Articles Posted in Valuation

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  • The controlling shareholders of a corporation owe fiduciary duties to the minority shareholders by virtue of their ability to control the affairs of the company.

  • Even when a merger complies with statutory requirements, where it benefits the controlling shareholders and does not have an apparent business purpose, it must also satisfy equitable principles of fairness.

  • The fiduciary duties owed by controlling shareholders is a basis to grant injunctive relief, even it is appears that money damages might make the minority shareholders whole for any misconduct.

Corporations Attorney

Berkowitz v. Power/Mate Corp., 135 N.J. Super. 36 (Chancery Division 1975)

Statute: NJSA 14:14-1(1)(a)

Synopsis: In class action seeking injunctive relief blocking merger of defendant Power/Mate with corporation controlled by the majority shareholders, on application for a preliminary injunction, the court enjoined a going-private merger by the defendant controlling shareholders to compel the sale by the minority shareholders to a corporation they controlled. Held that despite compliance with statutory requirements, the merger would be preliminarily enjoined.  See opinion Berkowitz v. Power/Mate Corporation. Continue reading

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  • 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.

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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

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  • A limited liability company operating agreement may be amended informally by oral agreement or by a course of conduct.

  • The party that claims amendment of an operating agreement by a course of conduct must establish the clear and mutual intent of the parties to agree to the amendment.

  • A clear and unambiguous provision in an operating agreement that governs how the limited liability company will be valued in the future is an enforceable contract.

attorney for medical practice valuationA retiring member of a limited liability company was unable to convince a trial judge that the parties had amended the operating agreement through their course of conduct to adopt a new valuation approach.

Certificate of Agreed Value Required by Operating Agreement is not Updated for 17 Years

The opinion in the Chancery Division dismissed on summary judgment the plaintiff’s claim that sought to order the majority owners of a medical practice organized as an LLC to use a fair market value determination of the value of the interest of a retiring member, rather than to rely on an outdated “Certificate of Agreed Value” prepared in March 2001.

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  • ‘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

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  • In valuing the shares of a minority shareholder, a trial court must consider any valuation technique that is generally acceptable in the financial communities.  Determining fair value is an art, not a science.

  • Directors that hold a majority interest in a closely held business have a duty to deal fairly with the minority and in a merger to make full and fair disclosures and offer a fair price in exchange for shares.

  • A minority shareholder that sits by or acquiesces to wrongful conduct by the majority waives the right to later pursue a claim based on that behavior.

  • Fee awards are available only to shareholders with a statutory right to dissent and in the discretion of the judge.

Casey v. Brennan, 344 N.J. Super. 83 (App. Div. 2001)

Minority Shareholder Valuation Attorney

Statutes: NJSA 14A:11-1, NJSA 14A11-3; NJSA 14A:6-14: NJSA 14A:11-6; NJSA 14A:11-10

Action challenging the valuation provided by controlling directors (also majority shareholders) in corporate reorganization as plan to reduce number of shareholders to 75 or less to qualify for subchapter S status. Directors approved plan of merger at $73 a share in reorganization plan requiring small shareholders to sell. Trial Judge set value at $90 a share. (Opinion here.)  The Supreme Court affirmed the Appellate Division.  (Opinion here.)

Facts: Community Bank adopted a plan of merger as part of a plan of reorganization that would reduce the number of shareholders by acquring holdings of persons with less than 15,000 sharesat a price of $73 per share. Statutory dissenters and non-statutory dissenters brought various actions consolidated for trial. Trial court holding that proxy statement was misleading and provided non-statutory dissenters with right to sue, and determined fair value $90 per share. Affirmed in part and remanded for reconsideration of valuation issues that were rejected by trial court. Continue reading

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Oppressed Minority Shareholder Litigation AttorneyAn oppressed minority shareholder was awarded approximately $750,000 in attorneys fees and expert expenses — some eight times the amount of the buyout — even though the majority had good reason to fire him from his position as the corporation’s CEO.

Fee Award Under Oppressed Shareholder Statute to Selling Shareholder

This case is a 14-year-old litigation involving a dispute between the family members of a family-owned business, and the outsider executive who was brought in to take over the management of the corporation.  The relationship quickly deteriorated amid allegations of misappropriation and sexual harassment in the workplace.

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Oppressed Shareholder Valuation in Sale of Plant Business
The general rule is that a court should not apply discounts for marketability or lack of control (the later known as the minority discount) unless there is some unfairness or wrongdoing among the parties. Still, in the world of oppressed minority shareholder litigation, there is always some allegation of wrongdoing, so the question of discounts, or not, is invariably part of the ruling in any court-ordered valuation.

A trial court in Union County recently applied a 25 percent discount in the purchase of a 50% share of a family business after a 35-day trial. The net result was that the defendant in the case took significantly less for the acquisition of his shares in a family owned business than might have been available if there was not a finding of wrongdoing. Parker v. Parker, Docket No. UNN-C-108-13 (Chancery December 22, 2016) The parties involved in a business divorce litigation need to be cognizant that the allegations of bad behavior may have a significant effect on the ultimate determination of value made by a court.

Discounts Reduce Value of Buyout in Family Business Dispute

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business litigation attorneysHere is the hard reality.  The chances that your case, or any case, will get to a real trial on the merits is way less than one in 10.  The truth is that only between two and five cases out of 100 will be resolved with a trial.

What does that mean for a party drawn into civil litigation?  The statistics point to a group of “best practices” that effective litigation counsel should employ.  It is a blend of efficient trial preparation, motion practice, management of discovery and, perhaps most of all, advanced negotiation skills.  We review some of those here as a starting point for developing a case strategy.

Civil Trials in Business Litigation is a Rare Event

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Agent with Authority to Bind Partnership
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.

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9 Characteristics of Good Buy-Sell Agreements

Few of us have the liquidity that we need to contemplate the divorce while we are making plans to get marriedIt just doesn’t enter our minds at the time and, of course, when if it does later become an issue, it is way too late to come to an easy decision about how to handle the breakup.

The same is true for businesses.  It is difficult to get the new business owners to focus on what they will do if one leaves — and the probability is that one will — when they are in the formation mindset.  It’s a type of honeymoon, I suppose, full of optimism and promise.  And yet, experience says that if the business survives long enough, the absence of a buy-sell provision is going to create an issue, and maybe event a lawsuit.

Business owners need to reflect on the fact that with enough success, they will want to retire, or may become disabled or die.  That they might want to bring children into the business.  Or that one of them will undergo some type of personal change or circumstances that just makes it impossible to carry on.  A company’s organizing documents without a buy-sell in some form or fashion is incomplete.  It keeps the litigators happy, but it’s not wise.  Chris Mercer’s blog post here talks about some of the elements that you find in a reasonable buy-sell agreement.

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