433 Mass. 465 | Mass. | 2001
The plaintiff filed a complaint against his former employer, NetCentric Corporation (NetCentric); its chief executive officer, Sean O’Sullivan (O’Sullivan); four of its directors; and two venture capital firms that invested in NetCentric (collectively, the defendants).
1. Background. We summarize the undisputed material facts. See Annese Elec. Servs., Inc. v. Newton, 431 Mass. 763, 764 (2000). In 1994, the plaintiff, O’Sullivan, and his brother, Donal O’Sullivan (Donal) (collectively, the founders), discussed form
O’Sullivan was named the chief executive officer and a director. At some point, he became the chairman of the board as well. The plaintiff served initially as the company’s president, and later as its vice-president of sales and marketing, and as a director. Matrix and Northbridge received preferred stock and each appointed a director: Tim Barrows on behalf of Matrix, and Edward Anderson on behalf of Northbridge. Robert Goldman and Robert Ryan were named as outside directors.
The plaintiff executed a stock agreement and an employee noncompetition, nondisclosure, and developments agreement (noncompetition agreement). His stock agreement, executed May 16, 1995, provided that he would purchase 2,944,842 shares of stock in NetCentric at $0,001 a share. Forty per cent of the shares (1,177,938) would vest on May 1, 1996, and an additional five per cent (147,242) would vest each succeeding quarter, until all the shares were vested. According to the agreement, if the plaintiff ceased to be employed by NetCentric “for any reason . . . with or without cause,” the company had the right to buy back his unvested shares at the original purchase price. All the plaintiff’s unvested shares would vest immediately, pursuant to an acceleration clause, should NetCentric merge with, or be acquired by, another company.
Both the plaintiff’s stock agreement and his noncompetition agreement contained clauses providing that the agreements did not give the plaintiff any right to be retained as an employee of NetCentric and that each agreement represented the entire agreement between the parties and superseded all prior agreements
In June, 1996, Donal’s employment was terminated, and the company exercised its right pursuant to Donal’s stock agreement to buy back his unvested shares. In September, 1996, the plaintiff’s employment was terminated. At that time, forty-five per cent of the plaintiff’s shares (1,325,180) had vested; the remaining fifty-five per cent (1,619,662) had not vested. A month later, NetCentric notified the plaintiff in writing that it was exercising its right pursuant to the stock agreement to buy back the plaintiff’s unvested shares. The plaintiff has refused to tender the shares to the company.
During and after the time that Donal and the plaintiff were fired, NetCentric was in the process of hiring additional staff. New employees often were offered stock options in the company, issued from the employee stock option pool (pool), as part of their compensation packages. Some employee-shareholders expressed concern that this practice of authorizing new shares from the corporate treasury for issuance to new hires would dilute the value of their shares. Existing shares would not be diluted, however, if NetCentric acquired outstanding shares and offered those to new employees.
After Donal was fired, the number of shares in the pool was increased by the same number that NetCentric had repurchased from him. Within one month after the plaintiff’s employment was terminated, NetCentric hired a president and two vice-presidents, one of whom replaced the plaintiff as vice-president of sales. All three new employees were granted stock options, totaling 1,812,500 shares.
2. Standard of review. Summary judgment is appropriate where there is no genuine issue of material fact and, where' viewing the evidence in the light most favorable to the nonmoving party, the moving party is entitled to judgment as a matter of law. See Mass. R. Civ. P. 56 (c), 365 Mass. 824 (1974); O’Sullivan v. Shaw, 431 Mass. 201, 203 (2000).
