Balles v. Babcock Power Inc.
476 Mass. 565
| Mass. | 2017Background
- Balles, a senior executive and one of 17 "management investors," received 100,000 Babcock shares under a stockholders' agreement that defines "Cause" for repurchase of stock at $0.001/share and waives jury trial for disputes under the agreement.
- Balles engaged in a multi-year extramarital sexual relationship with a subordinate, used company trips and a company laptop in connection with the relationship, and falsified travel reimbursement details (without significant monetary loss to the company).
- Babcock suspended and then terminated Balles in 2010; the board unanimously found his conduct constituted "Cause" under the stockholders' agreement and repurchased his shares at the nominal price, withholding dividends and denying severance.
- Balles sued for declaratory relief seeking return of his stock and withheld dividends; the case was bifurcated—jury for most counterclaims; bench (jury-waived) for stockholders' agreement and related contract issues.
- The trial judge (bench) concluded Balles was not terminated "for cause" under the stockholders' agreement, ordered return of stock and dividends, but awarded Babcock equitable forfeiture of part of Balles's salary for breach of fiduciary duty; Babcock appealed the bench rulings.
Issues
| Issue | Balles' Argument | Babcock's Argument | Held |
|---|---|---|---|
| Appropriate standard of judicial review of board "cause" determination | Contract does not entitle board's finding to deference; court can interpret contract de novo | Last sentence of the Cause definition ("determination...may only be made by the Board") requires judicial deference (arbitrary/capricious/bad faith review) | Court: clause identifies who decides initially but does not set a deferential standard; de novo review appropriate |
| Whether Balles' conduct constituted "fraud" or "gross insubordination" (clause (a)) | Conduct did not meet elements of fraud or the higher threshold of "gross insubordination" | False reimbursement and favoritism toward subordinate (with concealed relationship) amount to fraud and gross insubordination | Court: no fraud (no material damage/intent) and no gross insubordination (term requires wilful disregard of direct orders); clause (a) not satisfied |
| Whether Balles' conduct was an uncorrected "willful and material breach" of duties (clause (c)) | Even if breach occurred, clause (c) required written notice and 30-day opportunity to cure; company did not give opportunity and futility exception does not apply here | Breach and its effects were uncorrectable (divided loyalty, cultural harm, harassment risk), so notice/cure was futile and unnecessary | Court: company failed to show futility; cure could address effects (and company already obtained compensation via forfeiture), so clause (c) was not satisfied because no opportunity to cure was afforded |
| Whether Balles' fiduciary breach bars contractual relief under the stockholders' agreement | Rights under stockholders' agreement are governed by contract terms; contract already addresses material breaches and termination for cause | Balles' breach of fiduciary duty should operate as a material breach of the stockholders' agreement and preclude relief | Court: where stockholders' agreement defines rights on termination, those contract terms govern; fiduciary duties cannot override agreed contract scheme; Balles not barred from relief under the contract |
Key Cases Cited
- EventMonitor, Inc. v. Leness, 473 Mass. 540 (court interprets contractual terms de novo)
- Danca v. Taunton Sav. Bank, 385 Mass. 1 (fraud elements defined)
- Noonan v. Staples, Inc., 556 F.3d 20 (1st Cir.) (language making company determination "conclusive" supports deferential review)
- Chokel v. Genzyme Corp., 449 Mass. 272 (stockholder rights arising under contract governed by contract law, not fiduciary principles)
- Donahue v. Rodd Electrotype Co. of New England, Inc., 367 Mass. 578 (close-corporation stockholder agreements can govern departures from fiduciary norms)
- Oehme v. Whittemore-Wright Co., 279 Mass. 558 (insubordination defined as willful disregard/refusal to obey orders)