I usually work as a defense attorney. However, I also counsel executives regarding their employment and future employment opportunities. On occasion, that counseling morphs into litigation, where I don the hat of plaintiff’s counsel. That is precisely what happened in late 2008, when I had the opportunity to work with Revis Stephenson. Two years later, we had won an interim award of more than $2 Million in an arbitration. Shortly thereafter, the case resolved, with the defendants paying my client $4 Million. This article addresses how this happened and how this outcome could have, and should have, been avoided.
Revis is an extremely bright, competent, dynamic and energetic individual who had spent much of his career in the financial services industry. In his investment banking career, Revis periodically worked with individuals establishing clean energy companies. In late-2004, however, Revis decided that rather than assisting other individuals to establish and run clean energy firms, he instead would do it himself.
Revis raised approximately $1.5 Million in angel investment, and started an ethanol company called Advanced BioEnergy, LLC (ABE). He then organized a road-show, sought additional investors, and raised more than $60 Million from various individuals throughout the Midwest. Revis became the Chairman of the Board and CEO of ABE. He worked closely with leading ethanol plant design and construction firms. After selecting a location in Fairmont, Nebraska, ABE built a state-of-the-art ethanol plant. Within a short time, ABE also acquired two existing ethanol plants in South Dakota, which ABE renovated and expanded. In short, within four years, Revis had converted his idea into a functioning ethanol company with three plants generating approximately $400 Million in aggregate annual revenue.
So far, this seems like a wonderful success story. But, for Revis Stephenson, the story took a darker turn in late 2008. Although ABE had had a series of outstanding accomplishments, in the tight capital markets for ethanol companies in 2007, it experienced difficulty in raising additional capital for its continued growth and expansion. Consequently, in 2007, ABE accepted a $25 Million convertible debt investment from a group that invests in ethanol companies, making it ABE’s largest shareholder. Unfortunately, by early 2008, that investment group was threatening litigation against ABE, threats which continued and intensified throughout 2008.
In September 2008, the investment group demanded a more favorable conversion price and a correspondingly greater percentage ownership of ABE as a method of resolving its threatened litigation against the Company. Revis, in his capacity as Chairman and CEO, and acting in concert with the Board of Directors, rejected the demand that would have increased the investment group’s already substantial ownership interest in the Company. ABE’s outside counsel also emphatically rejected the group’s demands, stressing in letters to the investment group’s attorneys that ABE would not be intimidated into settlement. As we later discovered, the investment group also demanded that Revis be removed as Chairman of the Board and terminated as CEO. Bizarrely, this settlement proposal was concealed from Revis even while he was Chairman and CEO, and worse, concealed during nearly the entire litigation. (More on that below.)
Upon receipt of the settlement proposal in September 2008, ABE’s Board of Directors had at least three options. First, ABE could have rejected the investment group’s demands and vigorously defended the threatened litigation, if it ever even were instituted. Indeed, this appeared to be the course that ABE was intending to pursue through approximately September 2008, as it stated on multiple occasions. Second, the Board could have agreed to some of the investment group’s demands and attempted to resolve the threatened litigation, while maintaining the status of the visionary leader who had started the Company. Third, the Board could have capitulated. Disappointingly, the Board selected the third option and caved.
At a Board meeting on October 15, 2008, the Board made the surprising decision to remove Revis Stephenson as Chairman of the Board and suspend him as CEO. But that was just the first of its ill-considered actions. The Board then had to decide whether to convert the “suspension” into a “termination,” and if so, whether to characterize the termination as a termination without cause, or a termination “for cause,” the latter of which was carefully defined in the Employment Agreement between ABE and Revis. If the Board terminated Revis without cause, they owed him two years’ severance and benefits. If the Board terminated Revis “for cause,” the severance/benefit obligation was eliminated.
Although the Board had not expressed any written criticisms of Revis’s performance during the preceding three years, although individual Board members had routinely provided him letters and emails praising his skills and achievements throughout this period, and although the Board had made other decisions (bonus, stock options, etc.) that illustrated their strong endorsement of Revis’s actions and leadership, the Board selected the financially expedient (at least in the short-term), though unjustifiable, option of labeling the discharge as “for cause.”
