Parting with any employee comes with a host of dangers and pitfalls for an employer. These liabilities are increased when the exiting employee holds ownership in or options to own the employer’s company. Especially for smaller businesses, restricting its ownership from departing with employees is essential to continuing to operate smoothly and effectively. But in cases where an employee has unexercised stock options in his or her employer’s company, how can the company ensure that shares of its ownership do not walk out the door with a former manager? A well-crafted severance agreement is the answer.

By taking the extra time to craft a comprehensive severance agreement, rather than an off-the-shelf template, a company can extinguish its former executives’ interest in the company. Because a grant of stock options is a part of the employment contract, it is essential that the severance agreement clearly and unambiguously terminate the employment agreement itself. Recently, in the case of MacDonald v. Jenzabar, Inc., 92 Mass App. Ct. 630 (2018), the Appeals Court for the Commonwealth deemed a former manager’s rights to both unexercised stock options and unclaimed preferred shares in his employer’s company to be extinguished by a broad general release by his employer.

Broad Release Term Specifically Terminating Employment Agreement

Among other provisions the general release at issue provided:

“As a material inducement to the Company to enter into this Agreement, you agree to fully, irrevocably and unconditionally release, acquit and forever discharge the Company…from any and all claims, liabilities, obligations, promises, agreements, damages, causes of action, suits, demands,  losses, debts, and expenses (including, without limitation, attorneys’ fees and costs) of any nature whatsoever, known or unknown, suspected or unsuspected, arising on or before the date of this Agreement and/or relating to or arising from your employment and your separation from employment with the Company and/or any of the Released Parties, including, without limitation, … any and all claims under the [employment agreement].”

Integration Clause Terminating and Superseding All Previous Agreements

In addition to this general release of claims, the severance agreement contained a merger and integration clause:

“This Agreement constitutes a  single, integrated contract expressing the entire agreement between you and the Company and terminates and supersedes all other oral and written agreements or arrangements; provided, however, that you understand and agree that the terms and provisions of the Confidentiality Agreement are specifically incorporated into this Agreement, and you remain bound by them.”

 

Stock Options Arise Out of Employment Agreement and Are Extinguished with Its Termination

Because the Court found that the plaintiff’s stock options and preferred shares arose from his prior employment, these provisions were found to be unambiguous and conclusive. Of note, the Court specifically observed that in addition to “generally [extinguishing] any and all agreements, of any nature whatsoever….[it] also expressly extinguishes the employment agreement.” Therefore,  absent any language to the contrary, this contract provision is sufficient to extinguish the employment agreement and consequently the preferred shares and stock options arising therefrom.

Going forward, an employer seeking to extinguish the unvested stocks and stock options in its departing managers, would be advised to consult with an attorney to craft a broad severance agreement with specific reference to the operative agreements relating to employment. Such consultation will allow the employer to restrain the ownership of its business while also crafting exceptions for contracts executed in the employer’s favor. With the right severance agreement, an employer can make sure that its stock stays in-house while continuing to be protected by previously executed non-competes and confidentiality agreements.

 

On Patriot’s Day, April 15, 2013, shortly before 3:00 p.m., two bombs went off on Boylston Street near the finish line of the Boston Marathon.  In addition to three deaths and 150+ injured, nearby property was damaged and businesses were closed up to a week for the investigation.  This was a grand scale calamity, the reason why people and businesses buy insurance:  so they are protected when the unexpected happens.  

Unfortunately, that insurance coverage might not be there.  In the wake of the attacks of September 11, 2001, Congress passed the Terrorism Risk Insurance Act (Pub. L. 107–297, 116 Stat. 2322) ,  reauthorized in 2007, creating the Terrorism Risk Insurance Program, administered by the U.S. Department of the Treasury.  In order to trigger the program, which would have the Federal government cover 85% of insured losses, there must be at least $5 million in property damage from a single event, plus over $100 million in damage from terrorism through the year.  In addition, the Secretary of the Treasury, Jack Lew,  along with the U.S. Attorney General Eric Holder and Secretary of State John Kerry, must certify that it is an “act of terrorism”.  This has a special meaning:  it must have been committed to affect U.S. policy or coerce citizens.  As the motives of the alleged bombers are not clear, such certification may never happen.

