Dissolution

June 26, 2019

Anti-Deadlock Agreements in Business Divorce Litigation

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.

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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

September 2, 2018

Business Divorce of Closely Held Corporations – An Overview

by Jay R. McDaniel, Esq.

‘Business Divorce’ refers to disputes in which the owners of a closely held business, whether a corporation, limited liability company, partnership or limited partnership, must separate their business interests.
In many cases, such as oppressed minority shareholder cases or oppressed LLC member cases, there are allegations that those in control of the company have engaged in wrongful behavior. In other cases, the deadlock of the owners on an important issue is the source of the dispute.
Courts that hear business divorce cases have the ability to intervene and impose short-term relief, such as an injunction or appointment of a custodian, and a permanent remedy, including the sale of the business, the compelled purchase of an owner’s interest or even the dissolution and liquidation of the enterprise.

achievement-agreement-body-language-1179804-1024x600 No one gets married expecting to get divorced. And no one forms a business expecting that it will fall apart. Just as people get divorced, many businesses come to the point at which a business divorce is the best alternative because the partners cannot, or will not, continue to work together. When that happens, the parties need to restructure, and often separate, their business interests.

Business Divorce Defined

We use the term business divorce to describe a series of different types of lawsuits that involve the owners of a closely held business. The defining character of the business divorce is that co-owners of a business must separate their business interests. There are typically two alternatives. Either one or more of the owners exits the business as part of a sale, or the business itself will be sold. While much of the business divorce litigation in the courts today is in the form of an action for involuntary dissolution of the business, it is the rare case in which the business actually dissolves by settling its debts and selling its assets. There are far better alternatives. In this article, we focus on the closely held corporation. Some of the principles are similar with other types of businesses, which we address in other articles, but the application of the principles are often quite different.

The law varies from state to state and much of this discussion is general. To the extent that we discuss specific state laws that apply to business divorce, we focus on New York, New Jersey and Delaware law. Continue reading

August 27, 2018

LLC Member Denied Judicial Dissolution

by Jay R. McDaniel, Esq.

New York does not recognize a cause of action for minority oppression of a member of a limited liability company.
Judicial dissolution is a remedy available to the minority LLC member when the majority is unwilling or unable to promote the purpose of the company or continuing the business has become financially not feasible.

The dismissal of a judicial dissolution claim brought by an LLC member seeking to dissolve the family business demonstrates the difficulty that an oppressed minority LLC member faces under New York law.

New York does not recognize a cause of action for minority oppression under its limited liability company statute, and so a trial judge in New York County made quick dismissal of a claim for involuntary judicial dissolution based on the allegations of a minority member that he was being treated unfairly. The plaintiff’s attorneys missed the mark and failed to assert other significant claims suggested by the facts alleged in the complaint.

July 30, 2018

Minority Shareholder Lacks Standing to Sue for Dissolution

by Jay R. McDaniel, Esq.

New York’s BCL requires at least 50 percent of shares to petition for dissolution based on deadlock, unless there has been a failure to elect directors.
The fact that a shareholders agreement required the election of two deadlocked directors was not a basis to waive the statutory requirement.
Parties avoid claims of wrongdoing and oppressed shareholder action that could trigger mandatory sale of minority interest.

Oppressed Shareholder lawsuit attorney

Judicial Dissolution Petition Requires 50 Percent Shareholder

A minority shareholder in New York will have a difficult time pursuing a claim for dissolution because of a deadlocked board of directors or a deadlock among the shareholders. New York law permits a cause of action for judicial dissolution based on deadlock, but only by shareholders with holdings of 50 percent or greater, unless the shareholders are unable to elect directors.

The statute can be harsh in its application, as demonstrated by a trial judge’s decision to dismiss a petition for dissolution under BCL § 1104, the provision of the New York Business Corporations Law that creates a statutory cause of action for judicial dissolution. (We discuss the issue of deadlock in more detail in our series on the topic, here and here.) Continue reading

July 23, 2018

Deadlock Resolved by Appointment of Custodian

by Jay R. McDaniel, Esq.

Courts use their authority to appoint a custodian to take control of a closely held corporation as a remedy to deadlocked directors or shareholders.
A showing of serious or irreparable harm is required before a court will intervene in a deadlock among shareholders or directors; more than dissension is required.
A court may direct a custodian to dissolve and liquidate a corporation, or sell the entire business as a going concern, in the best interest of the shareholders and other constituencies like employees.

