At-Will Employment Agreement Plus Mandatory Redemption Clause Leaves Minority Shareholder-Employees Out in the Cold
July 24, 2023
MiniCorp has five shareholders, all of whom are employees. Each shareholder’s employment agreement states that they are an at-will employee of MiniCorp, and the shareholders agreement provides that when a shareholder’s employment terminates for any reason, MiniCorp shall redeem their shares for book value.
After years of middling success, MiniCorp is on the verge of making it big: a closing competitor and well-timed celebrity endorsement are poised to send sales of its signature product through the roof.
Three of MiniCorp’s five shareholders decide that they would rather split their windfall three ways than five. They call a shareholders meeting, vote to terminate two employee-owners, then redeem their shares at book value. The ousted shareholders sue, alleging that the majority breached their fiduciary duties by forcing the redemption of their shares for the sole purpose of cutting them out of MiniCorp’s success. MiniCorp moves to dismiss. How does the court rule?
- Ousted shareholders win. Shareholders in a close corporation owe each other fiduciary duties. And it is a breach of those fiduciary duties where the majority exercises even legitimate rights, “if the sole purpose is reduction of the number of profit-sharers, or ultimately ‘to increase the individual wealth of the remaining shareholders’” (Alpert v 28 Williams St. Corp., 63 NY2d 557, 564 ). This means that where a shareholders agreement contains a redemption clause, those in control of corporation must still exercise those rights in accordance with their fiduciary duties.
- MiniCorp wins. “At-will employment” means what it says: subject to certain legislative exceptions, an employer can terminate an employee for any reason whatsoever—even one that would be a breach of fiduciary duty. And the redemption clause in the shareholders agreement is simply an automatic consequence of the employment decision that MiniCorp had absolute authority to make; fiduciary duties do not extend to employees.
Gallagher v Lambert
In 1989, a divided Court of Appeals held that the at-will employment agreement trumps any heightened duty that the majority would otherwise have to exercise the corporation’s redemption rights: “There being no dispute that the employer had the unfettered discretion to fire plaintiff at any time, we should not redefine the precise measuring device and scope of the agreement” (Gallagher v Lambert, 74 NY2d 562, 567 ). MiniCorp wins.
Dissenting Justice Kaye criticized the decision: “the majority gives no credence whatever to plaintiff’s independent status as a shareholder, and . . . extends the at-will employment doctrine . . . to diminish the long-recognized duties owed minority shareholders.”
That brings us to the subject of this week’s post, Laurilliard v McNamee Lochner, P.C., 79 Misc 3d 1220(A) (Sup Ct Albany Co 2023), a decision by Albany County Supreme Court Justice Richard Platkin that revisits Gallagher and its reasoning.
McNamee Lochner, P.C.
Founded in 1863, McNamee Lochner P.C. (“ML”) was an Albany-based full-service law firm. As of 2020, McNamee Lochner had eleven shareholders, including the Plaintiffs in this action, Kevin Laurilliard and Paul Pastore.
Two agreements governed the relationship between ML and its shareholders:
- An employment agreement, which provides that Plaintiffs’ termination from the firm could occur “[a]t the option of either Employer or Employee after not less than ninety days’ written notice.”
- A shareholders agreement, which included a mandatory redemption provision, stating that “[i]n the event the Shareholder terminates or has terminated his employment with the [Firm], then the share owned by him [or her] shall be offered … in accordance with Section 1 of this Agreement.” Section 1, in turn, specifies a price of $100, payable within six months.
Proposed Merger Talks, Firm Winddown
In February 2020, the Firm’s shareholders called a special meeting to discuss a potential merger with Whiteman, Osterman & Hanna LLP. Although the Plaintiffs were not supportive of the proposed merger, a majority of shareholders agreed to explore the opportunity.
Ultimately, several of the Firm’s partners—including Laurilliard, but not Pastore—received invitations to join WHO’s partnership.
Laurilliard asked other attorneys at the Firm whether “our current attorneys are willing to circle the wagon[s] and continue as the venerable law firm of McNamee Lochner P.C. or whether the Firm will definitely be winding down.” Others responded that because most were accepting their WOH offers, the Firm would be winding down. Laurilliard declined the offer to join WOH.
