Dissolution

July 2, 2018

Deadlock in the Closely Held Business

Deadlock is the inability of the owners of a business to make critical decisions, a paralysis of the management of closely held corporation, limited liability company or partnership.
The inability to maintain normal operations is a characteristic of a deadlocked business.
Courts will intervene to prevent harm to a deadlocked coproation, LLC or partnership, typically when one of the owners petitions to dissolve the business.

INTERVIEW Deadlock occurs when the owners of a closely held business, be it a close corporation, partnership or limited liability company, are unable to reach a decision on some matter involving the business. Because deadlock is typically associated with businesses in which most or all of the owners participate directly in management, they are characterized by emotions, self-interest and not always rational.

A Series Examining Deadlock Among the Owners of Closely Held Corporations, Limited Liability Companies and Partnerships

In the simplest case, two 50/50 owners are unable to come to some decision that is critical to the business, for example whether to provide additional capital or give personal guarantees to a lender. Because the ownership is equally shared, the principals have to govern by consensus, or not at all. This is true whether it is a corporation, limited liability company or partnership. Continue reading

September 13, 2017

Business Divorce: Sources of the Law

by Jay R. McDaniel, Esq.

The law that controls any business organizations is a creature of state law, and disputes among owners in a business divorce involve the application of the law where the business was formed. More often than not that means the law of the state in which the dispute is being heard, but not always. And significantly, at least for our present purposes, it does not mean that we will find the answer to a business divorce issue in the state in which the litigation is pending, even among the binding decisions of the state law where the enterprise was formed.

Here’s an example: a New York court is calle Business Divorce Attorneys d upon to determine whether a managing member of a limited liability company breached his or her duty in negotiating a sale of a substantial asset to a third party that the manager negligently believed was an objectively fair price. The plaintiff seeks to expel the manager or to force a dissolution and sale of the business as a going concern. Does the Court apply New Jersey law? If there is no New Jersey case on point – and there is no binding decision on all of the points in this scenario – does the Court apply New York law, and to which issues?

Even if this case is litigated in New Jersey, and there is no law on point, where does the trial court look to guidance. The nearly automatic response is Delaware, because the courts of Delaware have by far the most developed body of law applicable to corporate governance disputes. However, Delaware may be the wrong choice if the limited liability company statute needs interpretation. A well-reasoned decision from an Appellate Court in Illinois, for example, should be much more persuasive to a court construing New Jersey’s limited liability company statute because of the similarity between the two states’ laws.

April 4, 2017

Shareholder Deadlock Grounds to Sell Corporation

by Jay R. McDaniel, Esq.

Shareholder Deadlock Attorney Is an intractable deadlock among the shareholders good grounds to force the sale of a large, successful corporation? That was the issue before the Delaware Supreme Court in a case in which the trial court’s decision to sell the business as a going concern – over the objection of one shareholder –was affirmed by the Supreme Court.

In this case, a trial court’s ability to fashion and equitable remedy based on the circumstances of the case ran into direct conflict with the limited remedies that are available to minority shareholders under Delaware law.

Court Orders Sale of Corporation in Shareholder Deadlock

February 13, 2017

Unanimous Consent of LLC Members Not Required to Continue Company

by Jay R. McDaniel, Esq.

It may take a unanimous action of the members of a limited liability company to dissolve the entity or to change the date on which the company will dissolve according to the terms of its operating agreement. But unless the Operating Agreement specifically requires the members to act unanimous to extend the company, a simple majority may suffice.

That was the holding of the New Hampshire Supreme Court in McDonough v. McDonough, a case in which one of the members of this family business attempted to enforce a dissolution provision in the operating agreement to force the purchase of his shares.

Limited Liability has Limited Term of Existence

December 14, 2016

Texas Appeals Court Affirms Partnership Dissolution Verdict

by Jay R. McDaniel, Esq.

A partnership has no obligation to complete performance of its executory contracts, the Texas Court of appeals held in affirming a multi-million dollar trial court verdict involving a chain of TGI Fridays in Dallas.

The case involved a joint venture formed with TGI Fridays and several entites that qualified as “disadvantaged.” The joint venture operated restaurants in four Dallas International Airport terminals from 1995, but as a result of changes in FAA regulations and disputes among the joint venture participants, the enterpise began to unravel in 2004.

