The Business Divorce Law Report

June 28, 2017

Oppressed Shareholder Wins $750,000 Fee Award

An 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.

June 13, 2017

Evidence of LLC Membership by Plaintiff MD is Lacking

by Jay R. McDaniel

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

April 4, 2017

Shareholder Deadlock Grounds to Sell Corporation

by Jay R. McDaniel

Shareholder Deadlock Attorney Is an intractable deadlock among the shareholders good grounds to force the sale of a large, successful corporation? That was the issue before the Delaware Supreme Court in a case in which the trial court’s decision to sell the business as a going concern – over the objection of one shareholder –was affirmed by the Supreme Court.

In this case, a trial court’s ability to fashion and equitable remedy based on the circumstances of the case ran into direct conflict with the limited remedies that are available to minority shareholders under Delaware law.

Court Orders Sale of Corporation in Shareholder Deadlock

March 30, 2017

Valuation of Corporation in Oppressed Shareholder Includes Marketability Discount

by Jay R. McDaniel

Oppressed Shareholder Valuation in Sale of Plant Business

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

February 14, 2017

Limited Liability Company Owners Personally Liable to Creditor

by Jay R. McDaniel

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 13, 2017

Unanimous Consent of LLC Members Not Required to Continue Company

by Jay R. McDaniel

It may take a unanimous action of the members of a limited liability company to dissolve the entity or to change the date on which the company will dissolve according to the terms of its operating agreement. But unless the Operating Agreement specifically requires the members to act unanimous to extend the company, a simple majority may suffice.

That was the holding of the New Hampshire Supreme Court in McDonough v. McDonough, a case in which one of the members of this family business attempted to enforce a dissolution provision in the operating agreement to force the purchase of his shares.

Limited Liability has Limited Term of Existence

February 8, 2017

Good Faith and Fair Dealing Required Disclosure of Conflict

by Jay R. McDaniel

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

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

February 2, 2017

Company Must Indemnify Former Director for Fees Owed under Oral Agreement

by Jay R. McDaniel

The potential liability of a director for attorney’s fees is what determines whether recoverable litigation expenses are due under the indemnification provisions of Delaware law, the Chancery Court holds.

The expenses at issue were incurred in litigation that wound its way through state and federal courts in Illinois for nearly a decade, including a bankruptcy. The Plaintiff in Dore v. Sweports, Ltd, C.A. No. 10513-VCL (Del. Chancery January 31, 2017) was a former director and investor in Sweports, who was ousted in a dispute with the other directors and locked out of the business. A significant component in the lawsuit involved the services of the law firm that was general counsel and also represented the plaintiff in some of the underlying litigation.

Court Awards Expenses Incurred Under Oral Agreement to Defend Counterclaims by Corporation Against Former Director

January 31, 2017

Misappropriation Claim Not Sufficient for Appointment of LLC Receiver

by Jay R. McDaniel

A claim that one of the members has misappropriated assets of a limited liability company and ousted the other member from management is a “quintessential breach” of the fiduciary duties that may exist in a closely held business. It is not, however, grounds for the appointment of a receiver.

This decision of the New Supreme Court in Chen v. Dai, Index Co. 653601/2015 (New York County January 18, 2017) holds that the fact that a claim arises from the existence of a contract – in this case an operating agreement – it may also involve duties independent of the contract. The court finds in a decision on a motion dismiss that pleading that the plaintiff was a co-member of two New York limited liability companies is sufficient to state a cause of action.

LLC Member Misappropriation is Breach of Fiduciary Duty

Fee Award Under Oppressed Shareholder Statute to Selling Shareholder

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

Court Orders Sale of Corporation in Shareholder Deadlock

Discounts Reduce Value of Buyout in Family Business Dispute

Limited Liability has Limited Term of Existence

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

Court Awards Expenses Incurred Under Oral Agreement to Defend Counterclaims by Corporation Against Former Director

LLC Member Misappropriation is Breach of Fiduciary Duty