The Business Divorce Law Report

February 2, 2011

Indemnification of Director Despite Judgment of Wrongdoing

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

December 20, 2010

Derivative Claim in Dispute Between Owners May Require Independent Counsel

by Jay R. McDaniel, Esq.

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.

September 30, 2010

Owners of Parent Corporations Should Have Remedies Against Officers of Subsidiary Businesses

by Jay R. McDaniel, Esq.

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

August 16, 2010

Appellate Division Affirms Sale of Business as a Going Concern in Shareholder Dispute

by Jay R. McDaniel, Esq.

The last-minute motion of a 50-percent shareholder to prevent the sale of a business as part of an oppressed shareholder lawsuit was insufficient to block the receiver from proceeding with the transaction, according to a New Jersey appellate court.

The opinion in Georgiadis v. Georgiadis, Docket No.: A-4018-08 (App. Div. June 21, 2010) demonstrates the ability of a chancery judge to manage a business divorce and fashion an equitable remedy based on the facts of the case, and the deference that the appellate courts give to those decisions.

The lawsuit arose between two brothers who owned equal shares in a diner in Mountainside. One of the brothers left the business to run another diner in Connecticut. When that diner closed, his brother refused to let him return to the business in Mountainside and an oppressed shareholder action followed. The defendant brother filed a counter claim and the case was tried in 2007.

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

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.

An Example