might be exposed as a result of their typically limited roles with a company. Thanks to a recent ruling by Massachusetts’ highest court, board members and investors of companies can take some comfort that liability for wages pursuant to the Massachusetts Wage Act, M.G.L. c. 149, § 148 (Wage Act) will not apply in most cases.

In Andrew Segal vs. Genitrix, LLC, the Massachusetts Supreme Judicial Court held that two former board members and investors in Genitrix, LLC (Genitrix) were not personally liable under the Wage Act for failing to pay wages owed to the former president of the Company, Andrew Segal (Segal). The Court concluded that, “…the Wage Act does not impose personal liability on board members, acting only in their capacity as board members, or investors engaged in ordinary investment activity.” It further concluded that, “… to impose such liability, the statute requires that the defendants be ‘officers or agents having the management’ of a company.” Additionally, defendants who were former board members had limited agency authority and management of the company as they were not also designated as company officers.

The scenario in the Genitrix case, while apparently being a case of first impression in terms of the law, is actually quite common in the startup world. Genitrix was a life-sciences startup that raised several rounds of angel financing, pursuant to which the investors had rights to sit on the Board and to approve various major corporate actions. As the Company’s cash position depleted and the business did not take off as planned, it was unable to raise additional funds. At that time, Segal, the Company’s founder, president and key employee, took it upon himself to defer his own compensation and implement other cost-cutting measures. Because the investors had approval rights over these matters, these matters were approved, or at least made known, to the Board. To keep the Company in business, the investors also put in additional emergency capital which included specific terms on how the funds would be applied, among other conditions. Segal later argued that these approval rights amounted to the directors and investors becoming “agents having management of [the] corporation,” which the Court rejected.

A brief summary of the Wage Act as the Court applied it to board members and investors in the Genitrix case is as follows:
1) employers are required to compensate employees for earned wages;
2) an employer may be sued directly if it does not pay employees for earned wages;
3) an “employer” is a business or person having employees in its, his or her service;
4) in corporations, “employers” are, by definition, the president, treasurer, and any officer or agents having the management of the corporation (in addition to the corporation itself)
5) the Wage Act does not include board members or investors as “employers” to the extent their roles are limited to those of what a board member or investor would typically do in order to safeguard their investments or participate in board meetings; and
6) if personal liability is to be imposed on individuals who are board directors or investors, it will not be imposed by virtue of their holding those roles, but they must be also be (i) the president, (ii) the treasurer, or (iii) officers or agents having assumed and accepted individual responsibility for the management of the company.

In concluding against a finding of agency, the Court reasoned that a Board acts collectively and not individually; accordingly, the actions of a director are not of an agent, but “as one of the group which supervises the activities of the corporation.” Similarly, an investor’s exercise of its rights is separate and distinct from serving as an agent. Exercising those rights and, in particular, the “leverage as an investor over infusions of new money” are separate and distinct from being an agent having the management of the company. While the documents in this case did provide the investors with some, albeit very limited, powers regarding Segal’s employment agreement (which included the Company’s rights under that agreement to fire Segal for cause and to select his successor), the Court held that this limited authority would not amount to “agency” as required for liability to apply under the Wage Act.

It is also important to note that Genitrix was a Delaware limited liability company headquartered in Boston, and not a Massachusetts limited liability company. While the Massachusetts corporate laws generally would not be applicable to corporate directors and officers for a Delaware entity – which would be governed by Delaware law under what is known as the “internal affairs doctrine” – the Wage Act applies to any employer in the Commonwealth regardless of where it is formally organized.

While this ruling is a win for board members and investors, it does not mean that they cannot be found liable pursuant to the Wage Act. This case illustrates how important it is for board members and investors to only become officers of a company if necessary and to limit their agency authority and exposure to management of the company in the language contained in their company documents.

We recommend having experienced corporate or employment counsel analyze each situation to ensure that board members and investors are not agreeing to written documents overstating their level of management or agency authority, and that investors and board members consult with such counsel to understand the limitations of their roles that are necessary to avoid the risk of personal liability.


Delaware extends statute of limitations to 20 years for breach of contract claims

Posted on Sep 6th, 2014

The State of Delaware recently passed legislation that authorizes a statute of limitations of up to 20 years for breach of contract claims.  Delaware is the first state to adopt a statute of limitations of such length for breach of contract claims.  The legislation, which amended Section 8106 of Title 10 of the Delaware Code, was effective on August 1, 2014.  The new amended Section enables parties to a written contract involving at least $100,000 to provide that up to a twenty year limitations period will apply to any breach claims arising from the contract.

