Members | Partners | Shareholders Category Archives — Page 3 of 5 — The Business Divorce Law Report Published by Business Lawyer

February 14, 2017

Limited Liability Company Owners Personally Liable to Creditor

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.

November 1, 2016

LLC Distribution Needs Definition

by Jay R. McDaniel, Esq.

The Appellate Division sent a case back to the trial judge to figure out exactly what the owners of an LLC meant in a settlement agreement when it referred to when it linked a contingent payment to a “distribution.”

The case, which involves a relatively modest amount in dispute, is a cautionary tale arising from the use of a statutorily defined term in a context in which it just wasn’t clear what the parties were referring to. One of the parties pointed to the dictionary and the other the text of the statute.

Be Careful with that Word

October 26, 2016

Plaintiff Alleges Wrong in Derivative Suit Against Managers

by Jay R. McDaniel, Esq.

New York has recognized the right of limited liability company members and managers to bring derivative claims – that is, claims belonging to the LLC – against other members or managers. But, the derivative plaintiff needs to beware of the demand requirement or face having their case dismissed.

Derivative Suit Seeks Recovery for LLC of Management Fees

In a derivative case, the plaintiff is actually asserting a claim that belongs to the company. If there is a recovery, it goes to the company and the derivative plaintiff only gets individually what may, or may not, be passed through to the equity members. The law even provides for an award of attorney’s fees in some derivative cases to encourage shareholders or members to police the business.

October 25, 2016

Who’s the Agent Here? Partners’ Ability to Act for the Partnership

by Jay R. McDaniel, Esq.

It is not unusual that a dispute between the owners of a closely held business also involves a dispute about the authority of one of the owners to act as agent for the entity. We had a recent case, for example, in which a central issue was whether the manager of a limited liability company exercised his business discretion in a way that was in the best interests of the business.

Once that dispute was on the table, we had to look at whether the manager had express or implied authority to act — in this case to hire a third party — and whether that exercise of authority was within the scope of the generally delegated authority provided to the manager by the operating agreement, or required an affirmative vote of the owners.

Professor Douglas Moll, writing on the law professors blog, parses the issues nicely under the most recent iteration of the Uniform Partnership Act, which has been widely adopted by state legislatures. For Professor Moll, the question of authority turns on the extent to which an ordinary business transaction is involved.

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.

August 1, 2016

Single Member LLC May Be a Poor Choice for Asset Protection

by Jay R. McDaniel, Esq.

Asset Protection, Charging Order — LLCs Can Protect Individual Assets From Judgement Creditors

One of the principal reasons for forming a business entity is to protect the owners from personal liability for the debts of the corporation. At the same time, business owners may use the business, most often a limited liability company, as a way to protect their business interests from being at risk for personal liabilities.

Understanding how a charging order could ultimately be applied is particularly important for individuals in high-risk professions. This includes not just the professionals like doctors or engineers, but also anyone who routinely deals with intellectual property, including patents, copyrights, trademarks and trade secrets. In all of these areas, the insurance coverage is poor and the risk is high. For that reason, many individuals will seek to hold assets inside of other vehicles, including a limited liability company.

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

Be Careful with that Word

Derivative Suit Seeks Recovery for LLC of Management Fees

Seasoned Negotiators, Effective Apologies