The controlling shareholders of a corporation owe fiduciary duties to the minority shareholders by virtue of their ability to control the affairs of the company.
Even when a merger complies with statutory requirements, where it benefits the controlling shareholders and does not have an apparent business purpose, it must also satisfy equitable principles of fairness.
- The fiduciary duties owed by controlling shareholders is a basis to grant injunctive relief, even it is appears that money damages might make the minority shareholders whole for any misconduct.
Attorney separation agreements may require that a lawyer give reasonable notice to his firm before resignation, reducing conflict with departing lawyers.
Lawyers may agree in advance how they will handle such issues as billing, transfer of file responsibilities and return of equipment.
Joint notice to clients by the law firm and the departing lawyer is the preferred method of advising clients of an attorney’s departure from the firm.
Attorney separation agreements that contain provisions for a minimum notice period before an attorney’s resignation and other terms for notice, transfer of files and billing should be common. They are not, and it is likely bad for the clients and the firm.
The free-for-all that may follow a resignation is something that can be avoided, and a recent opinion of the ABA’s standing committee holds that the minimum notice requirement is ethical as long as it does not restrict competition by the departing lawyer or limit the client’s ability to choose counsel.
Separation Agreements to Manage Lawyer Resignations
What would such an agreement look like? We suggest that the following issues should be addressed whether dealing with withdrawing principals or resigning attorneys.
Minimum Notice to Law Firm of Intended Departure
In many circumstances the withdrawal of a senior lawyer from a law firm for another practice is a process that is implemented over weeks or months. The orderly transition of files by a process that is mutually acceptable to everyone involved serves a number of interests held by all involved, particularly the clients. Continue reading
Law firms may not limit the ability of lawyers to resign, solicit clients and compete with the firm, but they may contract for a reasonable notice period necessary for the orderly transfer of client matters.
Both the departing lawyer and the law firm share an ethical obligation to assure the client of continued competent representation during the transition period before the lawyer’s departure.
The notice requirement cannot act as a financial disincentive to competition and the departing lawyer’s willingness to cooperate in the transfer of matters and post-departure billing is a factor in determining whether the notice period is reasonably imposed.
There are some very good reasons for lawyer firm management to fear the “grab and go.” A key lawyer resigns with little or no notice and immediately begins to solicit clients. In some instances, the result can devastate the fortunes of a law firm, drawing out cash flow and personnel, but leaving the firm to continue to carry the same level of expenses.
The Law Firm Grab and Go
It’s sometimes known as the “grab and go.” It occurs when one or more lawyers resign without notice while simultaneously soliciting the firm’s clients to follow them. In some cases, the grad and go will strip a small firm of a substantial portion of its revenue while leaving it with large liabilities such as leases, advanced expenses and personal financial exposure for the remaining principals. Can a law firm contract with its principals and attorneys to prevent the grab and go? Continue reading
Law firms should recognize that lawyer resignations and the loss of clients are inevitable in the modern law practice due to prohibitions on agreements that restrict competition.
Law firms can protect the interests of clients and the firm by adopting best practices that govern lawyer resignations.
Law firms should recognize the investments made in the firm’s intellectual property and adopt policies that limit misappropriation.
Law firms must survive in a world in which key employees are free to leave at any time and to take as much of the firm’s business with them as they can. Many lawyers, motivated by the financial incentives that are part of their separation, believe that there are no rules limiting their solicitation of clients, copying of key documents and compensation for their old firm. This view may be mistaken, but sorting it out after the resignation or withdrawal is expensive, time-consuming and threatens to draw off the time and attention of key managers.
The grab and go is the unexpected resignation without notice combined with the immediate unilateral solicitation of clients. Its corollary is the law firm lockout, in which a lawyer that has indicated his or her intention to leave is locked out of the firm and cut off from clients while the clients are intensely solicited by the firm.
Best Practices to Manage Lawer Resignations
Here is a list of some of 10 policies that a law firm should have in place before a key lawyer decides to move his or her practice. But first, the reality check. Lawyers will leave and lawyers will take clients. Not only that, but lawyers have a right to leave and take clients. The only issue on the table is managing the process.
Law firms, the individual lawyers that work there and the clients that we serve are better served by articulating a clear set of rules beforehand, by adopting key internal policies and by recognizing that resignation need not equate with conflict. Lawyers and their former law firms should remember that life goes on after the departure. But when one side tries to gain an unfair advantage over the other, however, life gets complicated and messy. Continue reading
Courts determine whether an individual has an equity interest in a law firm partnership by examining the financial investment and risk taken by the claimed owner, such as payment of capital and guarantees of obligations.