Historically, the Delaware statute of limitations for contract type claims was either three years (for general contracts) or four years (for UCC claims).  Because claims for other types of liabilities (such as say ERISA or tax claims) a buyer could be find itself liable for these third party liabilities without a remedy against a seller if the shorter limitations period had already expired.  For this reason, practitioners have tried to draft around this issue by allowing claims from certain types of reps (often referred to as the “Fundamental Representations”) to survive by contract for a longer period of time.  However, the case law on whether this actually would be enforceable has been unclear and the issue often turns on whether a contract was signed “under seal”.   While a physical seal is not necessary in Delaware, it is important to reference those key words (signed under seal, executed under seal, etc.) next to the executory signature.  Clearly a somewhat an antiquated process, and a trap for the unwary waiting to happen.

The Delaware legislature has now responded by allowing the parties to contract for this extended limitations period, without the need for the arcane “seal” language.  Now that this period is up to 20 years, the parties’ bargained-for terms will be given much greater effect under typical asset purchase or merger agreements involving the acquisition of a private company.  Since many commercial contracts also are governed by Delaware law, even where the parties are not based in Delaware, it is important to note this change for that context as well.

Although the legislation does not specifically indicate whether it would apply to contracts entered into prior to August 1, case law discussing amendments to statutes of limitations as “remedial” and not affecting “substantive or vested rights,” particularly where a statute of limitations is not shortened so as to cut off a plaintiff’s right to bring suit, suggests that this legislation should apply to contracts entered into prior to its effective date.

 


SJC issues key interpretive decision in employee-shareholder context

Posted on Mar 18th, 2014
Last week’s decision by the Massachusetts Supreme Judicial Court in Selmark Associates et al. v. Ehrlich is a critical reminder to corporate lawyers and fiduciaries of the extensive protections of minority shareholders of Massachusetts corporations and the necessity for carefully drafted shareholder and employment agreements with shareholder employees in such companies.  Two key takeaways from this decision are as follows:
  • In closely held corporations, Massachusetts has long afforded minority shareholders the protection of a fiduciary duty owed to them by the other shareholders that is more extensive than other states, such as Delaware, for example.  While courts will allow shareholders to provide otherwise in written agreements, Selmark holds that if the shareholder agreements are not specifically on point, the fiduciary duty standard will apply.
  • Going the other way, Selmark holds that the solicitation of customers by a former employee shareholder (who is then still a shareholder) is also breach of such shareholder’s fiduciary duty to his fellow shareholders, even where the employment was terminated by the corporation and was considered a “freeze out” under corporate law.  While this holding certainly could give companies more leverage in separation discussions with former employee shareholders, the potential uncertainty created over the scope of such a non-solicitation duty that was not reduced to writing could present significant challenges to practitioners on both sides of the matter.

Because of the potential uncertainly to fiduciary duty claims added by this decision, parties on both sides would be well advised to address the issue of fiduciary duty head-on in their agreements, and to define as specifically as possible the scope of any limitations to that duty.  While this point is not addressed by the Court, both employers and employees may also consider the advantages (and disadvantages) of using holding companies and special purpose entities to separate the legal identity of the employee from that of the shareholder.

In addition, potential buyers and sellers of Massachusetts corporations should take note of this case in the planning of their transaction.

If you have any questions about this topic, please feel free to email us.

Background

They say that bad facts often make bad law.  If that is true, then this case certainly does not disappoint.  The case ultimately arises from a sudden (and apparently unwarranted) termination of employment of a shareholder employee, Ehrlich, who  had been a long term valued employee of Selmark and its affiliate Marathon.  Ehrlich originally was employed by Marathon and had informally been promised equity in the company by its founder.  As part of Marathon founder’s planned retirement and succession plan a number of years later, Erhlick entered into a series of agreements with the sole stockholder of Selmark (Elofson) involving the gradual sale of Marathon to Ehrlich and Selmark. These agreements comprised a stock purchase agreement, an employment agreement, a conversion agreement and a stock (shareholders) agreement.

The purchase agreement provided for the gradual acquisition of Marathon stock by the two purchasers through monthly payments pursuant to promissory notes. Upon full payment, Selmark would own 51% and Ehrlich 49%. Under the terms of the purchase agreement, Marathon bore primary responsibility for the monthly payments and Ehrlich and Selmark were each separate co-guarantors.

The employment agreement between Ehrlich and Marathon provided for a term of employment through 2002, with extension possible on the written agreement of the parties. Per its terms, Ehrlich became the vice-president of Marathon and potentially a director, and could only be terminated for cause. If the agreement was not extended, at the conclusion of the initial contract term, it would terminate and Ehrlich would be required to resign as an officer and director of Marathon.

