The Supreme Judicial Court of Massachusetts recently handed down a decision in the case of Selmark Assocs., Inc. v. Ehrlich, which has been ongoing since 2008.
Our Boston business attorneys recognize the details of this case are extensive, but the core legal issues raised pertain to the duties that fellow shareholders and directors of corporations have to one another where contractual agreements define parts of their relationship. Also, the court wrestled with questions about the extent of damages to the aggrieved parties.
This complex business litigation reveals how important it is for corporations and shareholders to retain experienced attorneys for routine legal review of all dealings and contracts.
The case involves two companies – Selmark and Marathon – both Massachusetts corporations and both closely held (meaning stock is publicly traded, but most of it is held by a few shareholders with no immediate intentions to sell). Both firms operate on a business model called “manufacturer’s representative company,” which is that they provide outsourced sales support to firms that make electronic equipment. This is routine where manufacturers don’t have their own sales staff.
As the owner of Marathon neared retirement, there were ongoing discussions between his top sales person (Ehrlich) and executives at Selmark about selling Marathon. In 2001, a series of written agreements provided for the gradual sale of Marathon by the owner to both Selmark and Ehrlich. There were a total of four contracts that stipulated the stock purchase and redemption agreement, a conversion agreement, an employment agreement and a stock agreement.
Per these terms, Selmark would own 51 percent of Marathon, and Ehrlich 49 percent. Ehrlich would become the vice-president and possibly the director, and he could only be fired with cause. Also, after the initial owner of Marathon was paid off, Ehrlich would have the option of converting his in Marathon to a 12.5 percent interest in Selmark. That would make Selmark the primary owner of Marathon. Finally, the stock agreement outlined what the terms would be if Ehrlich decided to convert.
After these agreements were drawn up, the two firms remained two separate companies, yet they were presented publicly as a single firm. There bank accounts were separately maintained, as were the tax returns, etc., but Marathon was operating in Selmark’s office space and the two shared sales forces. There was no competition between the two. Ehrlich had business cards that indicated he was the VP of Selmark, although he was actually VP of Marathon.
When Ehrlich’s employment agreement expired in late 2002, he stayed on as an employee, even though there was no agreement in writing to extend his employment.
Things went well until Ehrlich informed Selmark’s owner in 2007 that he planned to hasten his payoff to Marathon’s previous owner and collect his full 49 percent share of stock in Marathon.
Selmark’s owner decided he didn’t want Ehrlich as a successor, and informed him that he was fired, effective immediately. The termination letter contained an offer to purchase his Marathon shares and interest for the same as what he would have gotten had he chosen to convert his shares.
Further, that letter indicated that Marathon didn’t have enough money to finish paying off the former owner. That meant Ehrlich would be liable for making up the difference. As he drove home from that meeting, his company cell phone was disconnected. A letter received shortly thereafter indicated that his departure from the company was the result of a failed relationship.
He received a severance package of $25,000, but he did not convert his Marathon shares, and he stayed on as a minority owner. However, he had no further involvement in the firm.
He later landed a job at a competing firm. There, he arranged meetings with numerous Marathon customers and solicited their business. Several switched.
Selmark made the remaining payments to the former Marathon owner. Ehrlich expressed doubt that the firm had insufficient funds upon which to pay his portion of the debt, but promised the former owner that if that was the case, he would honor the original agreement. When he failed to pay, he never received a default notice from the former owner, as required in the purchase agreement. Instead, the former owner filed suit against him to collect the remaining balance.
Then, Ehrlich attempted to exercise his conversion rights and collect on his 12.5 percent interest in Selmark stock. However, Selmark told him that he couldn’t do so because he had failed to repay the Marathon owner, so he forfeited his right to collect the stock.
Both Selmark and Marathon filed claims against Ehrlich for breach of fiduciary duty.
The jury found breaches all around. Ehrlich had breached his fiduciary duty to Marathon by soliciting customers for his new firm. Selmark and its owner had committed a breach of contract to and breach of fiduciary duties to Ehrlich. All the parties at Selmark engaged in unfair or deceptive practices.
Upon review by the Supreme Judicial Court:
- The jury verdict in favor of Selmark and Marathon on breach of fiduciary duty against Ehrlich was affirmed;
- The jury verdict in favor of Ehrlich on breach of fiduciary duty counterclaim against Selmark and its owner was affirmed;
- The court determined Ehrlich was entitled to collect on his breach of contract counterclaim, but remanded the case for a new trial on the issue of contractual damages;
- Concluded that Ehrlich was not entitled to damages under Mass. Gen. Las ch. 93A, which defines unfair business practices.
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Selmark Assocs., Inc. v. Ehrlich, March 14, 2014, Supreme Judicial Court of Massachusetts
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