The rise of the non-equity partner in law firms management has changed the status associated with the title partner. Nearly half of all law firm partners are now classified as non-equity or limited equity.
The way in which the firm reports the income of a partner to the IRS in its tax filings are evidence of an equity interest in many cases, but describing an individual as an equity owner may not be conclusive.
The last refuge of the general partnership may be the law firm. However, the term “partner” in a law firm can have a number of different meanings and it often does not identify only the traditional equity owner of the enterprise. In many circumstances, “partner” is a title that indicates a senior attorney, usually at the top of the firm’s professional structure. It does not, however, provide a particularly reliable indication of either management responsibilities or a financial interest in the firm.
Not all partners are created equally. In fact, the rise of non-equity partner, those that do not share in the profits or capital of the law firm, is rising rapidly. Only 56 percent of the partners in law firms in 2018 were equity partners. (Above the Law, 3 Reasons to Embrace the Rise of Non-Equity Partners). That trend is a 250 percent increase over the past two decades. In 1999 the figure was 17.1 %.(Altman Weil, Inc. What Should Law Firms Do about Non-Equity Partnership).
Not surprisingly, the existence of an equity interest, or not, is not an uncommon area for dispute. In this post we consider here involving the effect of tax documents on the claim of an attorney that he held an equity interest in a well-known personal injury firm. Treatment for income tax purposes is invariably a key component of holding equity. Is it dispositive? In this case, no. Continue reading
Attorneys have common law and statutory security interests in the proceeds of recoveries of their clients, generally referred to as charging liens.
A statutory lien is created when a lawyer files a pleading with an affirmative claim for recovery and may be enforced by filing a petition in the underlying action.
Clients have an interest in the assertion of an attorney charging lien and must be notified of their right to have the amount of the fee determined by arbitration.
Attorneys that provide services to clients with that yields a financial recovery to the client will typically have a security interest in that recovery to secure their fee. The lien may be statutory or, in some cases, the attorney may have a lien that is enforceable in equity. These two types of liens, statutory and equitable, have significant differences, but both types of liens provide the lawyer with a security interest in the proceeds of the case.
In this article, we will take a look at some of the mechanics of asserting and enforcing a lien. In a subsequent post, we will examine the manner in which courts have allocated competing claims for fees.
The Attorney Charging Lien
A lien is more than just a claim for fees. It is a secured interest in the recovery that a client achieves – through the lawyer’s efforts, of course — for the satisfaction of the debt. It may be asserted over all of the recovery and, therefore, even against the client. As a practical matter, liens are asserted when a lawyer is replaced or in rare instances when a client fires the lawyer in an attempt to avoid paying a fee. Continue reading
Buy-sell agreements, like a shotgun sale triggered by a deadlock, are the principal means by which the owners of closely held businesses protect against the worst consequences of deadlock.
Commonly used shotgun provisions allow one party to set the price and allow the other party to decided whether to buy or sell at the offered price. Closely related to the shotgun is an auction that allows offerors a chance to sweeten their offers to buy.
The compelled sale of an equity interest triggered by a buy-sell agreement will be subject to the fiduciary duty of loyalty and the implied covenant of good faith and fair dealing.
Courts may apply shotgun or auction techniques when compelling the sale of a business as a going concern.
A well-drafted agreement between the owners of a business will address the issue of what to do in the event they become deadlocked. This is true of effective shareholder agreements or corporate by-laws, limited liability company operating agreements or partnership agreements.
Agreements that are intended to prevent or resolve a deadlock in most circumstances will contain language that in some circumstances will require the exit of one person from the business. This exit, in turn, requires payment of the value of the equity interest of the departing owner.
In this post, the last in a series on deadlock in the closely held business, we look at buy-sell agreements as a means of breaking deadlocks without litigation and, in particular, a form of buy-sell often referred to as a shotgun. A buy-sell often avoids or greatly simplifies litigation between the deadlock owners of a business, sure. It also has the effect of avoiding deadlock in the first instance.