Pursuant to a separate  conversion agreement, Ehrlich had the option, once he and Selmark fully paid off the purchase of Marathon, to convert what would his then 49% interest in Marathon into a 12.5% interest in Selmark (and then Selmark would own 100% of Marathon).  This agreement also required that, upon conversion, Selmark offer Ehrlich an employment agreement that would provide “for compensation, bonuses, expense payments, and benefits consistent with his percentage ownership of [Selmark].”  Independent of employment, upon conversion, Ehrlich was to become an officer of Selmark and member of its board of directors.

Under a separate “stock agreement”, if Ehrlich paid off his purchased stock and exercised his conversion option, Ehrlich’s rights as a minority stockholder of Selmark would be governed by that agreement.  This agreement provided both parties with the opportunity to end their business relationship through the sale of Ehrlich’s stock, which included a cross-purchase put and call rights for the parties.

After these agreements were executed, Marathon and Selmark remained separate entities, but presented themselves as “Selmark” to the outside world.  Ehrlich identified himself as a VP of Selmark even, while technically  he was an employee and vice-president of Marathon.  Ehrlich’s employment agreement expired by its terms in 2002, but Ehrlich remained an employee of Marathon and retained his position as vice-president. In 2003, Ehrlich began to report directly to Selmark’s management and received no complaints about his job performance.

In the summer of 2007, Ehrlich provided notice to Elofson that he intended to accelerate his final payments on his 49% share of Marathon stock by December 2007.  According to the Court, Elofson then decided that he did not want Erhlich as a business partner and in October 2007 informed Ehrlich that his employment with Marathon was terminated and offered for  Selmark to purchase Ehrlich’s 49% interest in Marathon for the same price he would have received had he converted his Marathon shares into Selmark stock and then Selmark had exercised its call rights pursuant to the stock agreement.  To assuage him to sell his shares, Elofson also told Ehrlich that Marathon did not have the cash-flow to support the continuing payments under the Notes, and that Ehrlich would have to meet the shortfall if he did not sell his shares to Elofson.

In November 2007, Ehrlich took a job with a competing manufacturer’s representative company and afterwards solicited some of Marathon’s customers. After his termination, Ehrlich received a small severance, but did not cash in his Marathon stock under the terms offered in the termination letter and remained a minority shareholder of Marathon.

Following his termination, Ehrlich did not believe that Marathon had insufficient funds to make its remaining payments under the notes.  Taking matters somewhat into his own hands, he suspended payments to Marathon which appears to have only complicated the parties disputed because of the default issues that arose.  While it appears that Ehrlich did eventually pay off his portion of the Notes and attempted to cure the default, the ambiguity over whether he perfected his conversion rights and his shareholder rights under the stock agreement added additional complexity to the dispute.

In 2008, Selmark and Marathon sued Ehrlich for breach of fiduciary duty for his solicitation of Marathon customers, and  Ehrlich responded with thirteen counterclaims against counterclaims, also including fiduciary duty claims.  At trial, the jury ruled in favor of the plaintiffs on their fiduciary duty claim, and in favor of Ehrlich (with respect to Selmark and Elofson) on his breach of contract, fiduciary duty and 93A counterclaims, netting a significant verdict in his favor.  (The trial judge also later doubled the 93A damages and awarded attorney’s fees. )  The parties then appealed.

Discussion

While many aspects of this decision are worth a careful reading in its original, unabridged version, the most interesting parts of this case for me relate to its holdings on the fiduciary duty issue.

1.  Fiduciary Duty owed to Ehrlich as an Employee Shareholder.  The jury found that Selmark and Elofson breached their fiduciary duties to Ehrlich in relation to the termination of his employment by Marathon.  Citing the long standing precedent in Massachusetts protecting minority stockholders in closely held corporations, the SJC held that a “freeze-out” can occur “when a minority shareholder is deprived of employment”.

Although the Court acknowledged that fiduciary duties of good faith and loyalty may be inapplicable where the parties have negotiated a series of agreements intended to govern the terms of their relationship, the challenged conduct must be clearly contemplated by the terms of the written agreements.  The presence of a contract “will not always supplant a shareholder’s fiduciary duty, ” and when the contract does not entirely govern the other shareholders’ or directors’ challenged actions, a claim for breach of fiduciary duty may still lie.   To supplant the otherwise applicable fiduciary duties of parties in a close corporation, the terms of a contract must clearly and expressly indicate a departure from those obligations.

