The Business Divorce Law Report

April 12, 2011

LLC Does Not Distribute Clients on Dissolution

When a limited liability company dissolves, it pays its creditors and distributes the remaining assets in the winding-down process. Many professional practices are organized as LLCs, and their principal assets are the clients they serve. That does not mean, however, that the professional limited liability company in dissolution has to divide up the clients.

This is an important holding for lawyers, accountants, doctors and other professionals that are practicing in New Jersey as a limited liability company. According to a New Jersey appeals court, the clients that the professionals, such as an accountant, bring to the LLC represent personal goodwill that belongs to the individual professional, rather than goodwill belonging to the enterprise. Thus, clients of professional limited liability companies are not considered assets of the LLC and on dissolution are not subject to distribution.

Accountants Seek Dissolution of Firm

March 14, 2011

Fiduciary Duties in Unfair Competition Case

by Jay R. McDaniel, Esq.

You just learned that an employee secretly formed and operated a competing business while employed by you. Is there a claim against the competing business or just the employee? Most likely there are viable claims against both. The fiduciary duties of the employee are likely to be imputed to the company he or she formed.

Breach of Fiduciary Duties

Similar facts were before the court recently in an unfair competition and breach of fiduciary duty case, Vibra-Tech Engineers, Inc. v. Kavalek, Civil Action No.: 08-cv-2646, in the United District Court for the District of New Jersey. (opinion here) A vice president and director of Vibra-Tech, along with his wife, formed two businesses. One of the businesses sold equipment to Vibra-Tech; the other competed directly for the same customers. Vibra-Tech, of course, had no idea that one of their executives was involved in the two businesses.

February 16, 2011

Employer E-Mail Policy Creates Privacy Rights

by Jay R. McDaniel, Esq.

As an employer, we may assume that because we own the computer equipment, that includes any data left on there by our current or former employees. Thus, if an employee wants to use company time or our equipment for personal e-mail, then they do so at their own peril. If we’re not careful, however, we may be wrong.

Whether an employee working in New Jersey has an expectation of privacy in e-mails sent during working hours and whether the employer can read those e-mails –will depend on the policies that the company establishes, particularly those in writing, and its actual practices.To be safe, the policy should be clear and it should be in writing.

The New Jersey Supreme Court recently held that an employee had a reasonable expectation of privacy in workplace e-mails sent to her attorney through a web-based personal e-mail account, but using a company computer, largely because the company was less than clear about its policy. Stengart v. Loving Care Agency, Inc., 201 N.J. 300 (N.J. 2010). (copy of opinion here). In Stengart, employee Marina Stengart’s e-mails sent to and received by her attorney on her work laptop were viewed by her former employer, Loving Care Agency, whom she was then suing for employment discrimination. The e-mails were discovered by her attorneys when her laptop was examined by an expert during the litigation.

February 2, 2011

Indemnification of Director Despite Judgment of Wrongdoing

by Jay R. McDaniel, Esq.

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 automatically 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

January 28, 2011

Partnership Agreement Disclosure to Labor Union Pending Trial Court Decision

by Jay R. McDaniel, Esq.

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.

January 24, 2011

Court Defers to Management’s Liquidation Value in Dissenting Shareholder Value

by Jay R. McDaniel, Esq.

The Business Judgement Rule presumes that a decision made by a majority of the board of directors in business matters is entitled to deference. Courts generally will not interfere with decisions that fall under the Business Judgment Rule.
Courts disregard the Business Judgment Rule when there is evidence of bad faith, misconduct or self dealing.
Even in a case involving the fair value of the shares of a dissenting minority shareholder, a court may consider the transaction at ‘arms length’ and defer to the board’s discretion.

January 19, 2011

Written Agreement Defeats Claimed Oral Partnership

by Jay R. McDaniel, Esq.

Oral agreements and even an extended course of dealing probably will be insufficient under New Jersey law to contradict the language of a written agreement, even if by all outward appearances a partnership existed. An Appellate Division decision finding that no partnership between attorneys who practiced together for 11 years is a warning to make sure that the documents defining a business reflect its actual operations.

