Consider the following: A male executive has a long-term, clandestine affair with a young female subordinate.\u00a0 The executive takes steps to conceal the affair, while at the same time using his position to advocate for his paramour\u2019s career advancement.\u00a0 Upon learning of the situation, his employer terminates his employment for \u201ccause.\u201d\u00a0 Caught red-handed, the executive has no legal recourse, right?\u00a0 Not so fast.<\/p>\n
In Balles v. Babcock Power Inc.,<\/em> a recent case involving such an affair, the Massachusetts Supreme Judicial Court discussed whether such conduct constituted \u201ccause<\/strong>\u201d for termination and, if so, whether correction<\/strong> (or cure<\/strong>) was possible.<\/p>\n The Court\u2019s answers were unexpected \u2013 and forgiving.<\/p>\n It was undisputed that Babcock Power Inc. terminated Eric Balles after learning of the affair. If the termination was for \u201ccause,\u201d as defined in the stockholders agreement, the Company could re-purchase Balles\u2019 stock for the nominal price of $0.001 per share, and need not pay Balles any severance under his employment agreement. Thus, unsurprisingly, the Company took the position that the termination was for \u201ccause.\u201d Balles filed suit, and the Company counter-sued.<\/p>\n The trial judge found for the Company on its breach of fiduciary duty (loyalty) claim and, on that basis, assessed against Balles an \u201cequitable forfeiture\u201d of past salary \u2013 that is, the salary he had been paid during the period of his disloyalty to the Company. In addition, the trial judge denied Balles any severance because of what the judge found to be Balles\u2019 material breach of his employment agreement.\u00a0 However, the trial judge held that, under the stockholders agreement, there was not \u201ccause\u201d for Balles\u2019 termination.\u00a0 The Company was ordered to return Balles\u2019 stock and to pay him past dividends.<\/p>\n The Company appealed and Massachusetts\u2019s highest court, the Supreme Judicial Court, granted direct appellate review.<\/p>\n The Supreme Judicial Court provided guidance in several areas of crucial importance to executives, including the following:<\/p>\n First, the Court discussed \u201cfraud<\/strong>\u201d as grounds for \u201ccause.\u201d \u00a0As the parties had not supplied a definition of \u201cfraud\u201d in the agreements, the Court applied the common law definition and required, among other things, that the executive had done actual harm to the Company. \u00a0The Court held that Balles\u2019 efforts to advocate on behalf of his paramour \u2013 without disclosing their personal relationship \u2013 did not constitute \u201cfraud\u201d because, as the trial judge found, the paramour fully earned her salary and benefits by \u201cher obvious verbal and managerial skills, intelligence, maturity, and motivation\u2026\u201d<\/p>\n Second, applying the common law again, the Court held that merely violating a Company policy does not constitute \u201cgross insubordination<\/strong>.\u201d \u00a0\u201cGross insubordination,\u201d in contrast to insubordination, \u201cis generally defined as willful disregard of a direct order.\u201d\u00a0 Balles never disobeyed a direct order and, therefore, his conduct did not constitute \u201cgross insubordination.\u201d<\/p>\n Third, when an agreement provides for an opportunity to<\/strong> correct<\/strong> one\u2019s conduct (that is, to cure<\/strong>), a company cannot ignore this on the \u201cnarrow\u201d theory of futility, such as that \u201ccure\u201d would be impossible because the harm was already done.\u00a0 As the Court pointed out, by asserting that cure requires the undoing of the wrong, rather than the remedying of its effects, the Company was reading the opportunity to correct out of the agreement, which it was not allowed to do. \u00a0The Court rejected the Company\u2019s argument \u201cthat the risk of a sexual harassment claim\u2026 was uncorrectable.\u201d\u00a0 Rather, the Court pointed out that cure was possible, such as through the financial penalty (loss of severance) imposed by the trial judge.\u00a0 The Court went so far as to say that even if termination was required to protect the integrity of the Company\u2019s personnel policies, the termination did not have to be \u201cfor cause.\u201d<\/p>\n Fourth, \u201cthe rights of stockholders <\/strong>arising under contract\u2026are governed solely by contract.\u201d Thus, as a stockholder, Balles was entitled to his rights under the stockholder agreement \u2013 despite his breaching the duty of loyalty that he owed the Company as an employee.<\/p>\n Here are two takeaways for executives:\u00a0 (1) first and foremost, drafting is king, so make sure you have an executive advocacy lawyer represent you in contract negotiation; and (2) even if you make a mistake, talk with your executive advocacy lawyer as soon as possible, as you may have legal protections of which you are unaware.<\/p>\n","protected":false},"excerpt":{"rendered":" Consider the following: A male executive has a long-term, clandestine affair with a young female subordinate.\u00a0 The executive takes steps to conceal the affair, while at the same time using his position to advocate for his paramour\u2019s career advancement.\u00a0 Upon learning of the situation, his employer terminates his employment for \u201ccause.\u201d\u00a0 Caught red-handed, the executive […]<\/p>\n","protected":false},"author":9,"featured_media":63,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"_monsterinsights_skip_tracking":false,"footnotes":"","_links_to":"","_links_to_target":""},"categories":[82,8],"tags":[],"class_list":["post-61","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-cases-to-note","category-executive-advocacy"],"acf":[],"yoast_head":"\nBackground<\/strong><\/h3>\n
Answers from the Court<\/h3>\n
The Bottom Line<\/strong><\/h3>\n