In this case, while the parties had entered into multiple, complex written agreements, the Court still held that none of these agreements covered the duties at issue.  The Court reasoned that none of the agreements contained terms that addressed Ehrlich’s employment rights upon expiration of his Marathon employment agreement and before conversion of his Marathon stock.  Finding that fiduciary duty did apply, the Court affirmed the trial court’s findings in favor of Ehrlich on these issues.  Among its reasoning, the Court noted that Elofson could have sought less harmful alternatives before resorting to termination, and cited precedent that a fellow shareholder employee is owed “real substance and communication, including efforts to resolve supposed complaints by less drastic measures than termination.”

2.  Fiduciary Duty owed by Ehrlich.   At trial, Marathon and Selmark argued that Ehrlich violated his fiduciary duties of good faith and loyalty to Marathon when he solicited Marathon’s customers for his new employer. The jury agreed, and awarded them $240,000 in damages.  On appeal, Ehrlich contended that, because he was fired by Elofson and essentially “frozen out” of Marathon, he had the right to compete with Marathon without committing a breach of his fiduciary duties to the company.

Ruling in favor of the employer in this case, the Court cited long-standing precedent under Massachusetts law that  shareholders in close corporations owe fiduciary duties not only to one another, but to the corporation as well.  (See, e.g., Chambers v. Gold Medal Bakery, Inc., 464 Mass. 383, 394 (2013); Donahue v. Rodd Electrotype Co. of New England, Inc., 367 Mass. at 593.)

At issue here was whether those fiduciary duties to the corporation continue once a shareholder has been “frozen out,” or wrongfully terminated, by that corporation.   Declining to follow precedent from the Supreme Court of Wyoming that held that a freeze out does extinguish such a duty, the Court held that the fiduciary duty does, in fact, survive a freeze out.  The Court saw what Ehrlich proposed as a “drastic step” and reasoned that “allowing a party who has suffered harm within a close corporation to seek retribution by disregarding its own duties has no basis in our laws and would undermine fundamental and long-standing fiduciary principles that are essential to corporate governance.”

Because the Court did not address what would be the scope and extent of such a duty, parties are still advised to address all such issues in a written non-solicitation agreement, which can define more precisely the specifics such as the term, geographic scope and other similar issues.

 

 

 

 

 


SEC Proposes New Rules under JOBS Act to Facilitate Investment in Private Companies

Posted on Jan 16th, 2014

Pursuant to the Title IV of the JOBS Act, in December 2013  the SEC proposed new rules to facilitate start ups and smaller companies to raise capital.  Title IV of the JOBS Act created a new exemption under section 3(b)(2) of the Securities Act of 1933, as amended (Securities Act), for smaller offerings. As directed by section 3(b)(2), the proposed rules would amend  the existing Regulation A, an exemption for unregistered public offerings of securities up to $5 million.

These proposed rules could be significant. The amended Regulation A, commonly referred to as “Regulation A+,” is intended to facilitate capital formation for small companies by addressing certain issues in the current Regulation A that have deterred companies from using Regulation A to raise funds, including the low maximum offering amount and the high costs of state blue-sky compliance requirements.  The proposed rules would create two tiers of Regulation A offerings: Tier 1 for offerings of up to $5 million in a 12-month period and Tier 2 for offerings up to $50 million in a 12-month period.  Both tiers would be subject to certain basic eligibility, disclosure, and procedural requirements that are derived from the existing Reg A framework, with certain updates to conform to current practices for registered offerings. Tier 2 offerings would be subject to additional requirements, including the provision of audited financial statements, ongoing reporting obligations, and certain investment limitations.  Tier 2 offerings would provide federal law preemption and thus be exempt from having to comply with state blue-sky requirements.

The proposed rules are subject to a 60-day public comment period after publication in the Federal Register. If adopted, Regulation A+ has the potential to provide start-ups and private companies with a viable alternative for raising capital quickly and inexpensively, while improving the liquidity of their securities in secondary markets.  We will continue to monitor these developments and will post updates as they become available.

 


Massachusetts Appeals Court Rejects Stockholder Representative’s Appeal to Deny Partial Settlement Out of Escrow Fund

Posted on Dec 4th, 2013

A recent decision by the Massachusetts Appeals Court interprets the right of a seller shareholder to bypass a stockholders’ representative and settle directly with a buyer claimant and to use for such settlement the proceeds from an escrow fund established as part of the sale transaction.  This opinion is an important read for anyone engaged as a stockholders representative or serves as counsel to one.   While the decision is somewhat limited by the specific provisions of the merger and escrow agreements at issue, corporate practitioners may find the facts useful for tightening up standard provisions on these issues in future deals.  The case also provides a handy explanation of the oft-used (and misunderstood) term “power coupled with an interest”, which we have summarized below.  A full copy of the opinion can be found here.