Pursuant to the Employment Agreement, the Board was obligated to provide Revis a Notice of Consideration letter, providing him a written explanation of the reasons why he was being discharged “for cause.” The contract specifically provided that the fact-finder in a subsequent dispute could only consider the reasons articulated by the Board in the Notice of Consideration letter and further provided that the fact-finder would conduct a de novo review of the Board’s decision (in other words, there was a specific directive that the fact-finder would not defer to the Board’s decision under the business judgment rule). The contract also provided Revis the opportunity to address the Board’s articulated justifications for its discharge decision.
Having terminated its Chairman and CEO, and having made the tentative, foolish decision to characterize the decision as a “for cause” discharge, the Board still could have extricated itself from this deteriorating situation. At that point, the Board had the opportunity to resolve its incipient dispute with its Revis and settle the matter by paying a substantial portion of the severance compensation he was owed, while simultaneously characterizing the separation in a way that would not damage his future career opportunities. Once again, ABE’s Board made the wrong choice, offering a paltry sum to resolve the dispute and threatening to go public with the “for cause” discharge decision to pressure him into an unfair resolution of his severance claim. While that approach might have intimidated other executives, it did not intimidate Revis.
To his credit, he did not capitulate. The Board then carried through on its misguided threat, finalizing its tentative determination and publicizing its decision to terminate Revis “for cause,” both in its SEC filings posted on the Internet, and in other Board and Company communications. This action not only increased the emotions and tension associated with the Board’s unwarranted decision, it guaranteed litigation.
As a result of this series of ill-conceived decisions, my role as counselor shifted to my more typical role as a trial lawyer. We filed a Complaint in arbitration against ABE in June 2009 (the Employment Agreement had a mandatory arbitration clause). After approximately one year of discovery, the arbitration hearing commenced in September 2010. The hearing was conducted by Richard Pemberton, a highly regarded attorney from out-state Minnesota who has been practicing for more than 40 years. Mr. Pemberton has a long list of accomplishments, including a stint as the President of the Minnesota Bar Association and a member of the American College of Trial Lawyers.
The arbitration involved 15 days of testimony and the introduction of nearly 1000 exhibits. Thereafter, the parties briefed the issues extensively, submitting Findings of Fact and Conclusions of Law in early 2011. (ABE’s brief, for example, was nearly 200 pages in length.) In February 2011, the Arbitrator issued his Interim Award.
The Arbitrator found for Revis on every important issue. First, the Arbitrator found that ABE had breached its contract with Revis by terminating him “for cause” and refusing to pay him the severance compensation he would have been owed under the Employment Agreement had he been discharged without cause. Second, the Arbitrator found that ABE’s characterization of the discharge as a “for cause” discharge was defamatory. Third, the Arbitrator awarded substantial damages – approximately $900,000 for the breach of contract claim (two years’ severance compensation, plus two years of benefits), and $1,000,000 for defamation. With interest and costs, these awards rose to approximately $2.1 Million. Fourth, for reasons explained further below, the Arbitrator invited Stephenson to submit a request for attorneys’ fees.
There are many lessons that can be learned from this dispute and the way ABE approached it, some of which I’ve touched on briefly above. Set forth below are the key mistakes I would identify.
First, ABE disregarded the critical language of its CEO’s Employment Agreement when determining how to proceed. Perhaps I belabor the obvious to point out that the language used in executives’ employment agreements is important. When companies craft this language, they should expect that it will be followed. Moreover, given the standard principle of contract construction that ambiguities are construed against the drafter, it should be assumed that if the contract is unclear or ambiguous, the executive will be the beneficiary of that ambiguity when courts (or arbitrators) are interpreting the agreement.
In this case, for example, the contract language was clear that only the discharge reasons set forth in the Notice of Consideration letter could be considered by the Arbitrator. The defendant foolishly attempted to argue that the arbitrator could consider other reasons, an interpretation with which the arbitrator disagreed. Similarly, as noted above, the employment agreement at issue established a de novo standard of review. That provision, however, did not mean that the arbitrator was entitled to start anew, and disregard the information set forth in the Notice of Consideration letter. The language simply was designed to eliminate the standard deference to Board decisions. ABE argued otherwise, which our team felt diminished its credibility with the tribunal.
Second, just as ABE tried to wish away the problematic language of the contract establishing due process protections, the Company disregarded the specific language of the “for cause” standard set forth in the contract. Like many executives’ employment agreements, Revis’s Employment Agreement contained a high threshold for a “for cause” discharge. The contract included the following language,
“For the purposes of this Section 10(d), no act or failure to act on Executive’s part shall be considered “dishonest,” “willful” or “deliberate” unless done or omitted to be done by Executive in bad faith and without reasonable belief that Executive’s action or omission was in the best interests of the Company. . . .”