A Series Examining Deadlock Among the Owners of Closely Held Corporations, Limited Liability Companies and Partnerships
Shotgun provisions are a form of weapons control, like the mutually assured destruction that has – thankfully so far, at least – kept the world powers from global conflagration. Owners of a closely held business have an emotional as well as a financial investment in a business and triggering a process in which they may be forced to sell will be seen as a very unwelcome choice. In many cases, shotgun language in governing documents triggers compromise among the owners of a closely held business.
Buy-Sell Agreements Triggered by Deadlock
Business divorce disputes among lawyers will often require the division of contingent fees realized after the parties have separated their business interests.
An agreement between lawyers in a firm to divide fees in the event of their separation cannot function as a restriction on a lawyers right to practice and to compete with a former firm, but otherwise is generally enforceable.
Courts also use principles of quantum merit — ‘as much as he deserves – to allocate contingent fees between lawyers who once practiced togther.
The division of fees, in particular contingent fees earned after a firm is dissolved or the resignation of a rainmaker, are the catalyst for business divorce disputes in law firm breakups. These disputes involve some key issues:
- Is there an agreement in place covering the division of fees?
- If there is an agreement, is it enforceable?
- If there is no agreement, how will a court divide the fees?
Agreements to Divide Fees
Lawyers practicing together in a firm frequently make agreements on how fees will be divided after the withdrawal of a lawyer. These agreements may be part of the firm’s partnership, operating agreement or corporation bylaws, or embodied in an employment contract or separation agreement. These types of agreements are generally, but not always, enforceable.
Getting the client’s consent to such a division is also a good practice and, in at least one jurisdiction, may be required.
Owners of a closely held business, be it a corporation, limited liability company or partnership, may enter into contracts that are triggered when the principals have become deadlocked.
Anti-deadlock provisions may provide for the appointment of an independent director, for alternative dispute resolution, or for the compelled sale of an equity interest.
The owner of a business that invokes the terms of an anti-deadlock provision, particularly when the sale of interest is involved, is likely to be subject to duties of loyalty and care.
After a closely held business becomes deadlocked, it is extremely difficult to push the parties toward some mechanism that might either break the deadlock or preserve the current management system, or event let the parties separate themselves on mutually agreeable terms.
A Series Examining Deadlock Among the Owners of Closely Held Corporations, Limited Liability Companies and Partnerships
Human nature stands in the way. The parties likely have financial and emotional positions that they are unwilling to compromise. These may range from the ability to control some aspect of the operations of the business to the payment of dividends or bonuses.
Lawyers and their clients try to address the potential for future deadlock with these contractual provisions that are known by a number of descriptions, such as buy-sell agreements, shotgun
provisions, put-call terms. In the world of closely held limited liability companies, corporations and partnerships, a buy-sell agreement that is triggered by a deadlock is the pre-nuptial agreement of business divorce.
In this and the following post, we examine these contractual provisions that are used to break deadlocks. We consider first the scope of anti-deadlock provisions, when they may be invoked and whether they are subject to judicial controls. In a following post, we will look at buy-sell agreements in more detail and, in particular, shotgun language that is intended to keep a forced sale on terms acceptable to both parties. Continue reading
When a shareholder, LLC member or partner sues to recover for damages based on wrongs committed against the business entity, the claim is derivative and the recovery belongs to the business. Derivative claims have special procedural rules.
Courts have discretion to allow the owners of closely held businesses to sue individually on a derivative claim when the plaintiff can show “special injury” or when the direct action is not unfair to the business, its creditors or other equity holders. The right to bring derivative actions is available to corporate shareholders, LLC members and partners in general and limited partnerships.
A shareholder may bring a direct claim to enforce rights that are contractual in nature or which enforce some right as shareholder, such as the right to vote or elect the directors.
It is not always easy to determine whether the remedy for the injury suffered as a result of some wrong among the owners of a closely held business belongs to the entity – whether a corporation, limited liability company or partnership – or instead belongs to one or more of the owners.
The distinction is both procedural and substantive, and may be fatal to the plaintiff’s claim. Some claims can belong only to the company. In addition, there are specific procedures in place for bringing a derivative claim in which an owner seeks to assert a right owned by the company. These procedural and substantive requirements can be fatal to a plaintiff’s claim.
But the line is often blurred in the context of the closely held business, and courts can ignore the distinction in some circumstances. In this post, we look at some recent cases in New Jersey considering the distinction, one involving a limited liability company and the other involving a closely held corporation. Although most of the case law has developed in corporate derivative actions involving shareholders, derivative causes of action may also exist in claims brought by members of a limited liability company or partners in a partnership.