In addition, as reported in the Boston Globe, many insurance policies contain a rider specifically exempting coverage for property losses and business interruption where a certified act of terrorism has occurred.  Only 60% of businesses have purchased insurance that covers certified acts of terrorism, according to the Congressional Research Service

Thus, a dichotomy.  If the bombing is certified as an act of terrorism, the Federal government will pay 85% of insured losses for the 60% of businesses purchasing such coverage.  But, if it is not certified, then the exclusion affecting 40% of businesses will not be triggered.  Whichever occurs, the Raymond Law Group can help a business understand its rights and pursue all available insurance coverage, government programs, and those who caused this tragedy to occur.

A recent decision by the Supreme Judicial Court declared that sellers of shares in a closely held corporation did not breach their fiduciary duty when the sale imperiled the corporation’s favorable S corporation status. See Merriam, et al. v. Demoulas Super Markets, Inc., et al., SJC-11098 (slip op., March 27, 2013)

A closely held corporation sought a judgment that minority shareholders had a fiduciary duty not to sell their shares if the sale would terminate the corporation’s favorable S corporation status.

The corporation’s articles of organization restricted stockholders from freely transferring their stock by putting in place a familiar procedure whereby the stockholder must first offer his shares to the corporation, but thereafter describes a discrete process of valuation and subsequent offer at a price to be determined by arbitrators.

The SJC held that such a clause in the articles of organization be treated as a contract between shareholders and the corporation. The clause restricting free sale of shares was a bargained for procedure for disposing of interests in the corporation. If the corporation had wished the procedure to reflect the importance of S corporation status then it should have included that in the articles or bylaws.

A shareholder in a close corporation always owes a fiduciary duty to fellow shareholders, however good faith compliance with the terms of an agreement entered into by the shareholders will satisfy that duty. The corporation cannot later require a shareholder who wishes to sell to be bound by additional substantive restrictions on the sale of their shares based on an asserted fiduciary duty that goes beyond a restriction imposed in the original articles or bylaws.

The SJC therefore rejected the corporation’s argument that selling the shares, which could terminate its S corporation status, constituted a breach of contract or fiduciary duty. Further, the SJC rejected the corporation’s argument that the sellers were required to reoffer their shares to the corporation should the sellers decide to offer the shares to a third party at a price lower than the value determined by arbitrators.

Click Here to contact Raymond Law Group for assistance with shareholder issues involving closely held corporations.

The Massachusetts Department of Public Health (DPH) held one of three listening sessions on February 14th in Boston regarding the implementation of a November, 2012 ballot measure approving medical marijuana. The meeting provided a forum for Massachusetts residents and stakeholders to provide input to the DPH concerning forthcoming medical marijuana regulations. The DPH will be accepting additional comments at the final meeting to be held on February 27th in Worcester. The comment period will be closing on February 28, 2013 and the DPH is expected to issue regulations on the implementation of medical marijuana by May 1, 2013.

The meeting in Boston was standing room only with a large wait to speak. As it was a listening session, the DPH panel did not ask questions or comment. Numerous patients and their doctors urged the DPH to expand the list of qualifying medical conditions beyond the current list of qualifying conditions. Concerned citizens and community groups also asked the DPH to adopt regulations concerning the advertising of medical marijuana.

Prospective dispensaries urged the DPH to adopt regulations regarding the operational requirements for a licensed dispensary. Some prospective dispensaries urged the DPH to look to other states such as Colorado for requirements such as chain of custody monitoring and security which would require dispensaries to keep careful track of their inventory and ensure quality control from “seed to patient.”  Additional comments concerned anticipated inconsistencies between state and federal law.

