Arguing That Neither An Outside Director of Nor An Investor in a Failed Startup May Be Held Personally Liable for Unpaid Wages and Treble Damages Under the Massachusetts Wage Act
On September 5, the Supreme Judicial Court heard oral argument in this case, in which NELF filed an amicus brief in support of the defendants, a venture capitalist and his manager who invested considerable funds and efforts in a failed biotech start-up limited liability company. At issue is whether such directors and outside investors of a company doing business in Massachusetts can be held personally liable for mandatory treble damages under the Massachusetts Wage Act, G. L. c. 149, § 148, for the company’s nonpayment of an employee’s wages. The Wage Act imposes liability on both the employer and “[t]he president and treasurer of a corporation and any officers or agents having the management of such corporation . . . .” G. L. c. 149, § 148 (emphasis added). And this Court has interpreted an “agent having the management of such corporation” to mean a high-ranking manager of the employer who has authority over the employer’s payment of wages. See Cook v. Patient Edu, LLC, 465 Mass. 548, 549 (2013) (Wage Act applies to “a manager who controls, directs, and participates to a substantial degree in formulating and determining the financial policy of a business entity . . . .”) (citation and internal quotation marks omitted).
The plaintiff in this case, Dr. Andrew Segal, was the president, CEO, and the sole officer of a biotech start-up company called Genitrix, LLC, a Delaware limited liability corporation doing business in Massachusetts. Genitrix’s mission was to develop a cancer-fighting molecule that would train the body’s immune system to attack cancer cells. Dr. Segal prevailed in a jury trial in his claim to hold the defendants, H. Fisk Johnson, III and Stephen Rose, personally liable for Genitrix’s nonpayment of his wages. Neither defendant was ever the president, treasurer, or an officer of Genitrix. And so the issue is whether either defendant was an “agent having the management of” Genitrix under the Wage Act and Cook, when Genitrix failed to pay Segal his salary.
NELF argued that the Wage Act does not, on its face, apply to the directors of a corporation, or to individuals occupying comparable positions in any other entity covered by the Act. This is because the Wage Act omits directors from its list of those corporate actors who are subject to personal liability--i.e., “[t]he president and treasurer of a corporation and any officers or agents having the management of such corporation . . . .” G. L. c. 149, § 148. Nor has the Legislature intended the word “agents” to include directors. To the contrary, the Legislature has recognized throughout the General Laws that directors are not agents of the corporation. In particular, the Legislature has named directors separately from agents in several other statutes that address the duties and powers of corporate actors. In light of the Legislature’s repeated distinction between directors and agents in those other statutes, the word “agents” in the Wage Act should not be interpreted to include directors.
NELF argued further that the Legislature’s frequent distinction between directors and agents is consistent with the common law of agency, under which a director is not an agent of the corporation, for two simple reasons. First, to be an agent, an individual must be subject to the principal’s control. But a director is not subject to the control of another (other than her placement in office by the shareholders). Once in office, a director is free to exercise her own business judgment in overseeing the corporation’s affairs. And second, an agent must be able to act on behalf and for the benefit of the principal. But a director has no power to act on her own for the corporation. Instead, she acts only as one of a board of directors that act as a body to supervise the activities of the corporation.
NELF also argued that investors in a company, and the individuals who manage their investments, should be allowed to take an active role in protecting those investments without risking the loss of their separate legal identities and becoming “agents” of that company under the Wage Act. After all, the Wage Act limits personal liability to “agents with the management of such corporation,” i.e., high-ranking managers of the employer who are in charge of the employer’s financial policy. Cook, 465 Mass. at 549. But the owners and managers of another company (such as the venture capital firm in this case or, for that matter, a parent corporation) that invests in the employer company are not agents of the employer. If they are agents at all, those individuals are agents of a separate legal entity that invests in the employer. Consistent with this foundational principle of corporate separateness, then, investors and their managers should be allowed to take an active role in protecting those investments, such as by specifying the purpose of capital contributions and monitoring the company’s operations, without losing their separate legal identities and becoming agents of the employer under the Wage Act. To overcome this core principle of corporate separateness, the employee would have to prove extraordinary circumstances to justify disregarding the corporate form and treating those individuals as if they were agents of the employer under the Wage Act.
Finally, NELF argued that an adverse decision could chill investment and business growth in Massachusetts, because it would expose venture capitalists and their managers to the additional risk of personal liability for treble damages under the Wage Act. This could, in turn, undermine the Commonwealth’s economy and the public interest. Indeed, Massachusetts’ innovative economy owes its success, at least in part, to venture capital. Without the necessary financing from risk-taking entrepreneurs and the committed efforts of their managers, many start-up businesses with innovative and even life-saving goals (such as the biotech start-up company in this case) would not be able to see the light of day. After all, Genitrix’s mission was to develop a cancer-fighting molecule, and the facts of this case illustrate the crucial role that venture capital can play in financing the early stages of such a business.
However, this case also illustrates that investing in a start-up company is an inherently risky prospect, with no guarantee of success. Exposing investors to more risk, by subjecting them to potential personal liability under the Wage Act, could deter them from investing capital in already risky start-up companies in Massachusetts. In the end, society as a whole could be deprived of many potentially innovative and even life-saving products and services because they lacked the initial capital investment to become a reality. The Legislature could not have intended such socially undesirable results under the Wage Act.