The case was tried to a jury, which apportioned substantial awards of damages and attorneys fees and found that good cause existed for the dissolution of the business in that it was no longer reasonably practicable to carry on the business in conformity with its governing documents.

December 14, 2016

Seven Business Litigation Best Practices that Address the Lack of Civil Trials

by Jay R. McDaniel, Esq.

Here is the hard reality. The chances that your case, or any case, will get to a real trial on the merits is way less than one in 10. The truth is that only between two and five cases out of 100 will be resolved with a trial.

What does that mean for a party drawn into civil litigation? The statistics point to a group of “best practices” that effective litigation counsel should employ. It is a blend of efficient trial preparation, motion practice, management of discovery and, perhaps most of all, advanced negotiation skills. We review some of those here as a starting point for developing a case strategy.

Civil Trials in Business Litigation is a Rare Event

October 27, 2016

LLC Member Enjoined from Competition

by Jay R. McDaniel, Esq.

An LLC member breached his fiduciary duty by competing with his own company, a trial court in New York City holds in issuing an injunction against one of the principals of a successful company that makes automated parking systems.

The case involves the company that makes Parkmatic parking systems, mechanical stickers and carousels for parking cars in limited spaces. The complaint in Zacharias v. Wassef alleges that the defendant Max Wassef responded to complaints of misconduct by his partner Zacharias by forming a new company to siphon off business using the Parkmatic name.

Limited Liability Company Member Claims Unfair Competition by Manager

October 26, 2016

Claims for Judicial Dissolution Not Easily Withdrawn

by Jay R. McDaniel, Esq.

New York’s oppressed shareholder statute has a unique provision that was initially intended to prevent the oppressed shareholder from destroying a viable business. That is because the New York statute otherwise gives the court only two options: send the oppressed shareholder away or force the dissolution of the business.

Other states give court’s more discretion, and a judge also has the ability to force a sale of an interest. New York’s statutory scheme, however, takes a different approach. (See our discussion here of some of the quirks of New York’s oppressed shareholder statute: Business Divorce New York Style.) One of the wrinkles in the statute, however, is that once a litigant invokes the oppressed shareholder provision in Business Corporations Law § 1104-a, it’s very difficult to stop the process.

Peter Mahler’s New York Business Divorce blog reports on an decision by a trial judge in Nassau County’s commercial part who declines to allow the plaintiff to withdraw a claim under BCL 1104-a. In that case, the plaintiff tried to get out of the substantive and procedural limitations that flow from the conclusory assertion of a claim under 1104-a.

October 10, 2016

An Apology at the Bargaining Table

by Jay R. McDaniel, Esq.

One of the hardest things about being an effective negotiator is the ability to leave your ego at the door. We need to listen, not impress.

Seasoned Negotiators, Effective Apologies

As negotiation trainer Jim Camp warns, an effective negotiator learns how to let the other side be “ok,” even when you’re not. The fact is that no matter how well we listen, no matter how well we employ our negotiator’s tool kit to learn the real interests of the other side, we’re going to make mistakes.

October 8, 2016

Partnership Dissolution Cannot Be Inferred

by Jay R. McDaniel, Esq.

When is a partnership dissolution not a dissolution? When the partnership is not subjected to the formal dissolution procedures, even if it appears that the Court may have intended otherwise.

Express Finding of Dissolution of Partnership Required

That was the result of a split decision of the Fifth Circuit Court of Appeals, coming some 14 years into the business divorce litigation between the partners to an oil well drilling venture, in Akuna Matata Investments Ltd. v. Texas No Limited Partnership. The Court affirmed a trial court decision terminating the partnership and awarding one of the partners a share of unpaid partnership profits.

The inability to maintain normal operations is a characteristic of a deadlocked business.

Courts will intervene to prevent harm to a deadlocked coproation, LLC or partnership, typically when one of the owners petitions to dissolve the business.

A Series Examining Deadlock Among the Owners of Closely Held Corporations, Limited Liability Companies and Partnerships

Court Orders Sale of Corporation in Shareholder Deadlock

Limited Liability has Limited Term of Existence

Civil Trials in Business Litigation is a Rare Event

Limited Liability Company Member Claims Unfair Competition by Manager

Seasoned Negotiators, Effective Apologies

Express Finding of Dissolution of Partnership Required