In McCarthy v. U.S.I. Corp., -- A.2d -- (Me. June 20, 1996), the Maine Law Court decided a case involving numerous claims and counterclaims arising out of the termination of two officers of a closely held corporation by the shareholders of the corporation. The Law Court upheld the terminations of the two officers and the judgment for the corporation against the officers for damages to the corporation arising out of the officers' diversion of corporate funds to their own personal use. In the course of its decision, the Law Court ruled on issues involving the interpretation of an incorporation/stockholder agreement, claims of fraud and negligent misrepresentation, and the recovery by the corporation of its accountant's fees. For most Maine employers, however, the Law Court's two most important rulings in this case concerned (a) the subsequent ratification of an improperly obtained "unanimous consent" resolution, and (b) the rejection of a breaching party's attempt to enforce a contract against a non-breaching party.

      Maine law authorizes the shareholders of a close corporation to take certain actions by use of a "unanimous consent," which is a (1) written consent (2) signed by all shareholders entitled to vote on the action being taken (3) and which is filed with the clerk as part of the corporate records. In the McCarthy case, the two officers were discharged in August, 1994, under the authority of a unanimous consent which, in fact, was not signed by two of the shareholders. Subsequently, at a special meeting of the shareholders held in January, 1995, the shareholders voted to ratify the prior actions of the shareholders regarding the officers' discharge. The officers claimed that their discharges were invalid because the alleged unanimous consent authorizing the discharges was defective. The Law Court rejected this claim and upheld the discharges in one sentence: "The fact that the 'unanimous' consent resolution of the shareholders authorizing [the officers'] termination was not signed by all of the shareholders in August, 1994, is not dispositive, because the shareholders ultimately ratified the action terminating [the officers]." The Law Court thus recognized and applied the "subsequent ratification doctrine," which generally provides that certain corporate acts improperly taken may be expressly ratified subsequently by proper corporate actions.

     This is a significant holding for Maine employers, because corporate employers may inadvertently fail to follow all required corporate formalities in connection with the terminations of corporate officers. Of course, prior to the termination of the employment of a corporate officer, the corporation should make every effort to observe all required corporate formalities and comply with all relevant contract provisions, if any, but if an action is taken and then later the action is determined to have been taken in an improper manner, the McCarthy case provides that the employer may simply take a subsequent ratification action, and that ratification will be legally effective. This is particularly important with regard to the termination of corporate executives, who are likely to be familiar with, and to complain about any failure to observe, required corporate formalities.

     The second ruling of significance for most employers was the Law Court's reaffirmation of a basic principal of contract law: a party who materially breaches a contract may not enforce the contract against a non-breaching party. In the McCarthy case, the two discharged officers complained that their discharges were implemented by the corporation's shareholders in violation of the parties' incorporation/stockholder agreement. The Law Court rejected the officers' argument by saying: "[The two officers] cannot claim the benefits of the agreement they themselves had breached." The Court cited authority for the proposition that a "party who has failed to perform her obligations pursuant to the contract cannot demand specific performance of the contract." Accord, Down East Energy Corp. v. RMR, Inc., -- A.2d -- (Me. June 19, 1996) (material breach of contract by one party entitled non-breaching party "to regard the transaction at an end . . . and to maintain an action for damages"). The key, of course, is determining which party materially breached the contract first. In the McCarthy case, the two officers materially breached their duties to the corporation first, so the corporation was excused from following the parties' agreement thereafter.

     This is a ruling likely to be of use to all employers who have employment agreements with employees. The McCarthy case supports the proposition that an employee who has materially breached an employment agreement may not enforce that agreement against the employer. That is a rule that Maine employers occasionally may find very useful in connection with the discharges of corporate officers.

DISCLAIMER: All information is provided for educational or promotional purposes only and not as legal advice on a particular matter. The information is provided AS IS with no warranties of accuracy, completeness, merchantability, or fitness for a particular purpose. Providing this information DOES NOT create an attorney-client relationship between Lawrence C. Winger, Esq. and the reader. All information is Copyright (c) Lawrence C. Winger, Esq. 2000 All Rights Reserved.

Dated: January, 2000

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