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.
The prior owner of a woman-owned business will be required to pay upwards of $500,000 to an oppressed shareholder after a trial court found — and the Appellate Division confirmed — that she had entered into a valid agreement to transfer her shares in return for an agreement that allowed her to continue collecting her husband’s salary while he was in prison.
The unreported decision in Dilworth v. DiSalvatore, Docket No. A-4492-14T2 (N.J. App. Div. March 16, 2017) is interesting in a number of respects. First, it presents a case in which we see the results of failing to commit agreements among the owners of a closely held business to writing. It’s great for the litigators but no so fortunate for the owners that failed to get it in writing.
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.
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.
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.
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.
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.
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.
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.
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.
