Source: http://bennettandbelfort.com/blog/category/business/shareholder-dispute/
Timestamp: 2019-04-21 22:06:19+00:00

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Under the Defend Trade Secrets Act of 2016 (“DTSA”), trade secret misappropriation is now an issue of federal law. This federal statute takes a field which was once nearly the exclusive domain of state law and adds a number of significant new rights for entrepreneurs seeking to preserve the secrets of their success – and for whistleblowing employees who report trade secret theft to the government.
DTSA Prohibitions And New Remedies. The DTSA broadly prohibits the misappropriation of trade secrets – a term which includes sensitive financial, business, scientific or technical information. The owner of the information must take reasonable steps to keep it secret and its secrecy must provide independent economic value to the owner. State laws are not preempted by the DTSA, so the particular nuances of Massachusetts law regulating trade secrets Mass. Gen. Laws Ann. ch. 93, § 42 and Mass. Gen. Laws Ann. ch. 93A, §§ 1 to 11 still apply. The DTSA creates an additional federal cause of action which may be in filed in federal court. Not only does the DTSA allow the victim of trade secret misappropriation recovery of double damages and attorney fees, but in some exigent circumstances the law provides for a procedure to secure court ordered seizure of trade secret data in order to avert irreparable harm and preserve a matter for judicial review.
Employer’s Notice Requirement Under The DTSA. The DTSA requires employers give employees, independent contractors and consultants notice of their qualified right to disclose trade secrets when done as a whistleblower reporting other violations of law. Employers are obligated to give such notice “in any contract or agreement with an employee that governs the use of a trade secret or other confidential information,” – an obligation which likely calls for updates to employment contracts, confidentiality agreements, and many employment policy handbooks. Failure to make this disclosure bars an employer from collecting exemplary damages or attorney’s fees under the DTSA from an employee who steals trade secrets – and may in itself be the basis for a violation of the DTSA.
Whistleblower Rights Under the DTSA. The DTSA protects whistleblowers who confidentially disclose trade secrets to a federal, state or local government official where such disclosure is solely for the purpose of reporting or investigating a suspected violation of law. Under the DTSA, qualifying whistleblowers are immune from civil or criminal liability under both federal and state trade secret law. Furthermore, an employer may not retaliate against an individual for reporting suspected violations of the DTSA. If an employer retaliates against an employee who is a legitimate DTSA whistleblower, it faces civil liability to the employee for its unlawful employment actions.
The attorneys at Bennett & Belfort, P.C. are pleased to advise you relative to the implementation of the new trade secret rules which protect businesses and whistleblowers. Should you have any questions on this or any other trade secret legislation, please feel free to contact Bennett & Belfort P.C.
Bennett & Belfort, P.C. Attorneys Secure Verdict of Nearly $500,000 in Superior Court Business Litigation dispute.
Attorneys Eric LeBlanc and Todd Bennett recently secured a verdict of nearly $500,000 in a business litigation dispute involving shareholders of a closely held corporation. The Bennett & Belfort, P.C. trial team represented Peter Trowt and Beverly Storage & Trailer Leasing, Inc. As outlined in an 18 page written opinion, the Hon. Justice Cornetta rendered a verdict in favor of both Mr. Trowt and Beverly Storage & Trailer Leasing, Inc. on all counts.
This complex business litigation matter involved claims of breach of fiduciary duty and a shareholder derivative action. In addition to their success on all affirmative counts, the court issued judgment for Mr. Trowt and Beverly Storage & Trailer Leasing, Inc. on all counterclaims and third party claims brought against them by shareholder, Richard Silva. Trowt v. Silva, et al. (Lawyers Weekly No. 12-119-14) (18 pages) (Cornetta, J.) (Essex Superior Court) (Civil Action No. 2011-01279) (Oct. 31, 2014).
Attorneys LeBlanc and Bennett successfully prosecuted individual claims on behalf of Mr. Trowt against Mr. Silva, for breach of fiduciary duty through the introduction of evidence of self-dealing, diversion of corporate opportunity and personal use of corporate resources by Mr. Silva. Bennett and Belfort, P.C. also prevailed on behalf of the shareholder derivative action on behalf of the corporate entity, Beverly Storage& Trailer Leasing, Inc. The Court not only found that Mr. Silva flagrantly violated his fiduciary duties to Mr. Trowt, but also that Mr. Silva improperly siphoned money out of Beverly Storage& Trailer Leasing, Inc., depriving the corporation of capital without a legitimate business purpose.
You can read more about the case in the latest edition of Lawyer’s Weekly.
It is well recognized that the shareholders of a Massachusetts closely held corporation are fiduciaries of each other, and owe each other a duty of the utmost good faith and fair dealing in the operation of the business, similar to that of partners. Brodie v. Jordan, 447 Mass. 866, 869 (2006).
A closely held corporation is defined as one which has a small number of stockholders; there is no ready market for its stock; and there is substantial majority stockholder participation in the management and direction and operations of the corporation. Donahue v. Rodd Electrotype Co. of New England, 367 Mass. 578, 586 (1975).
