Minority Shareholder/Fiduciary Duty

Judge Young on Employee Breach of Fiduciary Duty Claims, Interference With Contract and Pleading

September 3, 2008

U.S. District Court Judge William Young’s recent decision in Talentburst, Inc. v. Collabera, Inc. is worth study. Talentburst is the former employer of Raj Pallerla. While employed by Talentburst, Pallerla signed a noncompete agreement with Talentburst. He then resigned and went to work for Collabera, Inc. For ease of reading I’ll refer to these three parties as Former Employer, New Employer and Employee. When the Former Employer discovered that its Employee had gone to work for New Employer, it pursued an unorthodox legal strategy: rather than sue the employee for breach of the noncompete agreement, it sued only the new employer, alleging that the New Employer had “aided and abetted” a breach of fiduciary duty by the Employee. It also claimed that by hiring the Employee the New Employer “interfered” with the noncompete contract. The case was filed in Massachusetts Superior Court, but the Former Employer was able to “remove” it to federal court (based on diversity jurisdiction). To the Former Employer’s misfortune, the case was drawn by Judge Young, who was almost certain to give the case closer scrutiny than it would have received in state court. The Former Employer filed a motion to dismiss, which is usually a long shot. However, Judge Young allowed the motion and dismissed the suit on the basis of the complaint alone. In his decision Judge Young reasoned that the Employee, who was…

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Massachusetts Judges Reluctant to Enforce Noncompete Agreements

December 13, 2007

Further to my post below, commenting on whether the enforceability of noncompete agreements in Massachusetts has been a major factor in Silicon Valley’s relatively greater success in attracting high tech start-ups, a review of recent Massachusetts noncompete cases shows how difficult it has become to enforce these agreements in Massachusetts. Judges appear to be leaning over backwards to deny preliminary injunction motions (which is where the real action lies in these cases). Here is a quick summary of several recent state court cases. In Bank of America v. Verille, decided by Superior Court Judge Thomas A Connors in Norfolk County in August, the Court denied BoA a preliminary injunction to enforce a non-soliciation agreement (a close relative of noncompete agreements), on the grounds that the customers that followed the former employee to his new job signed affidavits to the effect that they were not solicited by him. To put this in context, many years ago I saw a Superior Court judge state from the bench that the line between “soliciting” a customer and the customer “following” an employee is so fine that she would presume that a customer had been solicited, even in the face of affidavits from the customer stating it had not been solicited. I doubt that this judge would draw the same inference today. In addition, in the Verille case the judge questions whether the “goodwill” (that…

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Does the Attorney for a Close Corporation Owe the Minority Shareholders a Fiduciary Duty?

September 28, 2006

Fiduciary Duty. As a recent case shows, the answer is: it depends. Assume that you are the attorney for a closely-held corporation (a privately held corporation with a small number of active shareholders), and you have interacted with and provided corporate legal advice to the shareholders over the years. Even though you did not represent them personally, the shareholders placed their trust and confidence in you. A dispute then arises between one of the shareholders (who has a minority position) and the corporation. Can you represent the corporation in this dispute, or do you have a fiduciary duty to the minority shareholder that presents a conflict of interest, and precludes you from the representation? An article by Massachusetts Bar Counsel written in 2003, Closely Held Conflicts, reviews the case law on this issue (which has developed mostly in the context of motions to disqualify counsel), and sends a clear warning that attorneys who have represented a closely held corporation most likely do owe a fiduciary duty to the shareholders. However, a recent decision by Superior Court Judge Francis R. Fecteau draws an important distinction to keep in mind when this issue arises. In that case, Bensetler v. Data Plus, Judge Fecteau found that attorneys who represented a closely held corporation did not have a fiduciary duty to a minority shareholder with whom they had never interacted. Thus, at least according…

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Recent Business Law Decisions From the Mass State Courts

August 18, 2006

Noncompete Agreements. Plaintiffs seeking to enforce noncompete agreements by means of preliminary injunctions have been up against it as of late. In Payson’s Trucking v. Yeskevicz (pdf file) Judge Peter Agnes denied the plaintiff’s motion, which was brought against a contracting party (as opposed to an employee), on the grounds (among others) that the agreement was too vague as to its geographic reach and in the identification of the plaintiff’s actual customers. In Merchant Business Solutions v. Arst (pdf file) Judge Richard Connon denied a preliminary injunction against a former sales employee on the grounds that the geographical limits were too broad and that the plaintiff was seeking protection from ordinary competition (among other reasons). Both cases are worth reviewing, since the impression one takes away is that the pendulum has swung (yet again) in the direction away from enforcement of these agreements. A plaintiff simply needs better facts than the parties had here in order to obtain a preliminary injunction to enforce a noncompete agreement. Derivative Shareholder Suits. When it turns out a company has made an operational mistake it can expect two lawsuits. The ubiquitous and much publicized class action and the less well-known derivative shareholder suit. The latter seeks damages on behalf of the corporation from the officers and directors who allegedly were involved in the wrongdoing. Often the two suits are coordinated by plaintiffs’ counsel,hoping that…

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It's Hard to Fire the President . . .

November 20, 2005

Minority Shareholder/Fiduciary Duty. . . . of your company, that is. OK, here the facts, minus the legal jargon. You’re a businessman with a successful company. You meet someone that wants to go into business with you in a related area. You start a new company, making sure that you hold a majority interest (52.5%). Your new “partner” gets 37.5%, and the rest of the stock goes to a couple of employees. Although your partner is a minority shareholder he’s running the business, so you make him president of the company. Almost ten years go by, and although the company is making money you’re unhappy with your partner. He’s bad at finances, and tensions arise over bookkeeping and other business issues. Eventually you reach your boiling point, and one morning you fire your minority partner. Simple enough you think. After all, you own a majority of the company, what’s stopping you from doing this? In O’Connor v. U. S. Art Co., a recent case decided by Judge Allen Van Gestel in the Suffolk County Business Law Session, the minority shareholder was awarded $218,000 in damages based on these facts. The judgment was against the other three shareholders, personally. Here’s the rub: in Massachusetts, shareholders in “close” corporations (nonpublic companies with a small number of shareholders) owe each other a fiduciary duty. You can’t fire a minority shareholder unless you have…

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

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)…

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