Harrison v. NetCentric Corp.
2001 Mass. LEXIS 163, 744 N.E.2d 622, 433 Mass. 465 (2001)
Rule of Law:
The internal affairs of a corporation, including questions of fiduciary duty owed to shareholders, are governed by the law of the state of incorporation. Unvested stock shares, contingent on continued employment, are generally not considered earned compensation for past services under the implied covenant of good faith and fair dealing, nor does termination to repurchase such shares constitute tortious interference when explicitly permitted by the employee's stock agreement.
Facts:
- In 1994, the plaintiff, Harrison, Sean O’Sullivan, and Donal O’Sullivan discussed forming a business entity to develop a medium for delivering facsimile transmissions across the internet.
- The founders agreed to a stock ownership arrangement where O’Sullivan would receive approximately 4.5 million shares, Harrison 2.9 million shares, and Donal 1.5 million shares.
- Matrix Partners and Northbridge Venture Partners, L.P. provided capital investment for the new venture.
- In 1995, the founders incorporated NetCentric Corporation under Delaware law and established offices in Massachusetts.
- Harrison executed a stock agreement on May 16, 1995, to purchase 2,944,842 shares of NetCentric stock at $0.001 per share, with shares vesting over time, and included a provision allowing NetCentric to repurchase unvested shares if Harrison ceased employment "for any reason . . . with or without cause."
- Harrison's stock agreement and an employee noncompetition agreement both stated they did not grant him any right to continued employment and contained a Massachusetts choice of law provision.
- In September 1996, NetCentric terminated Harrison's employment, at which time 45% of his shares (1,325,180) had vested, and 55% (1,619,662) had not.
- One month after Harrison’s termination, NetCentric notified him in writing that it was exercising its right under the stock agreement to buy back his unvested shares, but Harrison refused to tender the shares.
Procedural Posture:
- The plaintiff, Harrison, filed a complaint in Superior Court against NetCentric Corporation, its CEO Sean O’Sullivan, four directors, and two venture capital firms, alleging breach of fiduciary duty, breach of implied covenant of good faith and fair dealing, wrongful termination, and intentional interference with contractual relations, and sought a declaration that NetCentric had no right to repurchase his stock.
- 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.
- Harrison appealed from the grant of summary judgment, and the Supreme Judicial Court of Massachusetts transferred the case to itself on its own motion for direct review.
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Issue:
1. Does Massachusetts law or Delaware law apply to a breach of fiduciary duty claim against a corporation incorporated in Delaware but with offices in Massachusetts? 2. Do unvested stock shares, subject to a repurchase option upon termination, constitute "earned compensation" for past services, such that an employee's termination to prevent their vesting breaches the implied covenant of good faith and fair dealing? 3. Can an individual who is a founder, CEO, board chairman, and large shareholder be held liable for intentional interference with an at-will employment contract when the termination and stock repurchase are explicitly permitted by the employee's stock agreement? 4. Is a corporation entitled to specifically enforce its right to repurchase unvested shares from a former employee when the stock agreement grants such a right upon termination?
Opinions:
Majority - Cowin, J.
1. No, Delaware law applies to the plaintiff's breach of fiduciary duty claim, and under Delaware law, there is no heightened fiduciary duty of utmost good faith and loyalty owed to minority shareholders in a close corporation that is not a statutory close corporation. The court reaffirmed its policy that the law of the state of incorporation dictates the choice of law regarding the internal affairs of a corporation, including fiduciary duties owed to shareholders. NetCentric was and always has been a Delaware corporation, and the choice of law provision in Harrison’s stock and noncompetition agreements pertained only to the interpretation of those specific contracts, not to the corporation’s internal governance. 2. No, NetCentric did not breach the implied covenant of good faith and fair dealing. Harrison’s unvested shares did not represent earned compensation for past services but were compensation contingent on his continued employment. The stock agreement clearly stated that shares vested over time only if he continued to be employed, and his right to unvested shares would terminate immediately upon cessation of employment. The acceleration clause for a merger or acquisition was deemed to protect Harrison’s investment as a founder and shareholder, not compensation for his day-to-day work, and that contingent event never occurred. The Fortune doctrine does not protect speculative interests contingent on an event that has not occurred. 3. No, the defendants, including O’Sullivan, did not improperly interfere with Harrison’s at-will employment contract. The plaintiff failed to produce admissible evidence that the directors (other than O'Sullivan) participated in the decision to fire him. As for O'Sullivan, by signing the stock agreement, Harrison implicitly agreed that his at-will contract could be interfered with in this manner; he accepted that NetCentric had an interest in his unvested shares and that the vesting of those shares was connected to his continued employment. Therefore, his termination and the repurchase of unvested shares, as permitted by the agreement, did not constitute actionable interference. 4. Yes, the defendants were entitled to summary judgment on their counterclaim for specific enforcement. The stock agreement explicitly granted NetCentric the right to repurchase unvested shares if Harrison ceased employment for any reason and if the company exercised that right in writing within sixty days of termination, which it undisputedly did. Harrison's refusal to tender the unvested shares constituted a breach of this clear contractual obligation.
Analysis:
This case significantly reinforces the "internal affairs doctrine," holding that the law of the state of incorporation (here, Delaware) governs internal corporate matters, such as fiduciary duties, even if the company's operations are primarily in another state or specific contracts include a different choice-of-law provision. It clarifies that unvested stock, whose vesting is conditional on continued employment, is not considered "earned compensation" for past services, thus limiting claims under the implied covenant of good faith and fair dealing for termination to prevent vesting. Furthermore, the decision restricts tortious interference claims against corporate officers where the employee's termination and stock repurchase are explicitly permitted by the terms of the employment and stock agreements, emphasizing the importance of contractual stipulations in at-will employment scenarios.
