Articles Posted in MIscellaneous

• The vast majority of the personal wealth of most business owners is the value of their business.

• Getting access to that trapped wealth in the owner’s business is a principal goal of a successful access plan.

• Business owners without an exit plan may never realize the potential value of their business.

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Their closely held business represents for many owners not just a source of income but also the largest portion of their personal wealth. Yet, a common issue is that much of this wealth remains tied up in the business, making it difficult to access without a well-thought-out exit strategy. Without proper planning, owners may find themselves struggling to realize the full value of their company when it’s time to sell, transition, or retire.

I am a lawyer, a certified valuation analyst, and a certified exit and succession planner.  I have worked with the owners of closely held businesses throughout my career.

Contact me if you have questions about valuing your business, developing an exit plan, or implementing the legal bulletproofing necessary to protect your investment.

I see it in my law practice. Owners reach retirement and discover that they own a job, not a business. In many cases, there is no choice but to liquidate or simply close.

Without an Exit Plan, Personal Wealth Often Remains Trapped

The statistics revealed through surveys of the Exit Planning Institute suggest that for many owners without an exit strategy, that wealth may stay trapped there forever.

• 70-80% of Owners’ Wealth is Tied to the Business
• 70% of Businesses Put on the Market Don’t Sell

This is where the Exit Planning Institute’s (EPI) guiding principles of exit planning come into play. The EPI’s approach focuses on maximizing the value of a business while aligning it with the owner’s personal financial goals. Working with a Certified Exit Planning Advisor (CEPA) can help business owners navigate the complexities of exiting, allowing them to unlock the personal wealth trapped in their business. Continue reading

• Valuing a business on an ongoing basis is intended to avoid valuation disputes in litigation and provide fairness and predictability.

• Courts enforce contractual language that establish the the value of a closely held business based on valuation reports conducted by the owners for non-litigation purposes. 

• Courts are likely to view valuation reports conducted for the purpose of litigation with suspicion when they avoid the impact of the parties’  prior agreement

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Courts commonly reject a valuation report of one litigant in favor of another. Rarely, however, will a court reject the valuation reports of both sides. A trial judge in Delaware did just that, however, rejecting the valuation reports of both sides in a recent high-profile case in favor of the company’s periodic valuation report used for internal purposes.

In Catalyst Advisors Investors Global Inc. v. Catalyst Advisors, L.P., the central issue was the valuation of a limited partnership that, according to the terms of its partnership agreement, periodically calculated its value. Both sides submitted valuation reports, but the judge held that it was the terms of the parties agreements that ultimately determined the value of the enterprise based on a report “on file” when the dispute began.

Partners Dissociate from Boutique Recruiting Firm

The dispute arose after two partners, Catalyst Advisors Investors Global Inc. (CAIG) and Christos Richards, dissociated from the limited partnership Catalyst Advisors, L.P. The partnership operated as a boutique recruiting firm specializing in senior executive placements within the biopharmaceutical and medical technology sectors. The parties had a contractual right to leave the firm, and the company had the right to buy out their interest.

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• The fiduciary duties of loyalty and care may be different when a partnership is involved, rather than a corporation.

• The duties that shareholders in a corporation owe to each other are different than those owed in a partnership.  Shareholders have more discretion to consider their own interests first. 

• Understanding the duties owed by those in a business is important to avoid liability to business partners

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This fight between accountants in practice together demonstrates the different ways that courts will look at corporations on the one hand and partnerships, an entity that the what the law calls an unincorporated business association.  Limitied liability companies are also unincorporated business assocations.

The case is also another lesson in the course: Bad Things Happen to People Who Don’t Bother with Contracts When They Start a Business with Others.

Fiduciary Duties Owed Between Partners

The takeaway from this case is that the duties that shareholders owe to each other are different from the duties that partners and LLC members owe to each other. That is not to say that there are no duties between shareholders in a closely held corporation, but those duties are not presumedto exist.  They have to be proven from the circumstances.  We will discuss some of the differences as we go through the details of the case.

Why does this matter?  Because understanding the duties owed by those in a business is important to understanding the rights and liabilities of those involved, Those who have fiduciary obligations are personally liable when they ignore these duties.  And those who are owed the fiduciary duty have a right to hold the fiduciaries responsible.

Accounting Partnership Dissolves

This dispute between the accountants turned into a lawsuit. The combatants were involved in Forward LLP, a poorly documented accounting partnership. Kristina Edwards and Sean Forman were locked out of the business, but they went to court and got temporary restraining orders (TROs) by the trial court.

These allowed them to get back to using  Forward software, email, Google Drive, and client files and communications at the outset of the case. The defendants appealed that decision and lost.

The case we are looking at is from the California Court of Appeals, Edwards v. Forward, but the legal principles here will apply in most states, including New York and New Jersey, where I practice. Continue reading

• An arbitration award entered in a dispute between two parties over the alleged issuance of shares in a financing transaction was vacated by a court because of the arbitrator’s failure to issue the written award on time.

In the Matter of the Application to Confirm an Arbitration Award of Theodore Papakonstadinou and AKTOR CORPORATION, Petitioners, against Nikolaos Sparakis, LIZBETH GOZZER and GOZZER CORPORATION, Respondents. 

Petitioner Theodore Papakonstadinou is a director and owner of 95% of the voting shares of respondent Gozzer Corporation (“Gozzer Corp.” or “Corporation”), a domestic corporation with its principal place of business at 1043 Broadway, Albany, New York. The remaining 5% of the shares are owned by respondent Lizbeth Gozzer (“Gozzer”).

• In a business divorce case alleging the fraudulent acquisition of shares, once the defendant  established the existence of a release, plaintiff must prove it is invalid.

• A claim of a fiduciary relationship does not relieve plaintiff of proving that he did not release a claim that he was the victim of fraud in the purchase of shares of a closely held business.

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Nilish Chadha, Individually, and Derivatively on Behalf of Wahed Inc. f/k/a Wahed Invest Inc., Plaintiff, against Junaid Wahedna, and Wahed Inc. f/k/a Wahed Invest Inc., Defendants.

An ordinary contract, even between close friends, does not create a fiduciary relationship from which a court will find an equity interest.

Dominic Thomas Karipaparambil, Plaintiff-Appellant, v Robert Michael Polus et al., Defendants-Respondents. Judgment, Supreme Court, New York County (Jennifer G. Schecter, J.), entered March 10, 2021, dismissing the complaint, unanimously affirmed, without costs.

Appeal from order, same court and Justice, entered on or about March 2, 2021, which granted defendants’ motion to dismiss the complaint alleging causes of action for breach of fiduciary duty and aiding and abetting breach of fiduciary duty, unanimously dismissed, without costs, as subsumed in the appeal from the judgment.