CEOs as a Protected Species

Good read in yesterday's WSJ about the difficulties companies face in terminating a CEO. The article offers some particulars about the accusations MassMutual made toward its CEO as the basis for terminating him for cause, which included an affair with a subordinate and improperly transfering $1 million into a retirement account. According to the article, the arbitration panel actually found that some of the accusations were true, but held that they did not amount to sufficiently egregious misconduct to warrant a termination for cause. In my world, stealing $1 million would be grounds for termination for cause for anyone. Of course, I wasn't at the arbitration and didn't hear the evidence presented, so it may be that the actual findings were much less inflammatory than the accusation.

Off-Topic Rant regarding Plagiarism

Okay, I admit, this little post is not really on topic. But I think it's an important topic all its own. I read in the paper this morning (Boston Globe, I think, could have been the WSJ) about a Harvard senior who was just caught plagiarizing an article for the Harvard Crimson. She apologized, some kind of retraction was printed, and that apparently is that as far as Harvard and the Crimson are concerned.

Really, you have to be kidding me. How many of these plagiarism scandals does the world have to endure before it seeps into public awareness that plagiarism is wrong? This kid is far from alone here. You read pretty regularly about big time authors and academics being caught red handed stealing other people's work and presenting it as their own. I think a college senior, among others, particularly at Harvard, is old enough to know better. Truthfully, I think anyone over the age of 7 ought to know better.

Maybe public humiliation and being booted off the paper is punishment enough. But I am really tired of seeing this recurring problem. Write your own stuff, or keep your mouth shut and pen in the drawer. Maybe a day in the stocks in the center of the Yard being pelted with old cabbages and rotten tomatoes would be appropriate.

Equal Opportunity Doctrine with Regard to Share Redemption in Closely Held Corporation

In Pulsifer v. Butnaru, the Massachusetts Superior Court entered summary judgment on a claim that the controlling shareholders in a closely held corporation offered one shareholder more to redeem his stock than another. 2006 Mass. Super. LEXIS 487 (Aug. 17, 2006) (MacDonald, J.). The plaintiff's problem was with the evidence, however, not the concept. The Court squarely agreed that in "a close corporation, in accordance with the heightened fiduciary duty owed between shareholders, the redemption is subject to the additional requirement that the shareholders who caused the corporation to enter into the stock purchase agreement must have acted with the utmost good faith and loyalty to the other shareholders." This requires that "the corporation . . . offer each stockholder an equal opportunity to sell a ratable number of shares to the corporation at an identical price." Id. at *9.

This concept will apply in a variety of contexts. When you are dealing with your co-venturers in a small company, you have to play fair.

$50 Million Arbitration Award to Former MassMutual CEO

Wow, talk about a big arbitration award -- $50 million to Robert J. O'Connell, former CEO of MassMutual. Story here.

Unsurprisingly, the Company appealed the award. O'Connell's lawyer is certainly right (quoted in the article) when he says there are very limited grounds to challenge an arbitration award. The standard of review by a court when the losing party from an arbitration appeals is heavily in favor of affirming the award. I suppose MassMutual may be the exception to the rule, but it faces a profoundly uphill battle. I recently wrote an article for the American Bar Association's Litigation News about courts getting tired of hearing appeals from disappointed parties to arbitrations, and hitting them with sanctions. See Eleventh Circuit Criticizes Arbitration Award Appeals --- Threatens to Sanction Future Appellants, Litigation News, Vol. 31 No. 5 (July 2006) at 6.

What Does it Mean to Be a Fiduciary?

As the Massachusetts Superior Court once wrote, "[a]lthough fiduciary relationships can arise in circumstances "'so varied that it would be unwise to attempt the formulation of any comprehensive definition,' a fiduciary relationship exists only when a special degree of confidence is entrusted to another." Connolly v. Spracklin, Essex County Docket No. 92-2054-A 2 Mass. L. Rep. 460; 1994 Mass. Super. LEXIS 697 (July 12, 1994) (citation omitted).

Common fiduciaries include trustees, who owe a fiduciary duty to the beneficiaries of the trust they manage; corporate officers and directors, who owe duties to the company and its shareholders; and partners, who owe duties to one another.

So, once you hold a position as a fiduciary, what does that mean? In broad strokes, it means you owe the person or people whose trust you have undertaken certain duties. These duties include a duty of loyalty, a duty of care, and a duty of disclosure. In other words, you have to put their interests first -- you can't act for your own benefit or the benefit of others in your role as a fiduciary. You have to act reasonably and keep yourself informed. You have to keep the people to whom you owe the fiduciary informed about the matter you are responsible for. See, e.g. Quintan v. Gavin, 2001 Mass. Super. LEXIS 402 (February 12, 2001), aff'd 64 Mass. App. Ct. 792 (2005).

Bad News for In-House Counsel

Here's a link to a recent article about the increased risk in-house lawyers are facing of being tagged with liability: Gatekeeper GCs Increasingly Become Targets for Liability. According to the article by Sheri Qualters of the National Law Journal, the SEC whacked Biopure's GC with a $40,000 civil penalty in connection with its investigation into allegations of misleading public statements by the Company. Some in house lawyers are getting employed-lawyer professional liability insurance policies on top of D&O coverage. Sobering stuff.

Recent First Circuit Decision on Piercing the Corporate Veil

Here's a decision that I am quite taken with: Platten v. HG Bermuda Exempt Ltd., 437 F.3d 118 (1st Cir. 2006). Among other things, the Platten decision addresses a claim to pierce the corporate veil. The Court emphasizes that there is a "presumption of corporate separateness [that] may be overcome only 'in rare particular circumstances in order to prevent gross inequity.'" Id. at 128. The First Circuit affirmed the decision of the District Court dismissing the plaintiffs' claims. "Despite their allegations of intermingling [of several corporate entities], plaintiffs never alleged that they were confused about the identity of the legal entity with which they were contracting." Id. at 129. In a footnote, the Court notes that no Massachusetts Supreme Judicial Court case has ever applied veil piercing to a contract claim. Id. n.7. Because the Court affirmed the dismissal, it did not need to reach the argument that veil piercing simply does not apply in contract cases "because the parties to contractual relationships choose with whom to deal and can protect themselves through bargaining." Id. The Court found no allegation to support an inference of gross inequity.

I'm At It Again

So the past year has been a mighty busy one (I'm glad to say). At this point, most of my practice fits within a single rubric that I call "Fiduciary Litigation." In other words, I represent corporate officers, directors and shareholders, partners, members of limited liability companies, trustees and trust beneficiaries for the purpose of working out their disputes. So that's what I'm going to blog about.