The case arises from a stock purchase merger in September 2007 of Atlantis Components, Inc. by Astra Tech, Inc.  for $71 million. Per common practice, $6.3 million of the purchase price was placed into an escrow fund, to be disbursed to the former Atlantis shareholders on a pro rata basis on December 31, 2008, the release date. The purpose of the the escrow fund was to indemnify Astra Tech if it paid any claims asserted against Atlantis after the closing date but before the release date. The merger agreement designated a Shareholder Representative as the agent of the former Atlantis shareholders, which had the duty of approving or challenging any indemnification claim on the escrow fund.

Shortly after the closing, Astra Tech brought a claim against Atlantis for failing to disclose  certain correspondence alleging that Atlantis was infringing on the patents of one its competitors.   The parties disagreed on the merits of AstraTech’s claims and various lawsuits ensued.  As legal costs for these matters ballooned to nearly $2.5 million, in October 2010 certain of the Atlantis shareholders opted to settle directly with Astra Tech, using their pro rata share of the escrow fund as payment.  After reaching an agreement, the settling shareholders and Astra Tech moved in Superior Court for approval of their settlement. The shareholders’ agent opposed the settlement, on the basis that neither the merger agreement nor the escrow agreement permitted the settling shareholders to seek disbursement absent the consent of the shareholders’ agent. A judge approved the settlement agreement between Astra Tech and the settling shareholders and this appeal followed.

The Court’s decision involved the interpretation  and interplay of three contracts between the parties: (1) the escrow agreement between Astra Tech, Atlantis, the stockholders rep, and the escrow agent; (2) the merger agreement between Astra Tech, Atlantis, and the stockholders rep; and (3) the settlement agreement between Astra Tech and the settling shareholders.

On the escrow agreement, the Court determined that that the express provisions of that Agreement did provide for a procedural mechanism to allow the settling shareholders to seek court approval of their settlement.  An excerpt of that provision is provided below for reference. (1)

On the merger agreement, the stockholders rep argued that it had the exclusive right to negotiate with Astra Tech under under Sections 8.6(a) and (e) (pasted as footnote (2) below).  While the Court agreed that these provisions granted the Stockholders Rep with broad powers to negotiate and make decisions for the settling shareholders, it held that these rights were not exclusive, which would be required to bar the settling shareholders from negotiating for themselves.  The Court refused to construe the provision that the rep’s decisions and acts “constitute a decision of all Company shareholders” and are “final, binding and conclusive upon each such Company Shareholder” as granting the rep with exclusive rights.   To create an exclusive agency, the parties must expressly and unambiguously indicate such an intent in the contract.”  The Court noted that if the parties had wished to give the shareholders’ agent the sole or exclusive authority to negotiate on behalf of the settling shareholders, they should have provided for that expressly in the contract. (“We will not contort the plain language of the merger agreement to interpret “final, binding and conclusive” as synonymous with “irrevocable” or “exclusive.”)

Finally, the stockholders rep contended that its agency was irrevocable because it has a “power coupled with an interest.”  The Court disagreed.   Despite general agency law principles (which allow a creator of the agency relationship to revoke the agent’s authority at any time, even if their agreement expressly states that the principal may not revoke), the agent’s authority can be made irrevocable when it is a “power coupled with an interest”.  The Court explained that a ”power coupled with an interest is not technically an agency relationship because “it is neither given for, nor exercised for, the benefit of the person who creates it.”  In an agency relationship, granting authority to the agent is solely for the benefit of the principal, but when a “power is coupled with an interest, the donee holds that power for his own benefit (or for the benefit of a third party), but not for the benefit of the donor.”  The reference to “interest” in this phrase means that the agent (donee of the power) must have a present interest in the property upon which the power is to operate.  It is generally accepted that the “interest” must be ownership of the property itself and it is this ownership which makes the power irrevocable.

In its analysis, the Court broke down the term “a power coupled with an interest”  into two components: first, does the agent have “a power”, and second, is the power “coupled with an interest.  On the first point, the Court held that the  rep did not have “a power” in the escrow fund, as it did not have  exclusive or irrevocable power under the merger agreement or the escrow agreement.  The rep also did not have unilateral power in the escrow fund (a distinguishing factor in other cases cited by the Court) but rather was required to reach an agreement with Astra Tech before the escrow agent could be compelled to release the funds.