3. Breach of fiduciary duty. Initially, we must resolve a choice
The defendants claim, however, that Massachusetts law is of no avail to the plaintiff, as Massachusetts law is inapplicable to his fiduciary duty claim; NetCentric is a Delaware corporation, Delaware law applies, and Delaware law does not impose the . heightened fiduciary duty of utmost good faith and loyalty on shareholders in a close corporation. See Riblet Prods. Corp. v. Nagy, 683 A.2d 37, 39 (Del. 1996) (noting that Delaware has not adopted duty of utmost good faith and loyalty established in Wilkes v. Springside Nursing Home, Inc., supra); Nixon v. Blackwell, 626 A.2d 1366, 1380-1381 (Del. 1993) (declining “to fashion a special judicially-created rule for minority investors”). Instead, under Delaware law, minority shareholders can protect themselves by contract (i.e., negotiate for protection in stock agreements or employment contracts) before investing in the corporation. Additionally, founding shareholders can elect to incorporate the company as a statutory close corporation under Delaware law, which provides special relief to shareholders of
To avoid the imposition of “conflicting demands,” “only one State should have the authority to regulate a corporation’s internal affairs — matters peculiar to the relationships among or between the corporation and its current officers, directors, and shareholders.” Atherton v. Federal Deposit Ins. Corp., 519 U.S. 213, 224 (1997), quoting Edgar v. MITE Corp., 457 U.S. 624, 645 (1982). Traditionally, we have applied the law of the State of incorporation in matters relating to the internal affairs of a corporation (including both closely and widely held corporations), such as the fiduciary duty owed to shareholders. See Wasserman v. National Gypsum Co., 335 Mass. 240, 242 (1957); Beacon Wool Corp. v. Johnson, 331 Mass. 274, 279 (1954); Edwards v. International Pavement Co., 227 Mass. 206, 212-213 (1917). The plaintiff claims that we abandoned this “one-factor test” in Demoulas v. Demoulas Super Mkts., Inc., 424 Mass. 501, 511 (1997), in favor of a “functional approach” that applies the law of the State with the most “significant relatiónship” to the particular issue. In the Demoulas case, we recognized a recent trend in our cases applying the functional approach to resolving choice of law questions. See id., and cases cited. See also Nile v. Nile, 432 Mass. 390, 401 (2000) (breach of contract); Kahn v. Royal Ins. Co, 429 Mass. 572, 572-573 (1999) (statutes of limitations); Cosme v. Whitin Mach. Works, Inc., All Mass. 643, 646 (1994) (statutes of repose); Bushkin Assocs. v. Raytheon Co., 393 Mass. 622, 631 (1985) (Statutes of Frauds).
We followed this functional approach in the Demoulas case because the company involved was formed originally in Delaware but later merged into a Massachusetts corporation. We applied Massachusetts law to conduct that occurred both when the company was a Delaware corporation and later when
The Demoulas case was an exceptional one, as it concerned a company that had changed its State of incorporation as well as conduct that spanned both periods; thus, we conducted a functional analysis to determine which State had the more significant contacts. Nothing in our decision, however, suggested that we were overruling our long-standing policy of applying the law of the State of incorporation to internal corporate affairs.
Our decision accords with that of a majority of the jurisdictions that have addressed this issue. See, e.g., Atherton v. Federal Deposit Ins. Corp., supra at 224 (“States normally look to the State of a business’ incorporation for the law that provides the relevant corporate governance general standard of care”); R.W. Southgate & D.W. Glazer, Massachusetts Corporation Law and Practice § 16.5[d], at 541-542 n.102 (Supp. 1998, 1999), and cases cited. Similarly, our policy is consistent with the Restatement (Second) of Conflict of Laws § 302 (1971), which provides that the rights and liabilities of a corporation are generally determined by the law of the State of incorporation. See Model Business Corporation Act § 15.05(c) official com
The unusual circumstances involved in the Demoulas case are not present in the case before us. We apply the general rule that the law of the State of incorporation governs claims concerning the internal affairs of a corporation, including the treatment of alleged breaches of fiduciary duty. As NetCentric is, and always has been, a Delaware corporation, Delaware law applies to the plaintiff’s claim that the defendants breached their fiduciary duty.
4. Breach of implied covenant of good faith and fair dealing. The plaintiff next claims that the defendants violated the implied
In support of his contention, the plaintiff relies on the fact that he accepted a salary substantially lower than he had received in recent years because of the equity he received in NetCentric and because he expected he would be retained at least until his stock had fully vested. He also cites the fact that other employees received only stock options, while the founders received shares up front, and that all shares would immediately vest under the acceleration clause in his stock agreement should NetCentric merge with, or be acquired by, another company, a benefit granted only to the founders. The plaintiff claims that the unvested shares could not be considered payment for future services because they could have vested at any time in the event of a NetCentric merger.
The defendants did not deprive the plaintiff of any income that he reasonably earned or to which he was entitled. His shares vested over time only if he continued to be employed; thus, the unvested shares are not earned compensation for past services, but compensation contingent on his continued employment. The plaintiff’s argument to the contrary is belied by the terms of his stock agreement. Under the agreement, the plaintiff’s shares were to vest each quarter that he remained a NetCentric employee until they had fully vested. Should the plaintiff cease working for NetCentric for any reason, his right
At the time the plaintiff’s employment was terminated, forty-five per cent of his shares had vested. He had not yet earned the remaining fifty-five per cent. These unvested shares were contingent on the plaintiff providing future services for NetCentric, unless NetCentric merged with, or was acquired by, another company. See Sargent v. Tanaska, Inc., supra at 8-9 (terms “vested” and “unvested” not automatically controlling, but periodic vesting schedule can define line between past and future services).
