Members | Partners | Shareholders Category Archives — Page 2 of 5 — The Business Divorce Law Report Published by Business Lawyer

June 28, 2019

Dividing Fees in a Law Firm Business Divorce

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: business-861325_1280-1024x768

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.

June 26, 2019

Anti-Deadlock Agreements in Business Divorce Litigation

by Jay R. McDaniel, Esq.

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 18, 2018

Action by Written Consent of LLC Managers is Valid to Fire Executive

by Jay R. McDaniel, Esq.

Any action that the managers of a Limited Liability Company might take at a meeting can also be taken by executing a written consent.
An action by written consent may, in some circumstances, avoid the need to assemble a quorum of the managers.
The managers of an LLC many be contractually obligated to effect management changes by an operating agreement, but those obligations are not self-executing.

Limited Liability Company Lawyers A venture capital company and the independent manager of a limited liability company were permitted to correct a questionable vote and use a written consent to terminate one of the founders as manager of a group of holding companies.

The fired manager had challenged the vote as lacking a quorum, with only two of the four members present. The managers simply acted by written consent, permitted under Delaware Law, and the court held that the action had the necessary “disinterested” votes under the LLC’s operating agreement to remove the manager.

August 20, 2018

Member-Managed Limited Liability Company Similar to Partnership

by Jay R. McDaniel, Esq.

A trial court reasons that because a member-managed limited liability company is similar in management to a partnership, the court may reason from partnership law in fashioning a remedy for an expelled member.
The majority members of the LLC, who voted under the Operating Agreement, to compel the withdrawal of the member are jointly and severally liable to pay the ousted member the fair value of his equity interest.
When no other provision of the limited liability company statute applies, in many states a court may turn to recognized “rules of law and equity” to fashion a remedy.

Limited Liability Company Disputes Attorney A Delaware chancery judge drew a liberal comparison between a venture capital fund organized as a limited liability company and a limited partnership in holding that a member that had been forced out was entitled to fair value rather than the value of his capital account. The result was that his buyout increased by some fivefold, but not for the reasons advanced by the departing member.

Compelled Withdrawal of Member Requires Payment of Fair Value

The case, Domain Associates, LLC v. Shah, is significant for two principal holdings. First, it represents a relatively rare occurrence when a trial court falls back on the equitable catch-all provision that one finds in a number of limited liability company and partnership statutes. Second, the trial judge considered the management structure – the LLC at issue was member-managed similar to a partnership – as good reason to follow a decision construing the equitable catch-all provision found in Delaware’s partnership statute. Continue reading

June 13, 2017

Evidence of LLC Membership by Plaintiff MD is Lacking

by Jay R. McDaniel, Esq.

What is sufficient evidence of membership interest in a limited liability company? It is not uncommon that the intentions of the parties in forming a limited liability company are poorly documented and or non-existent.

The plaintiff in this case argued that documents that indicated his initial interest in the LLC were sufficient to establish his membership. These include emails in which he expressed his interest in participating in the LLC, the fact that he was included as a signatory in an early letter of intent with HUMC, the fact that he was initially included in an email group of members and the receipt of meeting notices.

Appellate Court Considers Evidence of LLC Membership in Ownership Dispute Among Critical Care Doctors

February 14, 2017

Limited Liability Company Owners Personally Liable to Creditor

by Jay R. McDaniel, Esq.

We counsel many owners of limited liability companies that the filing of a Certificate of Formation does note automatically protect the owners from person liabilities. There are a number of business practices, often referred to as the “corporate formalities” that should be followed.

A case from Iowa’s Court of Appeals illustrates this principle, in which the court affirmed the finding of a trial court that the owners of a limited liability company were personally liabile for $235,000 owed to a supplier. Keith Smith Co. v. Bushman, 873 N.W.2d 776(Table), 2015 WL 8364910(Table) (Iowa App., 2015).

The supplier claimed that the defendant was essentially a shell company with inadequate capitalization. The trial court agreed and the appeals court affirmed.

February 8, 2017

Good Faith and Fair Dealing Required Disclosure of Conflict

by Jay R. McDaniel, Esq.

