A Shareholders' Agreement

Previously, I discussed those aspects of Edenbaum v. Schwarcz-Osztreicherne that dealt with various questions arising under Corps. & Ass'ns § 3-413(b)(2). The case also involved questions with respect to the proper construction of a shareholders' agreement.

Edenbaum attacked three rulings made by the circuit court with respect to the shareholders' agreement.

First, the lower court had held that the shareholders’ agreement was a shareholders’ agreement, not an employment agreement. Therefore, as either a shareholder or a director (the court was not altogether clear in which capacity), Schwarcz was entitled to continue to receive her salary after she was terminated as an employee of Liberty.

Second, the circuit court awarded Schwarcz a portion of Liberty's profits for the years in question.

Finally, the two awards were entered as judgments against Edenbaum.

The second question is fairly mundane. In essence, the Court reversed the circuit court because it was not clear how the lower court's award of profits tied to the expert testimony that had been offered. It is of limited general interest.

The first and third questions, however, are worthy of closer inspection.

The Court of Special Appeals reversed the circuit court's ruling with respect to the nature of the shareholders' agreement, holding that it constituted an employment agreement as well as an agreement regulating various aspects of corporate governance. It thus rejected the judgment in favor of Schwarcz because that judgment was based upon her rights as an officer and director. Oddly, the appellate court also rejected any attempt by Schwartz to offer as an alternative basis for the judgment the fact that there had been a breach of the employment agreement between the parties. Here, the Court of Special Appeals found that Schwarcz should have cross-appealed, thus she had waived her right to appellate review as to whether her rights under the employment agreement had been violated.

Finally, the Court held that the circuit court had wrongfully entered judgment against Edenbaum, individually, because Schwarcz's claims, if any, were only against the corporation. Because Edenbaum had not guaranteed the obligations of the corporation, judgment should not have been entered against him.

While I will offer more detailed comments in a subsequent post, let me offer some briefly here.

As to the first count, the circuit court was probably correct in granting Schwarcz a judgment for lost compensation as an officer and director. The Court of Special Appeals seems to have it right, the shareholders' agreement did constitute an employment agreement in addition to constituting an agreement as to corporate governance. But the Court's denial of any recompense to Schwarz because she failed to cross-appeal seems to be incorrect. After all, one only appeals from the judgment and Schwarcz had no quarrel with the judgment. In essence, her argument that the shareholders' agreement encompassed an employment agreement should have been treated as an alternative argument in support of the judgment for lost compensation, with the lost compensation being based upon her wrongful termination as an employee. In my extended comments, I will discuss how I believe that the Court's ruling conflicts with its analysis under Corps. & Ass'ns § 3-413(b)(2).

The Court's ruling as to the third count also seems at war with its § 3-413(b)(2) ruling. If, as the Court suggests, the agreement of the parties in the context of a closely held corporation is closely akin to that of the parties in a traditional partnership, the party expelled from the business should be able to obtain a judgment directly against the dominant party if the expulsion was wrongful. After all, the contract governing all of the players, the shareholders' agreement, was entered into by all of the individuals as well as the corporation.

In my next posting on this case, I will discuss its implication for the resolution of disputes in Maryland with respect to all varieties of closely held business entities.