Employee Shareholder Gets Upper Hand In "Triple Freeze-Out" Case

by Lee Gesmer on November 7, 2005

Minority Shareholders/Fiduciary Duty. Massmanian v. Duboise, decided in September by Judge Ralph Gants in the Suffolk County Business Litigation Session, proves once again that when a party to litigation angers a judge, they can be forced to pay a high price.

In this case the plaintiff Massmanian was a 30% minority shareholder and employee in North/Win. After he filed suit accusing the majority shareholders of diverting North/Win’s profits and assets to another company (a serious breach of fiduciary duty, if true), North/Win terminated Massmanian for insubordination and neglecting his duties. Massmanian then asked the court to issue a preliminary injunction reinstating him. In opposing this motion, North/Win, and its lawyers made some serious strategic errors:

  • First, they demanded that all North/Win employees sign a Confidentiality Agreement which (among other things) barred employees from disclosing “matters related to the lawsuit Massmanian has filed against the company, even in a legal proceeding.” This Agreement was demanded upon pain of termination, and one employee was terminated for failing to sign it. The court characterized this as “heavy-handed overreaching” and an improper attempt to prevent employees from testifying in the case.
  • Second, when asked about the Confidentiality Agreement North/Win’s lawyers made false statements to the Court.

The upshot of all this was one very angry judge, who lambasted North/Win and its lawyers, and went on to describe North/Win’s actions as a “triple freeze-out,” (1) denying Massmanian lifetime employment, (2) giving North/Win the right to trigger its option to purchase Massmanian’s shares and (3) denying him access to information relevant to his status as a minority shareholder. The judge took the highly unusual step of ordering North/Win to reinstate Massmanian and enjoining North/Win from terminating his employment.

This case illustrates extremely bad judgment by North/Win (and possibly its lawyers, if they approved the Confidentiality Agreement), and North/Win is paying the price for it.

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