Articles Posted in Fiduciary Duties

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Oppressed Minority Shareholder Attorney

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.

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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.

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  • A derivative claim is an action brought by an individual, but to enforce a right owned by the company.  Any remedy or recovery belongs to the company.

  • An individual claim is brought to vindicate the rights of an individual owner.  The recovery or remedy belongs to the individual owner.

  • Although the business is often considered a nominal party in derivative litigation — one without a significant stake in the outcome — it may be necessary to have a separate attorney represent the corporation or limited liability company to avoid conflicts of interest with the lawyers representing individual owners.

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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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tyranny-of-the-majority

Limited liability companies are creatures of contract, and the Operating Agreement is the Magna Carta of the business.  Because it is a contract, however, all of the members must consent to any changes to the Operating Agreement, which means that the holdout member has a veto.  In short, the minority rules on major changes.

The Minority Rule Problem

All of the members, save one, may agree that a change to an operating agreement is in the best interests of the business.  Yet that one holdout, for whatever reason, can veto the change because a contract cannot be changed unless all of the parties’ to the original agreement consent.

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Contact Information
Jay R. McDaniel, Esq.
(973) 602-3915
Weiner Law Group LLP
New Jersey Office
629 Parsippany Road
Parsippany, NJ 07054
New York City Office
90 Broad Street
New York, NY 10004
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