On the second point, the stockholders rep did not have “an interest” in the escrow fund sufficient to create a power coupled with an interest.  Citing cases going back to 1823, the common thread requires the agent to have title or some other form of ownership of the underlying asset to assert that the power is “coupled with an interest”.   Even though the shareholders rep (as a Atlantis shareholder) had a personal interest in a portion of the escrow, it did not have a property interest in the entire fund in its capacity as shareholders’ agent.  The Court emphasized that the critical distinction between an agent and the donee of a power coupled with an interest lies in who receives the benefit of the relationship. “In a principal-agent relationship, the principal receives the benefit; for a power coupled with an interest, the benefit inures to the donee himself (or to a third party), but not to the donor.”

After concluding that the stockholders rep had neither the exclusive right to negotiate under the merger agreement nor a power coupled with an interest in the entire escrow fund, it then held that the settling shareholders did have a right to bypass the rep and enter into a direct settlement with Astra Tech.  In the absence of an agreement, the settling shareholders retain their common-law rights as principals. Notwithstanding any agreement between principal and agent, an agent’s actual authority terminates … if the principal revokes the agent’s actual authority by a manifestation to the agent. Because a principal may revoke part of the agent’s authority, it follows that a principal may, in the absence of an agreement to the contrary, negotiate on his own behalf without infringing on the agent’s ability to perform his duties.  Because nothing in the agreements abrogated these common-law rights, the Court held that the settling shareholders had the power to negotiate a settlement agreement with Astra Tech.

This opinion illustrates a number of interesting drafting points for preparing escrow and stockholder rep provisions in complex merger and sale agreements.  At the very least, practitioner may wish to counsel their clients on the alternatives of exclusive and nonexclusive roles of the rep and the possible ways those results can be effected.  Based on this decision, it appears likely that a Massachusetts court facing a similar issue will construe these agreements strictly and will require the exclusivity and revocability to be expressly stated to be enforceable.

If you have any questions regarding the issues discussed in this point, please feel free to contact us.

Footnotes:

 

(1) ”Any Disputed Claim and any other dispute which may arise under this Escrow Agreement with respect to the rights of [Astra Tech] or any other Indemnified Party and the Shareholders’ Agent or the Company Securityholders to the Escrow Fund shall be settled by mutual agreement of [Astra Tech] and the Shareholders’ Agent (evidenced by joint written instructions signed by [Astra Tech] and the Shareholders’ Agent and delivered to the Escrow Agent); provided, however, that upon receipt of a copy of a final and nonappealable order of a court of competent jurisdiction with respect to payment of all or any portion of the Escrow Fund, … the Escrow Agent shall deliver the portion of the Escrow Fund specified in such award or order to [Astra Tech] or other Indemnified Party and/or the Shareholders’ Agent for the benefit of the Company Securityholders as directed in such award or order.”

(2)  ”[T]he Shareholders’ Agent shall be, and hereby is, appointed and constituted in respect of each Company Securityholder, as his, her or its agent, to act in his, her or its name, place and stead, as such Company Securityholder’s attorney-in-fact, as more fully set forth in this Section 8.6. Without limiting the generality of the foregoing, the Shareholders’ Agent shall be constituted and appointed as agent for and on behalf of the Company shareholders to give and receive notices and communications, to authorize delivery to [Astra Tech] of the monies from the Escrow Fund in satisfaction of claims by [Astra Tech] Indemnified Persons against the Escrow Fund, to object to such deliveries, to agree to, negotiate, enter into settlements and compromises of, and demand arbitration and comply with orders of courts and awards of arbitrators with respect to such claims, and to take all actions necessary or appropriate in the judgment of the Shareholders’ Agent for the accomplishment of the foregoing.” [FN13]

Section 8.6(e) further delineates the actions that may be taken by the shareholders’ agent:

“A decision, act, consent or instruction of the Shareholders’ Agent shall constitute a decision of all Company shareholders … and shall be final, binding and conclusive upon each such Company shareholder, and the Escrow Agent and [Astra Tech] may rely upon any decision, act, consent or instruction of the Shareholders’ Agent as being the decision, act, consent or instruction of each and every such Company shareholder.”

 

 


E-commerce Expands Personal Jurisdiction for Businesses

Posted on Dec 3rd, 2013

A recent Massachusetts Appeals Court decision impacts businesses that deal with out of state companies, an issue that is much more common today thanks to the advent of e-commerce. Diamond Group, Inc. v. Selective Distribution International, Inc. expands personal jurisdiction and allows a Massachusetts business lawsuit to move forward against a Long Island company. The finding is based on the orders placed over emails between the two businesses.