The plaintiff seeks support from Cataldo v. Zuckerman, 20 Mass. App. Ct. 731, 741 (1985), quoting Gram v. Liberty Mut. Ins. Co., 391 Mass. 333, 334 (1984) (Gram II), in which the Appeals Court held that an employee’s unvested interest in real estate development projects “was sufficiently an ‘identifiable, future benefit . . . reflective of past services.’ ” The court concluded that the employee’s interest in future projects was a “continuing inducement” to work for his employer and constituted “compensation for that continuing work.” Id. at 740 (“Actual realization by Cataldo of the value of any share of the developer’s equity was for the future, of course, but ownership of the possibility was intended to be and was part of Cataldo’s day-to-day compensation for work currently being done”). Relying on this language, the plaintiff argues that his unvested shares constitute compensation already earned.
The Cataldo case, however, is easily distinguishable. When Cataldo was fired, some of the projects in which he had an interest were “then viable” (i.e., had already begun). It was his unvested interest in these “viable” projects that the Appeals Court determined was reflective of past services: on each project the employee had “already done a significant amount of work” and the project had “gone beyond the stage of a mere hope” to “a reasonable possibility of continuing on to completion.” Id. at 741. Further, the court did not decide how the buy-back provision in the employee’s contract (employer could repurchase employee’s interest if his employment terminated during a
In the present situation, the clause in the plaintiff’s stock agreement, which provides for the immediate vesting of all unvested shares on a NetCentric merger or acquisition, is not proof that the unvested shares represent compensation for past services. The acceleration of the vesting period depends on an event that is unrelated to the plaintiff’s role as an employee of NetCentric. Instead, it is related to the plaintiff’s status as a founder and shareholder. See, e.g., Merola v. Exergen Corp., 423 Mass. 461, 465 (1996) (investment in stock was investment in corporation’s equity and “was not tied to employment in any formal way”). The founders likely negotiated an acceleration clause in order to protect their investments against a change of control within the company. It is unlikely that they would have considered the immediate vesting of unvested shares as payment for the plaintiff’s day-to-day work as the vice-president of sales and marketing.
Further, NetCentric never merged with, or was acquired by, another company.
5. Intentional interference with contractual relations. The plaintiff alleged in his complaint that the “defendants” intentionally interfered with his contractual relations by terminating his employment in order to repurchase his unvested shares.
The Superior Court judge granted the defendants’ motion for summary judgment based on her conclusion that the plaintiff did not have a contract promising him that he would not be fired without cause until his shares had fully vested. The plaintiff has not contested this conclusion, but argues that the judge should have considered whether he could recover for intentional interference with his at-will employment. This issue was raised sufficiently to merit resolution.
In an action for intentional interference with contractual relations, the plaintiff must prove that (1) he had a contract with a third party; (2) the defendant knowingly interfered with that contract; (3) the defendant’s interference, in addition to being intentional, was improper in motive or means; and (4) the plaintiff was harmed by the defendant’s actions. See Swanset Dev. Corp. v. Taunton, 423 Mass. 390, 397 (1996); Wright v. Shriners Hosp. for Crippled Children, 412 Mass. 469, 476
The plaintiff has produced no facts demonstrating that the defendant directors Anderson (on behalf of Northbridge), Barrows (on behalf of Matrix), Goldman, or Ryan interfered with his at-will contract. The plaintiff admitted that he had no personal knowledge concerning whether the directors participated in the decision to fire him, and he has adduced no admissible evidence, beyond his own unsubstantiated assertion, that these defendants or their respective employers participated or were in any way involved in the decision to terminate his employment.
To maintain a cause of action for tortious interference against O’Sullivan, the plaintiff must show that O’Sullivan was not a party to his at-will employment contract and that O’Sullivan improperly interfered with this contract. A party to the contract cannot be held liable for intentional interference. See Appley v.
On the record before us (which is the same as that before the Superior Court judge on the summary judgment motion), a question of material fact exists whether O’Sullivan and NetCentric are in fact indistinguishable. We note that O’Sullivan is a founder of the company, the chairman of the board, the chief executive officer, and a large shareholder of the closely held corporation.
Nonetheless, even assuming that O’Sullivan could be distinguished from NetCentric, his bringing about of the termination of the plaintiff’s at-will agreement does not constitute actionable “interference.”
6. The defendants’ counterclaim. The defendants filed a
We affirm the Superior Court’s order allowing the defendants’ motion for summary judgment on the plaintiff’s claims and the defendants’ counterclaim.
So ordered.
We acknowledge the amicus brief filed jointly by the Associated Industries of Massachusetts and the New England Legal Foundation.
The plaintiff did not appeal from the judgment with respect to his wrongful termination claim.
We affirm the entry of summary judgment in favor of the defendants on the plaintiff’s claim of intentional interference with contractual relations but on different grounds from those of the Superior Court judge.
The company was originally incorporated as Netlnfo Corporation. The name was changed to NetCentric Corporation in 1996.