This is a tough standard to meet. The Company’s attorneys crafted an agreement that provided both the CEO and the Company substantial protections. Later, however, when the dispute arose, the Company proceeded as though those protections for the CEO did not exist. That too was a mistake.
Third, perhaps because the Company recognized (at least initially) that the Notice of Consideration letter would define the boundaries on which the discharge was to be judged, ABE included twelve different reasons to justify the “for cause” termination. Really? Twelve reasons? I’d assert that if a company has to concoct 12 separate reasons to justify firing a senior executive, the reasons already are suspect.
This is particularly true in the context of: a) a CEO who has received numerous, effusive compliments from his fellow Board members, many of which were in writing; b) a number of the reasons related to conduct that occurred more than a year before (with a substantial bonus paid in the interim); and c) a “cause” definition that required performance based problems to be communicated in writing, along with an appropriate “cure” period. In the Stephenson dispute, ABE had never communicated performance criticisms, in writing or otherwise. Yet, at the time the discharge decision was made, the Company suddenly alleged that its CEO had engaged in various types of problematic conduct throughout the preceding three years. (Imagine my restrained enthusiasm when, in the first Board member deposition – the deposition of the Board member who chaired the committee investigating the termination issues – the witness repudiated 11 of the 12 reasons as lacking substance and failing to meet the contract’s “cause” definition.)
Fourth, not only did the Board include too many reasons in the Notice of Consideration letter, it failed to conduct an appropriate investigation into the reasons it advanced. For example, although it stated on several occasions that it intended to interview Revis Stephenson, it never did so. Likewise, the Board failed to interview others, even though they could have provided insights and information into the reasons that were later included in the letter in the labored attempt to justify the discharge. In general, its “investigation” (a charitable characterization) was so inadequate that it did not satisfy even minimal due process guarantees. Even though a contract may not mandate an “investigation,” the atmospherics of disregarding any due process can undermine a Board’s actions, as it did here.
Fifth, the Board included many reasons in its effort to justify the discharge that simply were factually incorrect. Moreover, this information was brought to the Board’s attention after the Notice of Consideration letter was sent out but before the “for cause” discharge decision was finalized. For example, the Board claimed that Revis had signed a contract with a third-party after a certain date that obligated the Company to make substantial payments. This simply was not true: no such contract was ever signed and ABE never had to make the payments, facts that were easily verifiable. Yet, the Board continued to assert this reason throughout the arbitration proceeding, including at the hearing. It was one of many inexplicable decisions that undermined the credibility of the Company’s witnesses.
Sixth, not only were some reasons factually incorrect, other reasons articulated in the Notice of Consideration letter were either trivial or involved actions or decisions for which the CEO was not responsible. Even worse for the Company, one of the reasons involved conduct which the Board specifically ratified through a formal Board resolution. As set forth in the contract, actions ratified by the Board precluded the conduct being characterized as “bad faith” conduct, essential to the “for cause” definition. Other reasons involved issues known to the Board, where the Board or other executives contemporaneously complimented the CEO on his handling of the problem. It mystifies me to this day why these reasons continued to be asserted as justifications for the discharge decision. The only plausible, though ill-conceived, justifications for advancing these reasons throughout the arbitration was the mistaken perception that a litany of complaints would either complicate the plaintiff’s case or bias the arbitrator. Here, however, the infirm reasons undermined the defense case and the arbitrator was far too smart to be influenced by the disprovable justifications the defendant advanced.
Seventh, as noted above, the contract provided the Board the right to terminate the CEO without cause. While I personally felt that even a “without cause” firing would have been unjust, ABE indisputably could have taken this step without recourse. It was coupled, however, with the payment of severance compensation. As noted above, the Board made the expedient, though very short-sighted decision, electing to discharge the CEO “for cause” as a way of avoiding its contractually mandated financial obligations. Generally, an effective Board needs to make ethical and legally required decisions, however financially painful they may be in the short run. Disregarding this duty can lead to far more serious problems at a later date. Here, for example, as specifically referenced in the Award, the arbitrator concluded that the Board had treated Revis “reprehensibly.”