The DPH listening sessions do not replace the requirement for formal hearings under the Massachusetts Administrative Procedure Act, codified as M.G.L. c. 30A, §1-17.  The MA legislature delegates the power to agencies such as the DPH to promulgate rules and regulations. The notices for hearing will be published in the Massachusetts Register. Written comments will be accepted by the DPH until February 28, 2013

The Massachusetts Department of Public Health (DPH) held one of three listening sessions on February 14th in Boston regarding the implementation of a November, 2012 ballot measure approving medical marijuana. The meeting provided a forum for Massachusetts residents and stakeholders to provide input to the DPH concerning forthcoming medical marijuana regulations. The DPH will be accepting additional comments at the final meeting to be held on February 27th in Worcester. The comment period will be closing on February 28, 2013 and the DPH is expected to issue regulations on the implementation of medical marijuana by May 1, 2013.

The meeting in Boston was standing room only with a large wait to speak. As it was a listening session, the DPH panel did not ask questions or comment. Numerous patients and their doctors urged the DPH to expand the list of qualifying medical conditions beyond the current list of qualifying conditions. Concerned citizens and community groups also asked the DPH to adopt regulations concerning the advertising of medical marijuana.

Prospective dispensaries urged the DPH to adopt regulations regarding the operational requirements for a licensed dispensary. Some prospective dispensaries urged the DPH to look to other states such as Colorado for requirements such as chain of custody monitoring and security which would require dispensaries to keep careful track of their inventory and ensure quality control from “seed to patient.”  Additional comments concerned anticipated inconsistencies between state and federal law.

The DPH listening sessions do not replace the requirement for formal hearings under Massachusetts administrative law.  The MA legislature delegates the power to agencies such as the DPH to promulgate rules and regulations. The notices for hearing will be published in the Massachusetts Register. Written comments will be accepted by the DPH until February 28, 2013. 

data thief.jpgA data breach resulting in the theft and use of customer credit card numbers results in significant expenses and penalties for the victim company. Many companies still do not have specific cyber liability coverage and thus can be on the hook for all expenses related to such a breach. The Sixth Circuit Court of Appeals recently held that such losses resulting from the cyber theft of customer data were recoverable under a commercial crime policy. Retail Ventures, Inc. v. Nat’l Union Fire Ins. Co., 691 F. 3d 821 (6th Cir. 2012)

In 2005, hackers used an apparently unlocked wireless network at a DSW Shoe Warehouse store to obtain unauthorized access to DSW’s computer systems and downloaded credit card and bank account information from over 1.4 million DSW customers.  Subsequently, fraudulent transactions using the stolen customer payment information occurred. DSW incurred millions of dollars of expenses for customer communications, public relations, customer claims and lawsuits, and attorney fees in connection with investigations by seven State Attorneys General and the Federal Trade Commission (FTC).

DSW submitted a claim for coverage under a computer fraud rider to a “blanket Crime Policy” for losses related to the computer hacking. The rider provided coverage for Computer and Funds Transfer Fraud Coverage; specifically, any loss resulting from the theft of any insured property by computer fraud.

In subsequent litigation to determine whether the losses were covered by the commercial crime policy, DSW prevailed on summary judgment with respect to its claim that the hacking damages were covered under the policy. Defendant appealed arguing that the trial court erred by finding that the expenses incurred were a loss resulting directly from the theft of insured property by computer fraud. Defendant urged the Court to use the “direct means approach” which would require DSW to show the computer fraud to be the sole and immediate cause of the loss. DSW argued the District Court correctly utilized a traditional proximate cause standard.

The Appeals Court held that the District Court was correct in applying a proximate cause standard and did not err in finding that the loss was caused by the hacking. The Court also rejected the Defendant’s argument that the theft of customer data was covered by an exclusion under the policy. The policy stated that coverage does not apply to any loss of proprietary information, trade secrets, confidential processing methods or other confidential information of any kind. The Court held that the stolen customer information was not proprietary information because it belonged to the customer and not DSW. Furthermore, the stolen information did not constitute trade secrets or confidential processing methods. Finally, the language “other confidential information of any kind” was held to be general and should apply only to secret information of DSW. Otherwise, it would swallow the entire coverage for computer fraud. Since the confidential information was credit card and bank account numbers which belonged to the customers themselves, no exclusion under the policy applied.

