NEW YORK -- Daniel B. Eagan, who managed almost $5 billion in large-capitalization value stocks for BlackRock Inc., is suing his ex-employer for failing to honor the terms of his employment contract when he was fired.
At stake is the BlackRock stock Mr. Eagan holds, which has a market value of about $3.2 million.
Under the terms of his contract, if Mr. Eagan is terminated for "good reason," a forfeiture clause requires that he sell his 99,637.67 Class B shares back to BlackRock within 60 days for the price he paid for them in 1998 -- $350,000, according to the complaint filed by Mr. Eagan's attorneys Aug. 1.
Observers say these kinds of cases may become more common as more equity interests are offered and as the stakes get bigger. Protecting equity interests has become a critical component of the initial deal that's struck between a portfolio manager and the company in the event of an unhappy breakup later.
Mr. Eagan's complaint, filed Aug. 1 in U.S. District Court for the Southern District of New York, states that BlackRock informed him on June 27 that he would be removed as manager of the Select Equity Portfolio and the Large Cap Value Portfolio. He was offered another position at the firm, provided he voluntarily sold back to BlackRock half of his restricted company stock at book value -- $175,000.
When Mr. Eagan declined to accept the new job or to voluntarily sell his stock back to BlackRock, he was fired effective July 19, although he was paid through Aug. 18. Mr. Eagan was asked not to return to his office in Philadelphia and was told via letter that his personal belongings would be sent to him, according to the complaint filed by his lawyers.
Mr. Eagan's attorneys argue that New York-based BlackRock failed to meet the contractual terms of the employment contract by not giving him 30 days to resolve the problem and 30 days to seek an arbitration review of BlackRock's determination of "good reason" for the firing.
By failing to follow procedure, Mr. Eagan was terminated without "good reason" and he should therefore have no restrictions on sale of his BlackRock stock, said Barry Ungar, Mr. Eagan's attorney and a principal at the Philadelphia firm of Mann, Ungar, Spector & Labovitz PC.
"Good reason" is defined in Mr. Eagan's contract as "failure . . . to substantially perform any material assigned duties." Also, a "determination of good reason may be made only by BlackRock's CEO and a majority of the members of the management committee," according to the complaint filed by Mr. Eagan's attorneys.
BlackRock Chairman Laurence D. Fink said he could not comment on the lawsuit and could not provide further information about Mr. Eagan's situation. He did say BlackRock is not in negotiations with Mr. Eagan's attorneys regarding an out-of-court settlement.
According Mr. Ungar, BlackRock executives told Mr. Eagan he was being removed from his large-cap value management duties because of poor performance.
Mr. Ungar said Mr. Eagan was told his firing also was based on putting together a poor support team for his two equity strategies.
Mr. Eagan managed $2.5 billion in the BlackRock Large Cap Value Equity mutual fund and $300 million in separate accounts based on the same strategy. The composite return for the separate accounts was 1.8% for the year ended March 31, which placed it in the eighth decile ranking among large-cap value peers in Pensions & Investments' Performance Evaluation Report. The strategy had a compound annualized return of 13.6% for the three years ended March 31, which placed it in the seventh PIPER decile, and 18.4% for the five years, for a sixth decile ranking. March is the most recent date available for the strategy.
Institutional shares of the Large Cap Value mutual fund dropped 2.7% for the year ended Aug. 15, placing it in the 68th percentile of Morningstar Inc.'s peer funds group. The fund's 15.7% return for the five years ended Aug. 15 placed it in the 46th percentile. Institutional shares of the BlackRock Select Equity Fund returned 9.5% for the year ended Aug. 16, according to Morningstar, placing it in the 78th percentile, and its 21.7% compound annualized return for the five years placed it in the 41st percentile.
Mr. Eagan managed about $65 million in separate accounts using the same strategy; PIPER has not received composite return information for those accounts.
Mr. Eagan said in an interview: "This is about the stock that Dan Eagan owned. I truly don't believe this is a performance issue. This is about the terms of employment. I served my employer amiably and well. I abided by the terms of my contract. If the terms of that employment can be violated so easily by an employer, it sets a very bad precedent for this industry."
Mr. Ungar said his client's first objective is that the court finds that BlackRock did not terminate him for good reason. If it finds that the termination was made for good reason, the matter will go to arbitration.
To date, about 90% of such contested cases have been settled out of court, said legal observers.
Protecting an equity stake in the event of termination or departure has become a critical component of the initial deal that's struck between a portfolio manager and the company in the event of an unhappy breakup later, said Robert M. Kurucza, a partner in the law firm of Morrison & Foerster LLP, Washington.
Restrictions on equity stakes are common and few portfolio managers who are terminated, bought out or otherwise ousted realize the market value of their shares, said Robert Warren, president of money management recruiters Warren International Inc., New York.
Most contracts between portfolio managers and asset management companies are similar to Mr. Eagan's: If a manager is fired for just cause, he or she is required to sell back the equity stake at the price paid for it, usually within a specified period.
"With money management company valuations so high, it's very rare for a portfolio manager to get the full market price, the appreciation on the shares he owns. Management companies can't afford to give their executives the full valuation of their shares," Mr. Warren said.
Given that the contractual terms regarding the equity Mr. Eagan holds are "pretty typical," according to Mr. Warren, no doubt other portfolio managers will be watching the outcome of this case closely.