Eighth, once the Board made the poor decision to discharge Revis Stephenson “for cause,” it had to determine how to publicize its decision, or conversely, how to limit publication appropriately. As a public-reporting company, ABE had to make certain disclosures to the SEC. The Company made this disclosure in the most damaging conceivable fashion; in both its SEC disclosures and in other communications between the Board members and others in the industry, the Board stated that Revis was discharged “for cause.” There is a substantial body of case law standing for the proposition that describing a discharge as “for cause” constitutes defamation when the reasons articulated for the termination are untrue. That is precisely the determination the arbitrator reached here, awarding Revis One Million Dollars in defamation damages.
Ninth, the case also illustrates the importance of complying with court (or, arbitrator) orders. As referenced above, the company that had invested in ABE threatened to sue. We sought discovery from ABE relating to the negotiations between the investment firm and ABE regarding the threatened litigation. We believed, correctly, that the firm which had invested in ABE was attempting to squeeze out Revis as a condition of resolving its threatened claims. ABE, however, took the position that the information relating to these negotiations was irrelevant and refused to respond to our discovery requests. Consequently, we brought a Motion to Compel the production of this data. The arbitrator agreed with our position, ordering the production of this information. ABE, however, did not produce all of the relevant information during the discovery period. Indeed, the most critical information was not produced until we had concluded the twelfth day of the arbitration hearing. With 4/5ths of the hearing over, ABE unexpectedly produced 131 pages of never-before-produced documents, including a “settlement proposal” submitted by the investment company that, among other demands, insisted that Revis Stephenson be removed from the CEO position. Then, compounding the flagrant abuse of the discovery process, when a witness testifying at the hearing was asked why the documents had not been produced during discovery, defense counsel instructed him not to answer on the grounds of “attorney-client privilege.” That witness was then a partner in the law firm defending the arbitration; in fact, he was the very person to whom the settlement proposal had been provided more than two years before, in September 2008.
At this point, we moved for dispositive sanctions, seeking a determination that Revis Stephenson should prevail simply on the basis of the discovery abuse. The arbitrator did not grant our motion, but when he issued his merits-based decision, he observed that the ABE Board members “maliciously feigned ignorance of what they were doing right up to and including the hearing which I conducted, with the direct consequence not only of breaching ABE’s contract with Stephenson, but of defaming him, causing him inability to find comparable employment, pain, suffering, and emotional distress to this day and into the future.” (Emphasis added.) Given that perspective, it is perhaps unsurprising that the arbitrator invited Stephenson to brief his request for attorneys’ fees. As this fact pattern illustrates, it is critical for parties to comply with court orders and equally critical for witnesses to testify truthfully.
Tenth, the case also illustrates the mistake of arrogance. Before the hearing commenced, the parties met to explore informally whether the matter could be resolved. This effort was not successful. At that juncture, defense counsel stated emphatically that Stephenson’s case was a “loser,” expressing sympathy for the fact that we had to take the case to trial, and stating that he “hoped” we did not have the case on a contingency fee. (We did, as he likely knew.)
So what was the final outcome? After the arbitrator found for Revis Stephenson on both the breach of contract and defamation claims, and awarded approximately $2.1 Million, when interest and costs were included, the parties agreed to mediate informally the issue of attorneys’ fees and a related dispute against the company that had invested in ABE. At the conclusion of the day-long mediation, ABE and the other parties agreed to pay the total amount of $4 Million to Revis Stephenson.
In addition, we subsequently were informed by the law firm that took over the defense after the arbitration was lost, that ABE had spent approximately $2 Million in attorneys’ fees defending the case. So, juxtapose, the financial outcomes. Even assuming that ABE decided to proceed with a discharge “without cause,” the Company would have had to pay Revis about $600,000 to $700,000 (or less had he decided to compromise his claims slightly). Without the black mark of the highly publicized “for cause” discharge, Revis would not have been defamed and the Company would have had no exposure for defamation damages.
Instead, ABE and its insurers paid its own substantial attorneys’ fees, and ultimately settled for $4 Million, an aggregate amount roughly ten times higher than the amount of severance the Company would have owed Revis. In my opinion, the Stephenson case provides a stark illustration of poor decision-making by a Board and the corresponding expense associated with its actions.
Finally, I should note that the outcome we were able to achieve for Revis was not solely attributable to me. Like all good trial outcomes, this result reflected a team effort. Our trial team consisted of me and my colleagues David Trevor, Marilyn Clark, Sarabeth Ackerman, and paralegal, Chris Jenssen. All of these individuals contributed significantly to the outcome we were able to achieve for Revis.