The Business Divorce Law Report

January 19, 2011

Written Agreement Defeats Claimed Oral Partnership

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.

August 13, 2010

An Early Cost-Benefit Analysis in Business Breakups Will Keep Dispute in Perspective

by Jay R. McDaniel, Esq.

When one or more of the owners of a business think it is time to get divorced, the decision in invariably accompanied by hard feelings. As most clients ultimately learn, the courts are incapable of resolving emotional issues. But they deal pretty well with money – which is why it makes sense to find out how much is at stake in the fight that is likely to ensue. Save the emotions for therapy; money is what the case is about.

The Pitfalls of Misinformation

My experience is that most clients are pretty thoroughly misinformed about the “fair value” of their business as well as their individual interests. Not infrequently, clients will presume that the high price-to-earnings ratio that one may find in the market of publicly traded stocks will apply equally to their closely held business. Not so. Others will fail to recognize the effect that the unusually high salaries paid to the owners will likely have in inflating the value of the business.

August 11, 2010

Lawyer Confidence May Be Poor Indicator of Results

by Jay R. McDaniel, Esq.

Lawyers must evaluate cases and try to predict the most likely outcome. To be successful, to attract and win clients, they must do so with confidence. A recent study of the accuracy of those predictions, however, reveals that lawyers are often overconfident and overly optimistic in their assessments of a client’s case.

A recent study published in Psychology, Public Policy and Law revealed that the more confidence a lawyer expressed in his or her ability to achieve a possible result, the more likely he or she will fail to achieve those results. You can read the full article here (Insightful or Wishful – Lawyers Ability to Predict Case Outcomes.pdf).

The lesson appears to be that clients might want to maintain some skepticism about the results that the supremely confident lawyer predicts, even as they recognize that the statistics don’t tell the whole story. The lawyer who doesn’t believe in a case, or who lacks confidence will have a difficult time being the zealous advocate that is the touchstone of an effective litigator. We may not meet our lofty goals as often, but that is not to say that we don’t do better for our clients when we are confident in the case. In our next post, we’ll take a look at predicting the outcome in a business dispute case.

June 11, 2010

Limited Liability Company Subject to Claims By Former Managers Holding Membership Interests

by Jay R. McDaniel, Esq.

I often find myself counseling caution to business owners that want to use equity to reward or attract key employees. The reason, quite simply, is that if the relationship sours, the employee not only has to be fired but you then have to deal — at best — with a disgruntled former employee as owner or, more likely, he or she likely will have to be bought out.

It’s Not Easy to Fire the Owner-Employee

To get a sense of how difficult these circumstances can be, let’s look at Ross Holding and Management Co. v. Advance Realty Group (Ross Holding v. Advance Realty (Del).pdf), a case recently decided in Delaware construing New Jersey law. Advance Realty Group managed real estate properties on the East Coast and awarded membership interests to key managers. The managers received “Class A” general ownership units and “Class B” units reserved for management. Reading between the lines of the opinion, it seems that a new investor came into the business and the old management team got their walking papers.

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

The Pitfalls of Misinformation

It’s Not Easy to Fire the Owner-Employee