On September 5, the Supreme Judicial Court heard oral argument in this case, in which NELF filed an amicus brief in support of the defendants, a venture capitalist and his manager who invested considerable funds and efforts in a failed biotech start-up limited liability company. At issue is whether such directors and outside investors of a company doing business in Massachusetts can be held personally liable for mandatory treble damages under the Massachusetts Wage Act, G. L. c. 149, § 148, for the company’s nonpayment of an employee’s wages. The Wage Act imposes liability on both the employer and “[t]he president and treasurer of a corporation and any officers or agents having the management of such corporation . . . .” G. L. c. 149, § 148 (emphasis added). And this Court has interpreted an “agent having the management of such corporation” to mean a high-ranking manager of the employer who has authority over the employer’s payment of wages. See Cook v. Patient Edu, LLC, 465 Mass. 548, 549 (2013) (Wage Act applies to “a manager who controls, directs, and participates to a substantial degree in formulating and determining the financial policy of a business entity . . . .”) (citation and internal quotation marks omitted).
The plaintiff in this case, Dr. Andrew Segal, was the president, CEO, and the sole officer of a biotech start-up company called Genitrix, LLC, a Delaware limited liability corporation doing business in Massachusetts. Genitrix’s mission was to develop a cancer-fighting molecule that would train the body’s immune system to attack cancer cells. Dr. Segal prevailed in a jury trial in his claim to hold the defendants, H. Fisk Johnson, III and Stephen Rose, personally liable for Genitrix’s nonpayment of his wages. Neither defendant was ever the president, treasurer, or an officer of Genitrix. And so the issue is whether either defendant was an “agent having the management of” Genitrix under the Wage Act and Cook, when Genitrix failed to pay Segal his salary.
NELF argued that the Wage Act does not, on its face, apply to the directors of a corporation, or to individuals occupying comparable positions in any other entity covered by the Act. This is because the Wage Act omits directors from its list of those corporate actors who are subject to personal liability--i.e., “[t]he president and treasurer of a corporation and any officers or agents having the management of such corporation . . . .” G. L. c. 149, § 148. Nor has the Legislature intended the word “agents” to include directors. To the contrary, the Legislature has recognized throughout the General Laws that directors are not agents of the corporation. In particular, the Legislature has named directors separately from agents in several other statutes that address the duties and powers of corporate actors. In light of the Legislature’s repeated distinction between directors and agents in those other statutes, the word “agents” in the Wage Act should not be interpreted to include directors.
NELF argued further that the Legislature’s frequent distinction between directors and agents is consistent with the common law of agency, under which a director is not an agent of the corporation, for two simple reasons. First, to be an agent, an individual must be subject to the principal’s control. But a director is not subject to the control of another (other than her placement in office by the shareholders). Once in office, a director is free to exercise her own business judgment in overseeing the corporation’s affairs. And second, an agent must be able to act on behalf and for the benefit of the principal. But a director has no power to act on her own for the corporation. Instead, she acts only as one of a board of directors that act as a body to supervise the activities of the corporation.
NELF also argued that investors in a company, and the individuals who manage their investments, should be allowed to take an active role in protecting those investments without risking the loss of their separate legal identities and becoming “agents” of that company under the Wage Act. After all, the Wage Act limits personal liability to “agents with the management of such corporation,” i.e., high-ranking managers of the employer who are in charge of the employer’s financial policy. Cook, 465 Mass. at 549. But the owners and managers of another company (such as the venture capital firm in this case or, for that matter, a parent corporation) that invests in the employer company are not agents of the employer. If they are agents at all, those individuals are agents of a separate legal entity that invests in the employer. Consistent with this foundational principle of corporate separateness, then, investors and their managers should be allowed to take an active role in protecting those investments, such as by specifying the purpose of capital contributions and monitoring the company’s operations, without losing their separate legal identities and becoming agents of the employer under the Wage Act. To overcome this core principle of corporate separateness, the employee would have to prove extraordinary circumstances to justify disregarding the corporate form and treating those individuals as if they were agents of the employer under the Wage Act.
Finally, NELF argued that an adverse decision could chill investment and business growth in Massachusetts, because it would expose venture capitalists and their managers to the additional risk of personal liability for treble damages under the Wage Act. This could, in turn, undermine the Commonwealth’s economy and the public interest. Indeed, Massachusetts’ innovative economy owes its success, at least in part, to venture capital. Without the necessary financing from risk-taking entrepreneurs and the committed efforts of their managers, many start-up businesses with innovative and even life-saving goals (such as the biotech start-up company in this case) would not be able to see the light of day. After all, Genitrix’s mission was to develop a cancer-fighting molecule, and the facts of this case illustrate the crucial role that venture capital can play in financing the early stages of such a business.
However, this case also illustrates that investing in a start-up company is an inherently risky prospect, with no guarantee of success. Exposing investors to more risk, by subjecting them to potential personal liability under the Wage Act, could deter them from investing capital in already risky start-up companies in Massachusetts. In the end, society as a whole could be deprived of many potentially innovative and even life-saving products and services because they lacked the initial capital investment to become a reality. The Legislature could not have intended such socially undesirable results under the Wage Act.
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