We define a close corporation as “typified by (1) a small number of stockholders; (2) no ready market for the corporate stock; and (3) substantial majority stockholder participation in the management, direction and operations of the corporation.” Demoulas v. Demoulas Super Mkts., Inc., 424 Mass. 501, 529 n.34 (1997), quoting Donahue v. Rodd Electrotype Co. of New England, Inc., 367 Mass. 578, 586 (1975).
The special protections apply only to a corporation “designated as a ‘close corporation’ in its certificate of incorporation, and which fulfills other requirements, including a limitation to 30 on the number of stockholders, that all classes of stock have to have at least one restriction on transfer, and that there be no ‘public offering.’ ” Nixon v. Blackwell, 626 A.2d 1366, 1380 (Del. 1993), citing Del. Code Ann, tit. 8, § 342. There is no claim that NetCentric is a statutory close corporation under Delaware law.
We noted that, “[a]rguably, claims arising from occurrences while [the company] was a Delaware corporation should be determined according to Delaware law.” Demoulas, supra.
Demoulas could not have influenced the decision of the founders to incorporate NetCentric in Delaware, as that choice was made prior to our Demoulas decision. Further, the plaintiff signed the stock agreement, which provides that NetCentric is a “Delaware corporation.” If the founders had desired that Massachusetts law govern, they could have incorporated in this State.
That the plaintiff’s stock and noncompetition agreements provide that they are governed by Massachusetts law does not mean that the plaintiff’s breach of fiduciary duty claim must also be governed by the law of this State. The Restatement distinguishes between the law that governs corporate acts with respect to third persons and the law that governs the corporation’s relationship to its shareholders. See Restatement (Second) of Conflicts of Law, supra § 302 comment e, at 309 (“There is no reason why corporate acts [such as the making of contracts] should not be governed by the local law of different states”).
Indeed, counsel for the defendants noted during oral argument that Net-Centric has ceased operations.
The plaintiff does not distinguish among the defendants on this claim; however, NetCentric cannot be liable for interference with contractual relations between itself and its employees. See Appley v. Locke, 396 Mass. 540, 543 (1986), and cases cited.
The plaintiff claims that each of the defendant directors voted to terminate his employment. He relies on the deposition testimony of Paul English, a vice-president of NetCentric, who stated that O’Sullivan or Paul MacKay, president of NetCentric, “told [him] that the board [of directors] was involved . . . voted to terminate” the plaintiff’s employment (emphasis supplied).
The burden is on the proponent of the evidence to establish' that the statement is admissible. English did not identify whether O’Sullivan or MacKay was the source of his information. Cf. Martin v. State, 726 So. 2d 1210, 1213 (Miss. Ct. App. 1998) (statement inadmissible where witness could not identify speaker). Because MacKay is neither a defendant nor an agent of any of the individual directors, the statement is hearsay if he were the speaker. See Proposed Mass. R. Evid. 801 (d) (2); P.J. Liacos, Massachusetts Evidence §§ 8.8.1, 8.8.6 at 496-497, 507 (7th ed. 1999). (MacKay’s employment with NetCentric did not even officially begin until after the plaintiff had been fired.)
It is unclear from the record exactly how many shares of common stock O’Sullivan owned.
According to the Restatement (Second) of Torts, “[t]here is no technical requirement as to the kind of conduct that may result in interference with the third party’s [i.e., NetCentric’s] performance of the contract.” Restatement (Second) of Torts § 766 comment k, at 1-2 (1979).
The Restatement’s comment also suggests:
“The interference is often by inducement. The inducement may be any conduct conveying to the third person the actor’s desire to influ*479 ence him not to deal with the other. Thus it may be a simple request or persuasion exerting only moral pressure. Or it may be a statement unaccompanied by any specific request but having the same effect as if the request were specifically made. Or it may be a threat by the actor of physical or economic harm to the third person or to persons in whose welfare he is interested. Or it may be the promise of a benefit to the third person if he will refrain from dealing with the other.
“On the other hand, it is not necessary to show that the third party was induced to break the contract. Interference with the third party’s performance may be by prevention of the performance, as by physical force, by depriving him of the means of performance or by misdirecting the performance, as by giving him the wrong orders or information.”
Id. at 12-13.
In an effort to clarify the law in this area, we note that in United Truck Leasing Corp. v. Geltman, 406 Mass. 811, 815-817 (1990), we stated that we were “abandon[ing] the word malicious in the description” of the elements of a tortious interference claim, but we continued to define the improper interference required before a corporate officer could be liable in terms of “actual malice.” See, e.g., Shea v. Emmanuel College, 425 Mass. 761, 764 (1997); King v. Driscoll, 418 Mass. 576, 587 (1994), S.C., 424 Mass. 1 (1996); Boothby v. Texon, Inc., 414 Mass. 468, 487 (1993). There is no practical difference, however, between “actual malice” and impropér motives and means for purposes of this tort.