DSW did not have a specific cyber insurance policy yet was still able to obtain coverage based on language in its commercial crime policy. Businesses should review their existing coverage carefully and may find that coverage for data breach is not expressly covered.

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If you are a Massachusetts business owner, you have the right to see the books!

Raymond Law Group regularly represents clients seeking full access to the company books and records.  Here are the most important things to know:

  1. Whether you are an owner of a corporation; Limited Liability Company (LLC); or partnership; the law in Massachusetts  gives you the right to view the company books and records. See the following:  non-stock corporations – Mass. Gen. Laws Ann. Ch. 156C, § 9(b) ; partnerships -Mass. Gen. Laws Ann. Ch. 108A, §19;  Limited Partnerships – Mass. Gen. Laws. Ch. 109, §5(b ); see also inspections by shareholders ; Mass. Gen. Laws Ann. Ch. 156D, §§ 16.01 et seq
  2. Look to Your appropriate business agreement to identify the specific contract language that applies, if any;
  3. Make a written request / demand to see the records in a manner consistent with the operating agreement and applicable statute;
  4. If your demands are ignored; you may consider hiring an attorney. Your lawyer may file an action in the superior court to compel management to produce requested records.

Click Here to contact Raymond Law Group for assistance with getting access to the books. 

A former UBS banker, Bradley Birkenfeld, has been awarded $104 Million by the IRS for his role as a whistleblower in an action by the IRS that ultimately has recovered $5 billion in unpaid taxes by Americans using UBS to hide money in Swiss bank accounts.

A full discussion of the former proceedings, including the legal basis and ramifications of the IRS attempting to uncover the identity of Americans hiding assets in tax havens, can be found here.

Previously, Birkenfeld was prosecuted by the IRS for defrauding the government of $7.2 million in taxes. He spent two years in prison for his actions as a UBS employee in assisting certain American clients of UBS in setting up Swiss bank accounts to evade paying taxes. Ultimately, utilizing information provided by Birkenfeld, the IRS was able to force UBS to disclose the identity of accounts whose anonymity had previously been protected by Swiss law.

Birkenfeld availed himself of a qui tam action, under the IRS’s whistleblower provision which allows an informant, who substantially contributes to the IRS’ detection and recovery of taxes, to recover up to 30% of the proceeds collected by the IRS. 

ICANN has an established policy for resolving disputes regarding domain names. The Uniform Domain Dispute Resolution Policy (UDRP) provides a framework for any dispute between parties (excluding registrars) over the registration and use of an Internet domain name.

The purpose of the UDRP is to provide a clear and fast method to resolve domain disputes. Disputes under the UDRP are decided in an administrative proceeding under one of ICANN’s approved providers.

To succeed on your UDRP claim you must prove the following:

–          The domain name registered is identical or confusingly similar to a trademark or servicemark in which the complainant has rights; and

–          The respondent has no rights or legitimate interests in respect of the domain name; and

–          The domain name has been registered and is being used in bad faith

To prove the domain name is identical of confusing similar you do not have to actually have a Patent and Trademark Registration. Rather, you can show you hold a common law trademark right in the domain name by a showing of continuing and ongoing use of the domain as well as evidence that shows the domain name has sufficient secondary meaning.

Examples of bad faith registration include, but are not limited to:

–           Registering and using a domain name primarily for the purpose of disrupting the business of a competitor

–          Intentionally attempting to attract, for commercial gain, internet users by creating a likelihood of confusion with the complainant’s domain

–          Hacking and/or stealing a domain name

An experienced lawyer  can help you evaluate and navigate your options if you or your business has a dispute regarding a domain name.