A Wolf in Sheep's Clothing - Are Your Shareholders Also Employees?
Guest Blogger: Michael J. Lentz, Esquire
Ordinarily, employment in Maryland is “at will,” meaning that in the absence of a contract that says otherwise, an employer can fire an employee at any time, for any (non-discriminatory) reason, or for no reason at all. Of course, a written employment contract will govern the relationship between the employer and its employee.
However, in some circumstances, Maryland courts will interpret a shareholders’ agreement to be an employment contract. If a shareholder, who also happens to be an employee, enters into a shareholders’ agreement with the employing corporation, and the agreement includes the employee’s duties, compensation, and other employment related terms, the terms of the shareholders’ agreement will govern the employment of the employee-shareholder. A shareholder’s agreement that doesn’t speak to the issue will not change an employee’s at-will status, or provide post-termination benefits, but courts will enforce all written terms. Also, Maryland law requires all parties to a contract to deal with each other fairly and in good faith, even if no such requirements appear in the parties’ agreement. Since a shareholder’s agreement that addresses terms relating to employment will be construed as a an employment contract, this implied covenant of good faith and fair dealing will be implied in the parties’ employment relationship.
As a practical matter, this means that if you have employee shareholders, their shareholder agreements should include either nothing relating to their employment or all pertinent terms of their employment.
Perhaps just as significantly, even in the absence of a written employment contract, shareholders in closely-held corporations may be entitled to rights similar to those found in employment contracts. This is because a shareholder who invests in a closely held corporation may, depending on the nature and size of his investment, expect to be involved in the management and day-to-day operations of the corporation. Maryland courts have held that a shareholder in a closely-held corporation is entitled to “reasonably expect that ownership in the corporation would entitle him to a job, a share of the corporate earnings, and a place in corporate management.”
Corporations, and their majority shareholders, should take care to respect these reasonable expectations of minority shareholders. Maryland law suggests that courts have a wide variety of remedies available to them to ensure that the investment expectations of minority shareholders are protected, including the appointment of a receiver to run the corporation and, if no less drastic measure will protect the minority shareholder, the dissolution of the corporation.
Bottom Line: In closely-held corporations, minority shareholders present challenges not faced by publicly-traded corporations and other corporations with large numbers of shareholders. The corporation, its majority shareholders, and any minority shareholders are well advised to reach explicit, concrete agreements regarding their expectations for the venture, and to commit those agreements to writing thoroughly and precisely.
Michael graduated from Georgetown University Law Center in 1998. After spending five years with large Baltimore firms and three years as a solo and small firm practitioner, Michael joined Wagonheim Law in 2006, where he continues to utilize his extensive experience in commercial, bankruptcy, and appellate litigation to work with companies throughout the mid-Atlantic region.
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