Good faith and fair dealing are obligations implied in every contract, including contracts among owners of closely held businesses, and cannot be waived by the language in an operating agreement voiding fiduciary duties.
The duties of good faith and fair dealing require disclosure of conflicts of interest involving controlling LLC members or partners.
Contracts contain obligations that are so ‘obvious’ that they are not included in the written agreement; these obligations fall withing the scope of good faith and fair dealing.

February 7, 2017

Employee Termination Without Cause May Limit Enforceability of Non-Compete Agreement

by Jay R. McDaniel, Esq.

Litigating with a former employee for violation of a restrictive covenant agreement becomes more complicated when the former employee was terminated without good cause. And because we are an at-will employment economy, this becomes an issue more frequently than one might imagine.

As one author notes, it typically is not the underperformer who creates a problem for their former employer. It’s the superstars, of course, that threaten to walk out the door not because they were fired but because they plan on taking a big chunk of business.

Include Poor Performance as Grounds for Termination

December 16, 2016

Anti-Reliance Clause in Purchase Agreement Defeats Fraud Claim

by Jay R. McDaniel, Esq.

The parties to a transaction, including a transaction that concludes a business divorce, will often include a provision that states that neither side is relying on verbal representations of the other. Most often, this provision refers to the due diligence that precedes a transaction, but it can also refer to other circumstances including the discovery in an ongoing litigation.

We were recently involved in a case in which one of the parties claimed that it had been fraudulently induced into a transaction, notwithstanding the substantial discovery that had occurred. It wasn’t a successful argument, but it added to the complexity of the case.

More often, however, there is a claim either that there were facts or circumstances that were hidden or that that there were oral representations made that were material to the decision to enter into the transactions. A recent decision of the Delaware Chancery Court in IAC Search, LLC v. Conversant LLC , C.A. No. 11774-CB (Del. Ch. Nov. 30, 2016) demonstrates that an anti-reliance provision in a contract can avoid such a fraud in the inducement claim.

December 15, 2016

What’s in that Buy-Sell Agreement Again? Better Take a Look

by Jay R. McDaniel, Esq.

A business divorce case came into the office a couple of years ago, one of the second-generation owners was looking to force one of the first generation owners — who never came to work anymore — into retiring and selling his interests.

We reviewed the shareholder ledger and the by-laws and the second generation had a clear majority of shares. So at least the majority could terminate the employment of the minority if that was the way they wanted to go, and he would then have the ability to bring a suit to be bought out. Or more likely, once he was fired, he would want to be bought out. So far, so good.

But then the buy-sell agreement. It provided a formula for valuation that was pegged to the equity accounts of the shareholders some 25 years earlier. The books and records for that time period had long since disappeared. In the end, we were able to piece together a guess about the equity accounts and to negotiate a package.

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.

Agreements to Divide Fees

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

Any action that the managers of a Limited Liability Company might take at a meeting can also be taken by executing a written consent.

An action by written consent may, in some circumstances, avoid the need to assemble a quorum of the managers.

The managers of an LLC many be contractually obligated to effect management changes by an operating agreement, but those obligations are not self-executing.

A trial court reasons that because a member-managed limited liability company is similar in management to a partnership, the court may reason from partnership law in fashioning a remedy for an expelled member.

The majority members of the LLC, who voted under the Operating Agreement, to compel the withdrawal of the member are jointly and severally liable to pay the ousted member the fair value of his equity interest.

When no other provision of the limited liability company statute applies, in many states a court may turn to recognized “rules of law and equity” to fashion a remedy.

Compelled Withdrawal of Member Requires Payment of Fair Value

Appellate Court Considers Evidence of LLC Membership in Ownership Dispute Among Critical Care Doctors

Good faith and fair dealing are obligations implied in every contract, including contracts among owners of closely held businesses, and cannot be waived by the language in an operating agreement voiding fiduciary duties.

The duties of good faith and fair dealing require disclosure of conflicts of interest involving controlling LLC members or partners.

Contracts contain obligations that are so ‘obvious’ that they are not included in the written agreement; these obligations fall withing the scope of good faith and fair dealing.

Include Poor Performance as Grounds for Termination