Diamond, a Massachusetts company, sued Selective Distribution in a Massachusetts court for 45 unpaid invoices. Selective Distribution, a Long Island business, filed a motion to dismiss based on a lack of personal jurisdiction. The argument Selective made was the standard “minimum contacts” argument from the 1945 International Shoe case: the business had no presence in Massachusetts, and all deliveries it received came to its warehouses in New York and New Jersey.

The Court examined the International Shoe criteria and based its decision within them, albeit expanding them. First, the Court found that the series of email orders itself constitutes “purposeful availment” of Massachusetts commercial activity. Distinguishing this case from others in which personal jurisdiction was found absent based on the International Shoe standards, the Court explained that this ongoing pattern was far different than cases where single purchases or isolated transactions were involved. In contrast, Selective was a regular and active participant in Massachusetts commercial circles and this deliberate and routine involvement signaled that “traditional notions of fair play and substantial justice” would not be offended by the assertion of personal jurisdiction over the business.

Whether or not the Massachusetts Supreme Judicial Court will accept further appellate review is up in the air. For now, the clear take away is that doing business online with out of state companies can open your business up to liability in other states if this expanded understanding of personal jurisdiction holds up. This case is an important reminder of the benefits of including a governing law and dispute resolution clause in your contract forms to provide for a favorable locale as the exclusive forum for any proceedings to take place.

If you have any questions about this topic, please feel free to email us.


Recent Delaware Chancery Court Decisions Opines on Arbitration Clause in Merger Agreement

Posted on Oct 1st, 2013

A recent letter opinion by the Delaware Chancery Court in a case between Shareholder Representative Services (SRS) and a buyer of a business processing business raises an interesting interpretation of an arbitration clause in a merger agreement. The case can be read here.  The dispute between the parties arose from indemnification claims brought by the buyer under the merger agreement, which SRS claimed did not comply with the requirements of the merger agreement.  While the merger agreement contained a mandatory arbitration provision, it also provided that the Arbitrator did not have authority to grant “injunctive relief, specific performance or other equitable relief”.  Relying on this provision, SRS brought various claims in the Chancery Court, including a claim for injunctive relief to stop buyer from a breach of the merger agreement by seeking indemnification to which it did not have a right.  The court disagreed with SRS and compelled arbitration.

The court first noted that since the arbitration clause did not explicitly commit the determination of substantive arbitrability to the arbitrator, the court had jurisdiction to decide on this specific issue.  In a footnote, the court noted that these issues are presumptively determined by a court.  (One drafting note from this determination is that parties that wish to avoid any court proceedings altogether may want expressly cover the issue of substantive arbitrability in their agreement.)

The court cited a 2002 Delaware Supreme Court decision for the steps to be taken by a Delaware court to assess an arbitration clause:

  • First, the court must determine whether the arbitration clause is broad or narrow in scope.
  • Second, the court must apply the relevant scope of the provision to the asserted legal claim to determine whether the claim falls within the scope of the contractual provisions that require arbitration. If the court is evaluating a narrow arbitration clause, it will ask if the cause of action pursued in court directly relates to a right in the contract. If the arbitration clause is broad in scope, the court will defer to arbitration on any issues that touch on contract rights or  contract performance.

The court cited a few examples of a “broad” arbitration clause:  “any dispute, controversy, or claim arising out of or in connection with the …Agreement” and “any unresolved controversy or claim arising out of or relating to this Agreement” (the language at issue in the parties’ merger agreement). Finding this clause to be of the broad category, the court ruled that the determination of whether the indemnification claims were time-barred should be made by the arbitrator.

In support of its argument, SRS cited a 2006 decision involving an arbitration clause in a LLC operating agreement where the parties also sought injunctive relief from the court to compel a member to assent to a capital contribution.  The court distinguished this situation from the instance case, finding that SRS’s claims were really legal claims, not equitable ones, and colorfully noted that “[s]emantic legerdemain does not transform a legal claim into an equitable claim.”  The court reasoned that the relief that SRS has requested requires an analysis of the merits of the claims, which is legal (as opposed to equitable) in nature.   Accordingly, a plaintiff cannot “convert a claim for money damages arising from a breach of commercial contract . . . into a claim maintainable in equity by the expedient of asking that the defendant be enjoined from breaching such duty again.”

