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FMG Law Blog Line

In Praise of Folly: When Legal Advice Includes Business Issues

Posted on: September 24th, 2019

By: Paul Boylan

A recent case involving a highly compensated executive shows the pitfalls of getting what you want in a business deal.  In 2002, a sophisticated business executive negotiated a stock buyback provision in his executive employment agreement using a skilled and experienced corporate law attorney.  Jenkins v. Bakst, 95 Mass. App. Ct. 654 (2019).

The 2002 employment agreement was drafted and signed on an expedited basis because the board of directors of the employer, a high-tech company, wanted to announce the hiring of this key executive at an already-scheduled meeting of the board of directors.  The executive was a close friend of the founder of the company, and the company was very excited to bring him on board. Much later, after 13 years of successful work, the executive resigned.  At that point, he was very disappointed with the valuation formula he had negotiated as to the stock buyback price in his 2002 employment agreement.  That formula had been proposed to the executive by his attorney.  The formula used was based on fixed asset value plus goodwill.  The company at the time was routinely using, with other key executives, a stock buyback valuation formula based on revenues per month.

When the executive resigned after 13 years of service the payout under the fixed asset plus goodwill formula was $200,000.  The payout under the monthly revenue formula which the executive had chosen not to use would have been between 1.6 and 3.4 million dollars.  The revenue per month formula was far more profitable 13 years later because the high-tech company had developed a large but ever-changing sales base and did not have substantial fixed assets.

The executive resolved all claims against the former employer and sued the lawyer he had used in the 2002 negotiations for malpractice.  He recovered nothing against the lawyer because the attorney had explained the asset value plus goodwill formula to the executive before he signed the 2002 agreement, he read the agreement before signing, and put his initials on the page which included the buyback formula.  The court also held that the executive could not prove loss causation because it ruled there was no sufficient evidence to show that the company would have agreed to the monthly revenue formula as to this executive despite the fact that the company had concurrently done so in multiple instances with other key executives that same year.  The malpractice claim failed separately because counsel for the executive in the malpractice case did not offer expert testimony as to liability or loss causation.

If you have any questions or would like more information, please contact Paul Boylan at [email protected].

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