On March 6, 2017, the Massachusetts Supreme Judicial Court decided Balles v. Babcock Power Inc., a case involving the meaning and application of “for cause” termination language in stockholder and executive employment agreements. In Balles, the Court (Lenk, J.) provides guidance both to attorneys drafting and negotiating such
It was undisputed that Babcock Power Inc. (Babcock) terminated executive Eric N. Balles (Balles) after learning of his ongoing affair with a subordinate. If the termination was “for cause” as defined in the
In the jury-waived portion of the trial, the Superior Court (Wilkins, J.) found for Babcock on its breach of fiduciary duty claim and, on that basis, the Superior Court assessed against Balles an equitable forfeiture of past salary (that which was paid him during the period of his disloyalty) and denied him severance due to his material breach of the employment agreement.
On the other hand, however, the Superior Court found for Balles on the issue of “cause” under the stockholder
Guidance from the Court
The Court provided guidance in several areas:
(1) the standard of judicial review of a company’s determination of “cause”;
(2) the meaning of “fraud”;
(3) the meaning of “gross insubordination”;
(4) when an employer may ignore a contractually provided opportunity to correct (cure), and what constitutes correction in a circumstance such as this; and
(5) the application of fiduciary duty defenses to stockholders agreement claims.
First, parties to a contract may, within limits, agree to a standard of judicial review that is deferential to one party. However, merely reciting that that the decision regarding “cause” “may only be made by the [company]” does not evidence such agreement; nor is such language ambiguous. In other words, if the parties to a contract want to provide an enforceable deferential standard of judicial review, they would be wise to do so explicitly.
Second, regarding “fraud” as a grounds for “cause”, the common law definition applies, presumably unless otherwise defined by the parties, and requires, among other things, both fraudulent intent and actual harm.
Here, the two allegations of fraud did not meet the common-law definition. The mistakenly submitted false reimbursement request neither was submitted with the requisite intent nor was Babcock harmed. Likewise, Balles’ advocacy on behalf of his paramour without disclosing their personal relationship was done without the requisite intent and did not cause harm to
Third, regarding “gross insubordination” as a ground for “cause”, merely failing to abide by company policies does not rise to the level of gross insubordination. Rather, again where the phrase is not defined in the agreement, the Court looked to the common law and held that “gross” insubordination, in contrast to insubordination, “is generally defined as
Fourth, where the contract provides for an opportunity to correct one’s conduct, Babcock could not ignore this on the “narrow” theory of futility, i.e., that correction would be impossible because the harm was already done. The Court pointed out that by asserting that correction requires undoing the breach, rather than remedying its effects, Babcock was reading the correction provision out of the agreement. Furthermore, the Court pointed out that correction was, indeed, possible here by, e.g., financial penalty, such as that imposed by the Superior Court, and even termination if termination was required to protect company culture – but to insist that such termination be for “cause” would, again, make the correction provision “for naught.”
Fifth, unlike under the employment agreement, “the rights of stockholders arising under contract, as here, are governed solely by contract.” Thus, Balles was entitled to his rights under the stockholder agreement irrespective of breaches of fiduciary duties.
In light of Balles, executives are reminded to discuss their stockholder and employment agreements with their executive advocacy attorney to ensure that they understand the “for cause” termination language of those agreements. Learn more about Sherin and Lodgen’s employment department and executive advocacy work here.
 The bulk of Babcock’s