Shortly thereafter, the Firm—at the direction of a majority of shareholders—began to shut its doors, to the exclusion of Plaintiffs. The Firm:
- Stopped making its pension plan contributions;
- Terminated its of counsel and most of its support staff;
- Reduced Plaintiffs’ salaries;
- Announced in a press release, published in the New York Law Journal, that many of the Firm’s attorneys would be joining WOH;
- Finally, on April 16, 2020, told Plaintiffs to vacate the office by 5:00 pm the following day, at which time they would lose access to their email and computer system.
On May 2, 2020, pursuant to the shareholders agreement, the Firm requested that Plaintiffs “surrender their ML shares and offered to each Plaintiff a check in the amount of $100.00.” Plaintiffs refused to surrender their shares.
Plaintiffs sued in their capacity as employees and shareholders of the Firm. The complaint brought claims for breach of the employment agreement, breach of the shareholders’ agreement, accounting, dissolution under BCL 1104-a, and breach of fiduciary duty.
Plaintiffs’ breach of fiduciary duty claim alleged that the Firm’s majority shareholders terminated Plaintiffs’ employment for the sole purpose of buying their shares at the bargain price of $100 per share. Moreover, alleged the Plaintiffs, Defendants forced the redemption on the eve of the Firm’s liquidation in order to prevent Plaintiffs from sharing in the distribution of more than $600,000 in funds that the Firm held at the time of its winding down.
Plaintiffs’ Employee-Based Claims
Albany County Commercial Division Justice Richard Platkin granted Defendants’ motion to dismiss in its entirety. Plaintiffs’ claims for breach of the employment agreement could not survive, the Court reasoned, because the employment agreement provided the Firm with the unconditional right to terminate the employees. Plaintiffs were, said the Court, at-will employees who could not state a cause of action arising from their termination.
Did the Majority Shareholders Breach their Fiduciary Duties By Terminating Plaintiffs to Cut them Out of the Liquidation Proceeds?
“While it might seem self-evident that controlling shareholders of a corporation may not enrich themselves personally by altering the terms and conditions of minority shareholders employment to force a buy-out at a low price,” the Court observed, “that is not always the case.”
Relying on the majority’s opinion in Gallagher, the Court concluded that the combination of (i) Plaintiffs’ at-will employment and (ii) the mandatory redemption provision in the shareholders agreement, was fatal to Plaintiffs’ claims. The Court reasoned:
Each plaintiff ‘accepted the offer to become a minority stockholder [of ML], but only for the period during which he remained an employee. The buy-back price formula was designed for the benefit of both parties precisely so that they could know their respective rights on certain dates and avoid costly and lengthy litigation on the ‘fair value’ issue’”
The parties were bound by the deal they struck, said the Court, and:
Allowing plaintiffs to maintain a breach of fiduciary duty claim on the facts alleged here ‘would open the door to litigation on both the value of the stock and the date of termination, and hinder the employer from fulfilling its contractual rights under the agreement. This would frustrate the agreement and would be disruptive of the settled principles governing like agreements where parties contract between themselves in advance so that there may be reliance, predictability and definitiveness between themselves on such matters’”
Therefore, even assuming that the only reason the Firm terminated the Plaintiffs was to ensure that the Plaintiffs would not share in the $600,000 that would be distributed upon the Firm’s liquidation, Plaintiffs could not state a claim for breach of fiduciary duty.
Plaintiffs’ Dissolution Claim
Justice Platkin also dismissed Plaintiffs’ claims for dissolution under BCL 1104-a on two grounds:
First, the Court held that due to the mandatory redemption provision, the Plaintiffs were divested “at least equitably” of their rights as shareholders, and therefore lack standing to bring a claim for dissolution under BCL 1104-a.
Second, the Court held that even if they could sue as shareholders of the Firm, they were not oppressed under the standard set forth in Matter of Kemp & Beatley, 64 NY2d 63 (1984), since Plaintiffs could not have expected anything more than enforcement of the terms of the shareholders agreement:
In light of the plain language of the Shareholder Agreements, the only “return” that plaintiffs reasonably could have expected on their shares was redemption at the price of $100 per share upon the termination of their employment, and the judicial dissolution of ML is not required for plaintiffs to obtain that return.”
Laurillard offers a poignant reminder that the combination of an at-will employment agreement and a mandatory redemption provision can be harsh on shareholder-employees, especially where the redemption agreement provides for a bargain price. Shareholder-employees should revisit their agreements with the lessons of Laurillard in mind.