It’s a decision involving a law firm partnership that, if widely followed, will likely have a sweeping effect on the interpretation of the statutory requirement for unanimity in adopting critical agreements that govern partnerships and liited liability companies.
Attorney Andrew Zidel, an attorney who left prominent intellectual property boutique firm Lerner David in Westfield, failed in his attempt to use a minority veto to block the adoption of a law firm partnership agreement that treated retiring partners differently than withdrawing partners.
The trial court finessed the unanimity requirement found in the partnership statute, and was affirmed in an unreported decision of the appellate division.
Court Discounts Literal Language of Partnership Statute; Implies Consent to Adopt Partnership Agreement
The reason for Zidel’s failure to rely on the language of the statute was that the law firm had, for many years, operated without a formal partnership agreement. Therefore, the trial court found that the written formal agreement would be considered an amendment to the existing partnership agreement, and, under the partnership’s prior practices, it did not require a unanimous agreement.
Divorcing couples that own a business together must address business ownership issues as part of the matrimonial issues, in particular the distribution of assets.
An important issue when a couple divorces is how to address the family owned business in which one of the spouses was involved before the marriage. Courts may distribute the value of owner’s share to the non-owner spouse.
The divorcing couple may also have individual equity interests in a jointly owned business and must decide whether to buy out one of the spouses or continue on together as co-owners.
The divorcing couple that owns a business together has to manage the family and business relationships simultaneously. That typically involves terminating their relationship as well.
And if one of the parties owned the business before the marriage, such as a stake in a family business, it means dissecting the interests of the divorcing spouses in a way that may implicate the interests of still others.
Portrait of a confident young man and woman working together on a farm.
In a recent case before the Supreme Court in Montana, the issue was how to deal with a distribution of property when one of the sons of a ranching family was divorced from his wife after more than 30 years of marriage.
Business Divorce Issues Related to Divorcing Business Owners
The wife claimed an interest in the limited partnership that owned the ranch and argued that it should be valued for the purposes of the parties’ property settlement and not as a family business. The limited partnership vigorously disputed that she had any interest in the business.
Contact us for more information or to discuss your issue on business governance issues.
The case, In re Frost, relies on the liberal provisions of state law that provide that anything owned in whole or in part by the married individuals is distributable in a divorce. The trial court rejected the claim of ownership, but the award in some ways treated the rancher’s wife as if she had. Continue reading
The effective date of an LLC member’s expulsion may be a critical issue in business divorce litigation and may be tied to critical events or the litigation.
Courts will look at the facts and circumstances of the case before determining the effective date, but are often guided by the parties’ own intent.
A court may give the expulsion a retroactive date, often the date that litigation was commenced.
One of the issues that is often near the center of a dispute over the removal of a member from a limited liability company is when the expulsion should be effective. In other words, if the plaintiff succeeds in getting an order expelling a member, is it effective when the order is first entered or does it relate back to some other event or date?
Majority Owners of closely held businesses may face claims that they engaged in minority oppression of shareholders, limited liability company members or partners.
Defending the minority oppression claim requires examination of written agreements and consideration of the reasonable expectations of the owners when the business was formed.
Claims of minority oppression are asserted in any number of disputes between the majority owners of a business and one or more of the minority interest holders. The oppressed minority lawsuit is disruptive, expensive and can threaten the investments and value of the majority owners.
The failure of the parties to submit evidence on an issue during arbitration caused a failure to decide all of the issues of the dispute.
A Court may modify an arbitration award rather than vacate and permit partial enforcement while permitting litigation of claims were not included in an arbitration hearing.
Failure to clearly define the mechanics of an arbitration and to agree on the issues that the arbitrator is to decide can make an award unenforceable.
This court decision addresses a recurring issue when parties agree to resolve their dispute by arbitration: exactly what was it that we agreed to arbitrate? Unless the answer to that question is clear and unambiguous, trouble is likely to follow. Continue reading
A court may immecdiately grant the plaintiff a restraining order or preliminary injunction when there is a valid trade secret claim and the plaintiff may suffer irreparable harm without it.
Courts make the determination whether an injunction is necessary based on the evidence presented by the plaintiff at an initial application at the start of the case.
In a misappropriation of trade secrets lawsuit, one of the first actions taken by the court is to determine if an injunction will be available to protect the trade secret from use or disclosure pending a final resolution of the case.
Whether an injunction will be granted at the outset of the case pendente lite, or while the lawsuit is pending, is a critical must-win for both plaintiff and defendant. It will not only color the way the matter is handled, but in many cases reflects the ultimate outcome of the case.
An equitable accounting is a cause of action that requires those in control of the finances of a closely held business to account for their use of the money.
An accounting a two-stage process. First the controlling party must render an account of how it used the assets of the business. Then there is a proceeding for the minority to object to the accounting.
When a court finds that the party in control has misappropriate or misued the assets of the company, it can order repayment.
A minority member should demand an accounting before seeking the accounting in court and be prepared to support the request with plausible claims of misconduct.
