Fiduciary Duties

September 21, 2018

Business Judgment Rule Trumps Oppression; Minority Shareholder Entitled to Attorney’s Fees in Defense of Counterclaim

The business judgment rule insulates decisions made in good faith and in the best interests of the enterprise from being subject to judicial second guessing ordinary business decisions
Majority shareholders that failed to pay dividends to a non-employee minority shareholders in valid exercise of business judgment rule did not engage in wrongful conduct.
Common law dissolution under New York law is available only for a palpable breach of duty so egregious as to disqualify the majority from exercising rights over dissolution.
A minority shareholder subject to a counterclaim has a right to be indemnified against legal fees and an advance of funds for expenses.
A trial court may preclude individual defendants from using corporate funds to defend an oppressed minority shareholder lawsuit.

Feldmeier The decision of controlling shareholders that a corporation will not pay dividends to a former employee and director is subject to the business judgment rule, in this case defeating the shareholder’s claim of oppressive conduct by the majority.

The Fourth Department of the Appellate Division of New York Supreme Court rejected the claim brought by a minority shareholder of a family-owned equipment business in Syracuse, applying the presumption that an action taken in good faith by a business in the best interests of the business should be free from second-guessing by the minority and the Court. (Opinion in Feldmeier v. Feldmeier Equipment, Inc. here.) Continue reading

August 10, 2018

Fair Value of a Corporation: Art not Science

by Jay R. McDaniel, Esq.

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)

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

September 13, 2017

Business Divorce: Sources of the Law

by Jay R. McDaniel, Esq.

The law that controls any business organizations is a creature of state law, and disputes among owners in a business divorce involve the application of the law where the business was formed. More often than not that means the law of the state in which the dispute is being heard, but not always. And significantly, at least for our present purposes, it does not mean that we will find the answer to a business divorce issue in the state in which the litigation is pending, even among the binding decisions of the state law where the enterprise was formed.

Here’s an example: a New York court is calle Business Divorce Attorneys d upon to determine whether a managing member of a limited liability company breached his or her duty in negotiating a sale of a substantial asset to a third party that the manager negligently believed was an objectively fair price. The plaintiff seeks to expel the manager or to force a dissolution and sale of the business as a going concern. Does the Court apply New Jersey law? If there is no New Jersey case on point – and there is no binding decision on all of the points in this scenario – does the Court apply New York law, and to which issues?

Even if this case is litigated in New Jersey, and there is no law on point, where does the trial court look to guidance. The nearly automatic response is Delaware, because the courts of Delaware have by far the most developed body of law applicable to corporate governance disputes. However, Delaware may be the wrong choice if the limited liability company statute needs interpretation. A well-reasoned decision from an Appellate Court in Illinois, for example, should be much more persuasive to a court construing New Jersey’s limited liability company statute because of the similarity between the two states’ laws.

August 22, 2017

Minority Shareholder’s Silence Waives Oppression Claim

by Jay R. McDaniel, Esq.

It was the stuff of which a good minority oppression claim is easily cooked up. The party in control of the corporation had used the corporate bank accounts as his personal piggy bank while operating a competing business, paid himself inflated office rents and bankrolled an extra-marital affair with money taken from the business.

None of that, however, could carry the day in a lawsuit brought by the minority shareholders of a New Jersey corporation because they waited years to complain.

Minority Shareholder Oppression Alleged by Ousted Officer of Closely Held Corporation

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.

January 27, 2017

Fight Over Transfer of Interests is Grounds to Expel Member of LLC and Partnership

by Jay R. McDaniel, Esq.

An Illinois appellate court affirmed a finding of breach of fiduciary duty and the expulsion of a limited liability company member under a version of the Uniform Limited Liability Company Act. The case is of interest for the way it construes the model partnership and limited liability company acts.

Explusion of LLC Member After Transfer of Interests

The court in Kenny v. Fulton Assocs., LLC, 2016 IL App (1st) 152536 (Ill. App., 2016) holds first that under Illinois’ LLC statute the actual activities of the parties determined their fiduciary duties, not the agreements. The management of the entities were vested in one side as manager, but the day-to-day operations actually handled by the other side. The management of the business creates a fiduciary duty under Illinois law. The other significant holding is that refusing to honor a valid transfer of an interest is not just a breach of contract, but a breach of fiduciary duty. Finally, the court affirms the holding that when one of the principals is a lawyer that represents the firm, his breach of duty as an attorney is also a breach of fiduciary duty as a member or partner.

December 14, 2016

Seven Business Litigation Best Practices that Address the Lack of Civil Trials

by Jay R. McDaniel, Esq.

Here 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

October 27, 2016

LLC Member Enjoined from Competition

by Jay R. McDaniel, Esq.

An LLC member breached his fiduciary duty by competing with his own company, a trial court in New York City holds in issuing an injunction against one of the principals of a successful company that makes automated parking systems.

The case involves the company that makes Parkmatic parking systems, mechanical stickers and carousels for parking cars in limited spaces. The complaint in Zacharias v. Wassef alleges that the defendant Max Wassef responded to complaints of misconduct by his partner Zacharias by forming a new company to siphon off business using the Parkmatic name.

Limited Liability Company Member Claims Unfair Competition by Manager

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 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.

The business judgment rule insulates decisions made in good faith and in the best interests of the enterprise from being subject to judicial second guessing ordinary business decisions

Majority shareholders that failed to pay dividends to a non-employee minority shareholders in valid exercise of business judgment rule did not engage in wrongful conduct.

Common law dissolution under New York law is available only for a palpable breach of duty so egregious as to disqualify the majority from exercising rights over dissolution.

A minority shareholder subject to a counterclaim has a right to be indemnified against legal fees and an advance of funds for expenses.

A trial court may preclude individual defendants from using corporate funds to defend an oppressed minority shareholder lawsuit.

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 Oppression Alleged by Ousted Officer of Closely Held Corporation

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.

Explusion of LLC Member After Transfer of Interests

Civil Trials in Business Litigation is a Rare Event

Limited Liability Company Member Claims Unfair Competition by Manager

Derivative Suit Seeks Recovery for LLC of Management Fees

Seasoned Negotiators, Effective Apologies