Appointing a custodian or receiver of a closely held corporation is a recognized remedy when the owners are deadlocked. Once appointed, the custodian or receiver may be given wide authority to break the deadlock, to manage, to sell or dissolve the corporation — including cases in which the remedy seems to go beyond what is provided in the statute.

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

A bitter business divorce between two former college sweethearts provided the background for the Delaware Supreme Court’s analysis of the circumstances in which it could provide a dissolution-like remedy and order the sale of a large successful business.

INTERVIEW

The decision of the Delaware Chancery Court, Shawe v. Elting, involved Transperfect Global, Inc., a corporation formed by Elizabeth Elting and Philip Shawe in 1992 while the pair lived together in a New York University dorm room. The two became the co-CEOs, sole directors and equal owners of a company that provided a variety of translation services from locations around the globe, generating $80 million in profits in 2014. (Shaw later transferred 1 percent to his mother, but she remained firmly in his camp, which caused the deadlock to continue.) Continue reading

July 9, 2018

Deadlock Requires Finding of Harm to Corporation

by Jay R. McDaniel, Esq.

Deadlock is more than an inability to make a decision. It is an inability to act under circumstances that present the real threat of harm to the business.
Deadlock is triggered by the shareholders’ inability to elect directors.
When there are no alternatives to prevent harm to the business, like a buy-sell agreement, a Court is likely to find that the shareholders or directors are deadlocked.

For the closely held corporation, deadlock may be the result of a dispute among the shareholders, or among the directors in circumstances that the shareholders cannot fix by electing new directors. Whether a court is asked to find deadlock under an applicable corporations statute or as part of a common-law remedy, deadlock is rarely found in circumstances in which there is no threat of significant or irreparable harm.

In this article, we will consider some of the circumstance in which courts have been asked to declare that a deadlock exists among the directors and/or shareholders of a corporation – often in a closely held corporation they are one and the same – and to fashion a remedy. Most often the principal remedy in the INTERVIEW case of a “true deadlock” is the dissolution of the corporation, which entails the liquidation of the entity. Courts rarely impose such an extreme remedy on a viable business entity, so such remedies as the sale of a minority interest, sale of the entity as a going concern or other types of injunctive relief are far more common.

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

Corporations statues vary in the statutory remedy for deadlock or oppression. The Model Business Corporations Act (MBCA), on which many state corporations codes are modeled, provides for the judicial dissolution of a corporation when the shareholders are unable to elect directors or when the directors are deadlocked in the management of corporate affairs; the shareholders cannot break the deadlock; and there is either the potential for irreparable harm to the corporation, or the “business and affairs of the corporation” cannot be conducted to the advantage of the shareholders. MCBA § 14.30. The model act also provides a court with broad powers to appoint a custodian to manage and/or wind up the affairs of the corporation. MCBA §§ 7.48; 14.32. Continue reading

July 2, 2018

Deadlock in the Closely Held Business

by Jay R. McDaniel, Esq.

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 corporation, LLC or partnership, typically when one of the owners petitions to dissolve the business.

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

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.

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

‘Business Divorce’ refers to disputes in which the owners of a closely held business, whether a corporation, limited liability company, partnership or limited partnership, must separate their business interests.

In many cases, such as oppressed minority shareholder cases or oppressed LLC member cases, there are allegations that those in control of the company have engaged in wrongful behavior. In other cases, the deadlock of the owners on an important issue is the source of the dispute.

Business Divorce Defined

New York does not recognize a cause of action for minority oppression of a member of a limited liability company.

Judicial dissolution is a remedy available to the minority LLC member when the majority is unwilling or unable to promote the purpose of the company or continuing the business has become financially not feasible.

New York’s BCL requires at least 50 percent of shares to petition for dissolution based on deadlock, unless there has been a failure to elect directors.

The fact that a shareholders agreement required the election of two deadlocked directors was not a basis to waive the statutory requirement.

Parties avoid claims of wrongdoing and oppressed shareholder action that could trigger mandatory sale of minority interest.

Judicial Dissolution Petition Requires 50 Percent Shareholder

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

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

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

Courts will intervene to prevent harm to a deadlocked corporation, 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