Despite the existence of the “partnership” standard, the controlling/majority shareholders in a closely held corporation must have some room to maneuver in establishing the business policy of the corporation and effectively managing the corporation. Wilkes v. Springside Nursing Home, Inc., 370 Mass. at 851-52. In Wilkes v. Springside Nursing Home, Inc., the Supreme Judicial Court determined the standard to be applied relating to the termination of an employee minority shareholder. See id. The Court adopted a two step process to balance these competing interests: (1) the majority must demonstrate a “legitimate business purpose” for its decision to terminate the minority shareholder; and (2) the minority shareholder employee must prove that the same legitimate purpose could have been achieved through less drastic measures than a discharge. See id. Ultimately, the trial court must balance the business purpose against “the practicality of a less harmful alternative.” Id. at 852.
Nevertheless, if a majority shareholder of a closely held corporation decides to terminate a minority shareholder, it often leads to litigation by the minority shareholder(s). In many cases, minority shareholders depend on their employment as the primary benefit of their ownership interest. Therefore, termination of a minority shareholder can lead to fiduciary duty claims, in addition to the usual panoply of employment-related claims. For that reason, the majority shareholders will need to prove that they had no “less harmful alternative” to termination in the case of an employee-shareholder. Thus, there is a delicate balance between majority shareholders exercising reasonable discretion to advance legitimate business purposes of the corporation while abstaining from interfering with the rights of minority shareholders who are also employees.
Accordingly, it is imperative for majority shareholders of closely held corporations to maintain open channels of communications regarding the company’s business needs, and where minority (employee) shareholders need to focus their energy, and improve their performance. It is also imperative that any shareholder agreements are carefully drafted to help avoid any potential pitfalls. By taking these two steps, closely held companies can minimize the risk of a lawsuit for breach of a shareholder agreement, and maintain a healthy partnership within their business.
The Demoulas saga continues in Massachusetts. This ugly family feud has kept dozens of lawyers, the courts and even the bar licensing authorities busy for many years. In this newest skirmish, a superior court judge has ruled that minority shareholders do not owe a fiduciary duty to the corporation when selling their stock even though by selling their shares the minority shareholders would cause the Company to lose valuable tax protections.
In Merriam, et. al. v. Demoulas Supermarkets, Inc., et. al., the plaintiff shareholders had given written notice to the defendant corporation of their intent to sell their stock in the supermarket. The notice was required by the stock transfer provision set forth in the articles of organization of the corporation. The board of directors for the corporation rejected the plaintiff shareholders’ stock purchase proposal and sought to obtain its own valuation of the stock. In the lawsuit that was commenced by the selling shareholders, the corporation filed counterclaims seeking a declaration from the court that these shareholders would violate their fiduciary duties of utmost good faith and loyalty owed to the corporation. The company suggested that because the sale of these shares would result in the corporation losing its tax-saving status as a Subchapter S corporation the sale was improper as it would hurt both the company and the remaining shareholders. In reply to the corporation’s position, the minority shareholders argued that they did not owe any fiduciary duties to the majority shareholders in connection with the proposed sale since the articles of organization alone governed the sale of stock and thus any obligations owed by the minority to the majority shareholders are determined exclusively by the terms of the stock transfer restrictions of the articles of organization. The plaintiff shareholders persuasively claimed that, in Massachusetts, “when rights of stockholders arise under a contract [such as the corporation’s articles of organization] . . . the obligations of the parties are determined by reference to contract law, and not by the fiduciary principles that would otherwise govern.” Chokel v. Genzyme Corp., 449 Mass. 272, 278 (2007). Observing that the articles of organization did not contain an explicit restriction designed to ensure the survival of the corporation’s Subchapter S status, the court agreed with the plaintiffs that the shareholders “do not owe [Demoulas] a fiduciary duty to refrain from selling their shares in a manner that terminates [Demoulas’] Subchapter S status . . .” Merriam, Middlesex Superior Court Civil Action No. 2010-02681, Consolidated Memorandum of Decision and Order on Cross-Motions for Judgment on the Pleadings, March 30, 2011 (Haggarty, J).
Although the defendants have filed a motion for reconsideration of the decision in Merriam, it is unknown whether Demoulas intends to appeal that decision. However, if past practice gives any indication, this battle is not over yet. Even if an appellate court finds that the shareholders owed a fiduciary duty to the corporation in this sale of stock, it is questionable whether the appeals court would reverse the lower court’s decision. It appears unlikely that the appeals court would hold that the proposed sale of stock by these shareholders would constitute a breach of their fiduciary duties given that the trial court determined that the shareholders had a legitimate business reason to sell the stock and that there was not a less harmful alternative to the contemplated sale of stock since the corporation’s board of directors had rejected the shareholders’ proposed sale.
While the trial court ruled that minority shareholders do not owe a fiduciary duty to a corporation in the sale of stock where the sale is governed by the corporation’s articles of organization, the court indicated that shareholders are still bound by the covenant of good faith and fair dealing which is implied in the corporation’s articles of organization. As the court pointed out, Massachusetts law provides that a corporation’s articles of organization form a contract between the corporation and its shareholders, and the shareholders are bound to exercise their contractual rights in accordance with the covenant of good faith and fair dealing implied in the articles of organization. Chokel v. Genzyme Corp., 449 Mass. 272, 275-276 (2007). However, the court declined to opine on whether the proposed sale of stock would constitute a breach of the implied covenant of good faith and fair dealing because that issue was not before it. Therefore, if the trial court’s decision in Merriam is upheld on appeal, future litigation between these parties might conceivably involve the question of whether the shareholders’ contemplated sale that would destroy the corporation’s Subchapter S status constitutes a breach of the implied covenant of good faith and fair dealing. Stay tuned f or further updates in this ever developing court and family drama.

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