Raymond Nadel and Morris Starkman practiced together as Starkman & Nadel, shared profits and held each other and the firm out to the public as partners and even, it seemed, intended to be partnership. Nonetheless, the Appellate Division decision, reversing a trial court decision that there was no partnership in contradiction of a written agreement. See Nadel v. Starkman, 2010 N.J. Super. Unpub. LEXIS 2542 (App.Div. Oct. 20, 2010). (Copy of Slip Opinion Here) The Appellate Division held that, notwithstanding ambiguity in an agreement, a court cannot use extrinsic evidence to vary the unambiguous terms of a contract.

The decision turned on an application of the extrinsic, or parol, evidence rule, which prohibits the introduction of extrinsic evidence to vary the terms of a written agreement. Many trial courts see the rule as more of a suggestion and it sometimes seems that the exceptions to the rule make it meaningless. The biggest exception in my view is that courts will accept evidence to prove that the written agreement was amended by an oral agreement, even if the contract has a provision that it can be amended only writing. Perhaps the lesson here is that appellate courts look at such matters differently, or the plaintiff failed to argue that the original agreement had been amended orally or by the conduct of the parties.

January 11, 2011

Judges and Lawyers: FB Friends?

by Jay R. McDaniel, Esq.

Is it ok for lawyers to have FaceBook friends who are judges? Francis Pileggi, a Delaware corporate litigator writes about a recent Ohio professional ethics opinion that says it’s alright that FB friends are different than real friends, which is sometimes true and sometimes not. (Blog Post here)

Lawyers Use FB to Argue

The problem is that it assumes that FB is used by the lawyer only for personal matters and fails to consider just how much influence someone might wield from their posts. I wouldn’t want my adversary posting matters relevant to my case so that they can be read by the judge, nor would I want him or her to use FB posts to build credibility.

January 10, 2011

A Shareholder’s Right of Access To Board And Executive Committee Meetings

by Jay R. McDaniel, Esq.

Shareholders in a New Jersey corporation have the statutory right to inspect books and records concerning the corporation and its affairs; but does this right extend to minutes of the board of directors and executive committees? For example, can the shareholder who does not participate in the management of the business get behind the scenes minutes for any reason or no reason at all?

The short answer is that when there is a reasonable need for those records, a New Jersey court is likely to require that they be provided to the shareholder. A recent New Jersey Superior Court decision clarified this issue in holding that the New Jersey Business Corporation Act (“BCA”) §5-28(4) allows a court to grant to a shareholder, with proof of a proper purpose, the right to examine the minutes of the board of directors or executive committees as well. See Cain v. Merck & Co., 415 N.J. Super. 319, 323 (App.Div. 2010).

Empty Complaints Are Insufficient to Gain Access

January 4, 2011

American Chopper Feud Generates Shareholder Dispute

by Jay R. McDaniel, Esq.

I don’t like reality TV, but I will admit that I thought the fights between the Paul Teutul Sr. and his son, Paul Jr., were the most interesting part of the show. Now that they are involved in litigation over the ownership of the company, I suppose I can take a professional interest.

The complex dynamics between the majority shareholder, Paul Sr., and the minority shareholder, Paul Jr., have all the elements of the disputes that have fractured many a family business – conflict over the direction of the business, claims of misconduct and, of course, charged emotions. You will also find something else in this case that is not all that rare – documents that do not clearly explain how the parties are to deal with sensitive issues.

https://youtu.be/ZgRl_b3GfyI

Accountants Seek Dissolution of Firm

Breach of Fiduciary Duties

Advancement of Defense Costs

The Business Judgement Rule presumes that a decision made by a majority of the board of directors in business matters is entitled to deference. Courts generally will not interfere with decisions that fall under the Business Judgment Rule.

Courts disregard the Business Judgment Rule when there is evidence of bad faith, misconduct or self dealing.

Even in a case involving the fair value of the shares of a dissenting minority shareholder, a court may consider the transaction at ‘arms length’ and defer to the board’s discretion.

Lawyers Use FB to Argue

Empty Complaints Are Insufficient to Gain Access