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In Massachusetts, Directors and Investors Acting in their Normal Capacities Do Not Have Personal Liability for Wage Act Violations

The Massachusetts Supreme Judicial Court recently held that the Massachusetts Wage Act does not impose personal liability on board members or investors acting in their normal capacities. In Segal v. Genitrix, LLC, the SJC found that former board members and investors who were not company officers and who had limited agency authority did not fall within the scope of the Wage Act, which imposes liability for unpaid wages on certain officers and agents having management authority over the company.

In 1997, H. Fisk Johnson, III agreed with Andrew Segal to form a biotechnology company, Genitrix, LLC. To launch this venture, Segal contributed his intellectual property and served as president and chief executive officer; Johnson contributed capital. Each had two seats on the board. Later, through subsequent equity advances, Johnson gained a third board seat.

As CEO and president, Segal managed Genitrix. He was responsible for all day-to-day operations. Segal had sole authority on payroll issues; however, he did need board approval for certain hiring and firing activities.

In 2006, Genitrix experienced financial difficulty. Johnson conditioned any future equity investments on specified uses, such as payroll and other operating expenses. In January 2007, Segal decided to stop taking his salary to permit the company to pay its last remaining key employee.  A few months later, Segal informed his board that he had not been getting paid.

After a long falling out, Segal sued Johnson and others under the Wage Act for his unpaid wages from 2007 to 2009.

Under the Wage Act, the president and treasurer of a corporation, and any officers or agents “having the management of the corporation,” are liable for nonpayment of wages to employees. With no allegation that the defendants in Genitrix were officers, the SJC considered for the first time whether the definition of “agents having the management of the corporation” should apply to board members or investors.

The SJC recognized that not all agents of a corporation have the same responsibility. Only those agents that have assumed and accepted as individuals significant management responsibilities over the corporation, similar to those performed by a corporate president or treasurer, particularly concerning the control of finances or payment of wages, should have personal liability for Wage Act violations. Individual directors or investors may be considered agents of the corporation if they are empowered to act as such, whether through express or implied consent. However, in such cases, any agency relationship would stem from their appointment as an agent, not from their position as a director or investor.

Here, there was no indication that any individual board member or investor had engaged in any activity that equated to being an agent having management of Genitrix. The board, like most, acted collectively, not individually, when it set policy and oversaw management – the role of a typical board of directors. The board did not perform the management function of the company. Similarly, when the investors exercised financial control over the company, they were acting as outsiders, not managers or agents of the corporation. When investors in Genitrix earmarked future investments for specific expenses, they were not managing the company so much as managing the risk of their investment. The SJC noted that exercising one's rights and leverage as an investor over infusions of new money is acting in a manner separate and distinct from being an agent having the management of the corporation.

In short, the SJC found the board members and investors did not act as “agents having the management of the corporation” when they went about their normal functions as a board and investors, respectively.

The Genitrix decision is good news for boards and investors in distressed companies who often find themselves facing landmines and pitfalls as their company falls into insolvency. Board members and investors that act in their respective capacities but that do not seek to manage the company directly, especially with respect to payment of wages, should be safe from liability under the Wage Act. Nevertheless, it is a good idea to make sure that those running the company timely and properly pay wages to avoid the possibility of personal liability on this issue.

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Kevin J. Walsh is a Mintz bankruptcy attorney whose practice encompasses restructurings, workouts, and commercial financing transactions. Kevin works with debtors and creditors, including bondholders, trustees, financial institutions, and insurers. He works on cases in courts around the country.