For many minority owners of closely held businesses, the finances are sometimes a black box. There is a result, but where that result came from is unknown. The cause of action for an equitable accounting is a tool that gives the owners who don’t have day-to-day management roles a look inside the black box of the closely held company’s finances.
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The term black box comes from engineering and describes devices or systems that give a result from a set of inputs, but the process inside is a mystery. This lack of transparency makes it challenging to troubleshoot issues or make modifications to the black box without specialized knowledge or access to its internal components.
The same may be true of the finances of the closely held corporation, limited liability company, or partnership, particularly when there are questions about the majority’s behavior. Where, for example, there is a question about the misuse of an LLC’s assets, the minority may be able to sue and hire its own forensic accountants to reconstruct the workings of the black box. But if they can prevail in a cause of action for an equitable accounting, they shift the responsibility for the process to those in charge of the books.
There is a significant difference between putting the responsibility to explain the use of the assets of the LLC and pay back what was improperly taken and simply getting access to records. That has been the central point of a number of cases involving claims for equitable accounting. We examine some of those cases here under New York and New Jersey law, including a very recent decision from a federal court in the Southern District of New York applying state law.
There is no statutory right to receive a distribution of profits from a limited liability company before it dissolves and winds up its affairs. Distributions before then are discretionary.
Profit distributions are in the discretion of the majority members or commonly in the discretion of the managers of the limited liability company.
A minority member who is not receiving distributions may have a claim under the operating agreement or as an oppressed minority member if the majority refuses to make profit distributions.
Profit distributions are a frequent source of dispute among the members of a limited liability company. The fundamental question of who decides when distributions are made, how much is made, and how to deal with the tax issues related to distributions, profits and losses can all be the source of conflict.
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The short answer to the question of when a limited liability company must distribute profits is that ‘it depends.’ And many minority owners of LLC interests are frustrated to learn that they have less control over the process than they anticipated.
Limited Liability Companies Often Do Not Have Operating Agreements
Entrepreneurs choose limited liability companies as the form of a new business far more often than corporations or partnerships. They are cheap and easy to form and do not require the type of documentation and formalities that you generally see associated with other entities, corporations in particular. Continue reading
Statutes that protect the rights of the owners of trade secrets protect against ‘misappropriation’ of confidential information, which requires a defendant to take or use the trade secret without permission.
The inevitable disclosure doctrine can prevent an employee from working for another when the new job would inevitably require the use of the trade secrets of the former employ. Intent to misappropriate the information is not an element.
A party seeking to prevent disclosure of a trade secret under the inevitable disclosure doctrine will probably not be able to pursue the remedies available under the federal Defend Trade Secrets Act or the state Uniform Trade Secrets Act.
When a key executive with access to key data leaves an information-intensive position to start a competing business, does the fact that inevitably the former employee will make use of sensitive state a claim under federal law? Quite possibly not.
The federal Defend Trade Secrets Act (DTSA ) and the uniform state law on which it is modelled turns on the concept of misappropriation and without it, there may be no basis. Inevitable disclosure is a common-law doctrine and in itself may not create a right to sue under the these trade secret statutes.
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The inevitable disclosure doctrine is legal principle in trade secret law that enables a former employer to prevent a former employee from accepting a new position with a rival if the new position’s responsibilities will unavoidably cause the person to divulge the trade secrets of the former employer. The doctrine may apply even if fthe former employer lacks concrete evidence that the employee has actually taken trade secrets or threatened to do so.
The Difference Between the DTSA and the Inevitable Disclosure Doctrine
In a federal court action, Paro Inc., a Delaware corporation, unsuccessfully sought an emergency temporary restraining order against former employee Luke Kohan, a New York resident, and his newly founded company, FirmKey Solutions LLC, claiming Kohan was in breach of a restrictive covenant and had misappropriated trade secrets. Paro, an artificial intelligence-powered marketplace, provides various finance and accounting solutions to businesses through its AI-powered platform. Continue reading
Enterprise goodwill is the expectation that a business has in the continued patronage by its customers, regardless of the individuals involved. Personal goodwill is the expectation of continued patronage because of an individual’s continued participation in the business.
Personal goodwill is not an asset owned by a business, but it may be acquired through contractual arrangements including employment contracts and agreements not to compete with the business after employment.
As post-employment restrictive covenants become more difficult to enforce, the equity value of small, service-oriented businesses will be lowered.
Whether the closely held business is the owner of the goodwill that produces its revenue is a critical issue when valuing the entity.
Lawyers who are prohibited by the rules of professional ethics from any restriction on competition. A real estate management company where the principals each work their own book of business. A design-build firm in which a single principle generates the vast majority of the business. An outside sales organization in which the owners divide profits based on origination.
All of these examples raise the thorny issue of who owns the goodwill that is responsible for the future earnings capacity of the business. Does the reputation of the business belong to the business, or to the individuals? As one commentator put, does the goodwill of the business go home for dinner every night?
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The issue of who owns the goodwill — the enterprise or the individuals— is likely to become even more important as the general sentiment is turning away from enforcing agreement not to compete and various states and federal agencies are taking steps restrict the imposition of agreements that restrict competition after employment. Continue reading
