Harrison v. NetCentric Corporation

• Citation: 433 Mass. 465,744 NE 2d 622
• Court: United States State Supreme Judicial Court of Massachusetts
• Decision Date: 04 December 2000
• Parties: KEVIN HARRISON v. NETCENTRIC CORPORATION & others.

433 Mass. 465

744 NE 2d 622

KEVIN HARRISON v. NETCENTRIC CORPORATION & others.¹

Supreme Judicial Court of Massachusetts, Middlesex.

December 4, 2000.

March 14, 2001.

Present: MARSHALL, C.J., GREANEY, IRELAND, SPINA, & COWIN, JJ.

C. Max Perlman (Robert E. Sullivan with him) for the plaintiff.

John G. Fabiano (Douglas J. Nash with him) for the defendants.

Cynthia L. Amara & Loretta M. Smith, for Associated Industries of Massachusetts & another, amici curiae, submitted a brief.

COWIN, J.

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).² The plaintiff alleged that the defendants breached their fiduciary duty of utmost good faith and loyalty; breached the implied covenant of good faith and fair dealing; wrongfully terminated his employment; and intentionally interfered with his contractual relations. All of the plaintiff's claims stem from his termination as an officer of NetCentric and the company's attempt to repurchase from him certain shares of his stock pursuant to a stock restriction agreement (stock agreement). The plaintiff also seeks a declaration that NetCentric has no right to repurchase the stock for the stated price of $0.001 a share. The defendants asserted a counterclaim for specific enforcement of the purchase option provision of the stock agreement. A Superior Court judge allowed the defendants' motion for summary judgment on all the plaintiff's claims, and granted the defendants' motion for summary judgment on their counterclaim. The plaintiff appealed from the grant of summary judgment,³ and we transferred the case to this court on our own motion. We affirm the judgment of the Superior Court.⁴

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 forming a business entity to develop a medium for delivering facsimile transmissions across the world by way of the internet. The founders agreed to a stock ownership arrangement whereby O'Sullivan would receive approximately 4.5 million shares, the plaintiff 2.9 million shares, and Donal 1.5 million shares. In need of financing, they obtained capital investment from Matrix Partners (Matrix) and Northbridge Venture Partners, L.P. (Northbridge). They incorporated NetCentric⁵ the following year under Delaware law and established offices in Massachusetts.

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 and understandings relating to the same subject matter. In addition, the agreements contained a choice of law provision, providing that they "shall be construed, interpreted and enforced in accordance with the laws of the Commonwealth of Massachusetts."

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 employeeshareholders 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 vicepresidents, 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 of law question. As a minority shareholder in a close corporation,⁶ the plaintiff maintains that the defendants owed him a duty of good faith and loyalty and that they breached this duty by terminating his employment in order to repurchase his unvested shares. This claim is based on Massachusetts law, which provides that shareholders in a close corporation owe each other the duty of "utmost good faith and loyalty." Wilkes v. Springside Nursing Home, Inc., 370 Mass. 842, 848-849 (1976) (majority shareholders breached fiduciary duty by taking adverse employment actions against minority shareholder in order to pressure him into selling his shares at less than fair value); Donahue v. Rodd Electrotype Co. of New England, Inc., 367 Mass. 578, 593 (1975) (failure to offer to purchase minority shareholder's shares at same price as offered to another shareholder was breach of fiduciary duty).

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 such corporations.⁷

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 relationship" 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., 417 Mass. 643, 646 (1994) (statutes...