Articles Posted in Dissolution

by

  • The removal of a member from a limited liability company, known as involuntary dissociation, is permitted by statute in most states and may also be permitted in an operating agreement.

  • Removal is permitted when a member has engaged in wrongful conduct that has or will materially affect the company or when the member has repeatedly breached the operating agreement.

  • Removal may also be permitted when a member files for bankruptcy or if it is not reasonably practicable for the LLC to continue with them as a member.

There are plenty of choices that we make in our lives that we would like to undo. Some we can and some we can’t. Breaking up with a business partner is the topic of this discussion. More particularly, how a member of a limited liability company can be expelled from the business. We’ll cover the circumstances in which members can be expelled, when it’s easy and when it’s not.

Continue reading

by

    • A business divorce is the process by which the owners of a business separate their business interests.  The process involves negotiation and may also require litigation.

    • These cases can be divided into four phases: the emergent phase, the examination phase, the valuation phase and the resolution phase.

    • Most owner lawsuits end in a negotiated transaction because it gives the parties more flexibility over the manner in which the case is resolved.

We’re going to look at business divorce in terms of the four phases that the typical case goes through from its start to the time that is resolved, either through settlement or trial.We should start with the most basic definition of what is a business divorce. I use the term to describe the process by which people who were in a business together disentangle themselves. Continue reading

by

In most lawsuits, there is a presumption that the matter will, in most circumstances, go to trial.  A party involved in a dissolution action involving a closely held New York corporation needs to request a hearing, however, or risk having the matter resolved in a summary fashion.

That is the reminder from this decision of the Fourth Department of the Appellate Division affirming the decision of a trial court granting dissolution and the appointment of a temporary receiver for Brady Farms, Inc. in western New York.  (Opinion in Brady v. Brady)

The record does not include a request from respondents for an evidentiary hearing and, on appeal, respondents concede that they failed to make such a request. Consequently, respondents’ contention that the court abused its discretion in ordering dissolution summarily, without a hearing, is unpreserved.

Continue reading

by

  • 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.partnership-526413_1280-1024x562

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

by

  • 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.

Canva-Photo-of-Silver-and-Brown-Flintlock-Pistol-With-Brass-Ammo-1024x683

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

Continue reading

by

  • 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.

wedding-cake-407170_1280-1024x682

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

by

  • ‘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-1179804-1024x600No 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

by

  • 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.

Oppressed Minority LLC Member LawyerThe 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.

Continue reading

by

  • 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

by
  • 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.

    transperfect_2000x1125-300x169

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

Contact Information
Jay R. McDaniel, Esq.
(973) 602-3915
Weiner Law Group LLP
New Jersey Office
629 Parsippany Road
Parsippany, NJ 07054
New York City Office
90 Broad Street
New York, NY 10004
This newsletter may be considered advertising for legal services under the laws and rules of professional conduct of the jurisdictions in which we practice. The information on this site is of a general nature, is not intended as legal advice, and must not be taken as legal advice. We provide legal advice only to clients of the firm. You should not rely on the content of this article, but should consult a lawyer about legal issues. This letter does not establish any attorney-client relationship. We are are admitted to practice in the states of New Jersey and New York.

Attorney Advertising

Before making your choice of attorney, you should give this matter careful thought. The selection of an attorney is an important decision. If this letter contains inaccuracies or is misleading, you may report the same to the Committee on Attorney Advertising, Hughes Justice Complex, P.O. Box 37, Trenton, NJ 08625.

This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.

Please do not include any confidential or sensitive information in a contact form, text message, or voicemail. The contact form sends information by non-encrypted email, which is not secure. Submitting a contact form, sending a text message, making a phone call, or leaving a voicemail does not create an attorney-client relationship.

Copyright © 2025, Jay R. McDaniel, Esq.
JUSTIA Law Firm Blog Design