Articles Posted in MIscellaneous

  • 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

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A recent amendment to New Jersey’s limited liability company law changes the rights of creditors seeking to collect a judgment from a member of a limited liability company, eliminating the creditor’s right to foreclose the member’s interest.

Foreclosure of LLC Member Interests Eliminated

This particular aspect of the Revised Uniform Limited Liability Company Act (RULLC) is one of the more controversial provisions of the newly enacted statute because it eliminated a key asset protection aspect of LLCs.  Under the prior statute, a creditor’s right was limited to a “charging order.”  The amendment to the statute simply restores the prior law.

Under most state limited liability company statutes, a creditor has the right obtain a charging order that provides that when an LLC distributes money to its members, the debtors share goes to the party holding the charging order.  It only works if any money is actually distributed to the members.

The RULLC was based on a model act devised by the Uniform Law Commission and contained a provision that allowed judgment debtors to foreclose an interest under certain circumstances.  What that meant was that if the judgment creditor was being paid, it had a right to seek a foreclosure of the interest, meaning that it would be sold at a judicial auction.

Continue reading

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Purchaser Alleges Mortgage Was Not Approved by All LLC Members

A mortgage given by a New Jersey limited liability company to one of its members can be challenged by the purchaser in a court-approved sale of the business, the Appellate Division holds, reversing the trial court.

This case arises out of the estate planning undertaken by John Best and his wife, defendant Patricia Ann Best, after Mr. Best learned that he was terminally ill.  The couple owned Sea Village Marina in Northfield (across the bay from Margate).  They had transferred 25 percent of the business to their son, John, in 1994.

Ownership Transfer Rejected When Stock Certificate Note Endorsed

One of the principles of corporate law that comes up with some frequency in shareholder disputes is that a share certificate is not an interest in a company, but only evidence of ownership.  That does not mean, however, that the formalities for issuing and transferring shares can be ignored.

As a recent case from the Appellate Division of the New Jersey Superior Court demonstrates, a court may refuse to recognize what the plaintiff claimed had been a transfer of shares in a closely held corporation when the alleged transferee could not produce the endorsed stock certificate.

indemnification

Most corporations include broad indemnification provisions in their by-laws that are intended to protect directors and officers from the costs of lawsuits claiming wrongdoing. Those corporate provisions, however, as well as the statutory provisions that permit indemnification have an important caveat, an officer or director cannot be indemnified against intentional wrongdoing.

What happens when the officer or director loses a civil case, however, and a judgment is entered finding wrongdoing?  According to a recent decision in New Jersey that finding of wrongdoing does not protect-directorsautomatically deprive the officer or director a right to indemnification, nor does it require him or her to repay the costs incurred in the defense or payment of any judgment.

Advancement of Defense Costs

secret

In some circumstances, a business may be able to claim that its organizational documents are trade secrets. That seems to be the holding of a trial court decision insulating a partnership agreement from disclosure to a labor union.

The case is interesting because non-management owners do not generally have free access to all of the records of a business, but they do have a right of access to organizational documents. This case raises the prospect that a company that in turn enters into other ventures might classify those documents as proprietary or trade secrets and avoid disclosure to parties with an interest in their contents.

The dispute actually arose under New Jersey’s Open Public Meetings Act.  The lawsuit, Communications Workers of America and New Jersey Education Association v. John McCormac and Blackstone Capital Partners et al., L-3217-05 (2008), involved a complaint brought by several state workers’ groups against defendant public officials and private equity funds seeking documents which might reveal the investment strategy defendant private equity firms were utilizing to invest state worker pensions.

remedy

Businesses often create additional new businesses, whether as joint ventures or subsidiaries. The flexibility and favorable tax treatment given to the limited liability company have made it fairly common that an LLC has other business entities as its owners.  For the individual owner, however, this situation can present problems.  The requirement that the members act at the company level often means less individual control and less ability to address acts of wrongdoing in the subsidiary or joint venture.

The individual owner’s recourse is the double derivative action, a complicated device in which the individual owner. asserts the rights of the parent to assert a claim as an owner of the subsidiary. It’s confusing, but the principle is generally well accepted.

An Example

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