This decision is a useful reminder that boilerplate provisions such as arbitration clauses (and carveouts to those clauses) should be carefully considered in the context of any agreement, especially one relating to the sale of a business or other major transaction of a company.  While there may be varying opinions on the benefits of arbitration over litigation, once a path is chosen, the parties should carefully review these provisions to reduce ambiguity around any substantive and procedural issues that may arise.

If you have any questions about this topic, please feel free to email us.

 


Forum Selection Clause Valid in Delaware

Posted on Jun 29th, 2013

In a major win for corporations worried about choice of law, the Delaware Court of Chancery held that forum selection bylaws adopted by corporation boards are at least facially valid as a matter of contract under Delaware General Corporation Law (DGCL). Boilermakers Local 154 Retirement Fund v. Chevron Corporation stands for the proposition that bylaws which designate a specific forum for legal dispute resolution will stand up in court, taking some of the concern away for corporations in the realm of multiforum litigation.

In the case at bar, both Chevron and FedEx had adopted bylaws in their certificates of incorporation which indicated that Delaware would be the sole forum for any stockholder litigation. The court rejected the plaintiffs’ challenge of these forum selection provisions and held that the DGCL in fact does permit this kind of forum designation contractually.

The court’s reasoning was in part that the DGCL permits corporations to regulate themselves in order to function smoothly, and these kinds of bylaws assisted the smooth governance of the corporation. The court also found that both federal and Delaware law rendered forum selection bylaws contractually enforceable. This finding is based on the fact that the charters of the corporations in question granted unilateral power to the boards to adopt bylaws, and that this binding power was known to stockholders.

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Massachusetts Appeals Court Holds that Mass Wage Act Applies to Remote Employees

Posted on Jun 21st, 2013

A Massachusetts Appeals Court ruled today that an employee’s private right of action under the Massachusetts Wage Act under G.L. c. 149, § 148 did apply in the case of a traveling salesman who rarely set foot in the Commonwealth of Massachusetts. This choice of law case basically states that where the Commonwealth has a close connection to the employment relationship of the parties, local law should be applied to the claim.

In this case the plaintiff worked as a salesperson Starbak, Inc., a Delaware corporation that had its a sole place of business in Massachusetts. He resided in Florida and conducted most of his sales activity across the country for Starbal. When Starbak closed its doors, it terminated his employment with significant commissions outstanding. The plaintiff then brought suit against the company’s chief executive officer, a Massachusetts resident, seeking unpaid sales commissions of more than $100,000, certain unreimbursed expenses, wages in lieu of accrued vacation time, treble damages, and attorney’s fees. The question here was whether Massachusetts law would apply given that the plaintiff rarely visited the state.

The Court found that the nature of the plaintiff’s work was such that only Massachusetts was tied to it. The employment agreement governing the work relationship provided that Massachusetts law would be applied in the event of a dispute. Starbak was located there and as a result customers who dealt with the plaintiff entered into business with the company in Massachusetts. The plaintiff’s business cards identified his contact information as the same as Starbak’s, based in Massachusetts. His paychecks were issued from Massachusetts, and he communicated with the company daily. The plaintiff was in fact required to return to Massachusetts several times each year, and when he did return he would generally work in the same office space each time.

While distinguishing a case cited by the defendant where the Wage Act was not applied to an Australian employee operating outside the United States, importantly, the Court did acknowledge that the application of the Wage Act may be different in the case on a non-US employee.

This case should caution businesses that employ workers from a distance. While it does not seem to indicate that all remote employees will always be able to access remedies afforded by the local law of the businesses they work for, this is certainly something for businesses to consider when drafting employment agreements and establishing relationships with remote workers.

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Managers of LLCs Can Be Individually Liable for Unpaid Wages

Posted on Jun 14th, 2013

 

The Massachusetts Supreme Judicial Court recently held that managers of LLCs can be held liable individually for unpaid wages under the Massachusetts Wage Act. Specifically, a “manager who ‘controls, directs, and participates to a substantial degree in formulating and determining’ the financial policy of a business entity may be a ‘person having employees in his service’ under G.L. c. 149, § 148, and thus may be subject to liability for violations of the Wage Act,” [citations omitted].

The issue before the court was whether the legislative intent was to include managers of LLCs in the group of possible violators of the Massachusetts Wage Act, and the court found that it did. The court found a clear legislative intent to hold all individuals who contribute to a business’ fiscal and employment policies responsible for how employees are treated.

What does this mean for day to day business? LLCs of all sizes now have one more thing to consider when taking out director and officer and employee practices liability insurance. Since these kinds of policies are crucial to risk management for any business and this case signals a new kind of risk, this case should be on your radar.

If you have any questions about this topic, please feel free to email us.