This is an update to our September blog which discussed the arguments in Segal v. Johnson, concerning the potential for individual liability of corporate investors and directors under the Massachusetts Wage Act.
In Segal, the Supreme Judicial Court was reviewing a substantial jury award in favor of the plaintiff, Segal, the co-founder and President of a startup company, against Johnson and Rose, who were board members and investors in the company, Genitrix. After trial the jury determined that Johnson and Rose, through their investment decisions and board oversight of Genitrix, were individually liable under the Wage Act to Segal, who served as the company president for over two years without any pay. Johnson and Rose appealed.
On December 28, 2017 the SJC issued its decision under the caption Segal v. Genitrix. Focusing on the language of the Wage Act, the Court reasoned that because Johnson and Rose were not officers of Genitrix, they could only be held individually liable if they were “agents having the management” of Genitrix in their capacities as board members and investors.
The Court noted that an individual director is typically not an agent of a company because a director does not act individually, but only as a member of the collective board. The Court then stated that a board of directors cannot be a company’s agent because a board is not subject to the company’s control. Rather, the board oversees and controls the company. The Court also found that individual investors are generally not to be considered agents of a company. Although investors may impose terms and conditions on their investments, resulting in some control and leverage over the company, they do so as outsiders, not agents. The Court determined that such investments do not constitute “having the management of the company” as required for individual liability under the Wage Act.
The SJC decided that Johnson and Rose were not “agents having the management” of Genitrix and therefore were not subject to individual liability under the Wage Act. Accordingly the Court vacated the jury award and held that Johnson and Rose had no individual liability to Segal. The Court’s decision is likely to be welcomed not only by the defendants but also by those in the business community who expressed concern that an expansion of individual Wage Act liability could chill investments and participation in startup companies in Massachusetts.
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