By Stéphanie Smith
The Massachusetts Supreme Judicial Court (SJC) recently issued a landmark decision, clarifying the extent to which individual board members and investors may be held individually liable under the Wage Act. In Segal v. Genitrix, LLC, SJC-12291 (Mass. Dec. 28, 2017), a case of first impression, the SJC ruled that the Wage Act does not impose personal liability on board members acting only in their capacity as board members, or investors engaged in ordinary investment activity.
Genitrix LLC was a biotech startup founded by Andrew Segal and H. Fisk Johnson, III. Segal was appointed president and Chief Executive Officer (with duties commensurate with such titles) and Johnson provided the initial funding. Both could appoint two board representatives, and Johnson appointed Stephen Rose (Segal and Johnson also served on the board). As so many other startups, the venture struggled and was eventually running out of funds to meet payroll. Johnson made an additional investment in Genitrix through Fisk Ventures, LLC, a company he owned with Rose, which was earmarked for specific purposes, including payroll. When the company continued to struggle, Segal decided to stop paying himself a salary. Johnson (through Fisk) agreed to inject additional funds into Genitrix, to pay the wages of the only other employee then-remaining with the company (but not Segal’s). The lab was eventually closed, and Rose filed a petition to dissolve Genitrix, which was approved over Segal’s opposition. Segal later sued Johnson and Rose (and others, including Fisk) for unpaid wages. After a jury found for Segal, Johnson and Rose appealed directly to the SJC to set aside the verdict.
On appeal, the Court first reviewed the language of the Wage Act. The Wage Act imposes personal liability on the president and treasurer of a corporation and “any officers or agents having the management of such corporation.” At issue in Genitrix was whether Johnson and Rose, as board members and investors of Genitrix, were “agents having the management of such corporation.” After reviewing agency law principles, the SJC held that, unless acting as the president or treasurer (or other officer holding these titles), to face personal liability under the Wage Act, individual directors and investors (i) must have been empowered to act as an agent for the corporation, and (ii) must have “assumed and accepted as individuals significant management responsibilities over the corporation similar to those performed by a corporate president or treasurer, particularly in regard to the control of finances or payment of wages.” Finding that neither Johnson nor Rose met this standard, the SJC determined they were not personally liable for Segal’s unpaid wages.
“Agent” of the Corporation
Analyzing the statute under traditional agency law principles, the SJC found that an individual director does not generally act as an “agent” for the corporation, but as a member of the group that oversees its activities. Additionally, investors are not usually agents of the corporation because, when exercising control over the businesses in which they have invested, they are acting on their own behalf, to protect their investment, and not on behalf of the corporation.
However, the Court cautioned that an agency relationship does not require a formal board resolution, but can arise from either express or implied consent by the board evidencing that a particular individual has been empowered to act as the functional equivalent of the president or treasurer of the corporation.
“Management” of the Corporation
With respect to the “management of the corporation” prong, the SJC noted that “[s]ome management responsibility is not the same as ‘the’ management of the corporation.” The SJC held that a board’s normal oversight responsibilities over a corporation do not amount to “management of the company.” Here, Segal, as the sole officer of Genitrix, was exclusively charged with the management of Genitrix’s finances and operations, including payroll. Segal also was the only one with authority to sign corporate checks, and he alone decided to stop paying himself.
Notably, although Segal had submitted cost-cutting proposals to the board, which had been rejected, the Court found “nothing exceptional” in these board activities, as these proposals “were not the type of ordinary personnel or financial decisions left to individual managers and obviously rose to the level of board consideration.” Likewise, the SJC found that an investor exercising his or her rights and imposing restrictions over infusions of new money, standing alone, does not give that investor management direction and control over the company.
This case is an important reminder that executives (including the president of an entity) have standing to file a claim for unpaid wages under the Wage Act. However, with Genitrix, directors and investors in startups and other entities find some relief that their typical activities will not give rise to personal liability under the Wage Act (with its automatic treble damages provision).
Board members and investors can protect themselves from personal liability by clearly delineating the scope and extent of their authority in organizational documents and other operational agreements, including executive employment agreements. For example, the LLC agreement in Genitrix expressly stated that investors did not have agency authority.
However, since no formal board action is necessary to create an agency relationship, directors and investors should be cautious about engaging in actions that would imply that they have been empowered to act as the functional equivalent of the company’s president or treasurer.
The employment, bankruptcy and corporate attorneys at Casner & Edwards, including its emerging companies practice Fort Point Legal, are experienced in advising startups through all stages of growth, including structuring founder relationships and financing transactions, and counseling financially distressed companies.