The Business Divorce Law Report

March 8, 2024

Closely Held Businesses Can Use Agreements to Protect Value

Agreements that limit former employees from soliciting customers or disclosing confidential information are critical to protecting the value of a closely held business.
Restrictive covenants and non-compete agreements are difficult to enforce and must be carefully drafted to assure that they are enforceable.
Closely held businesses should rely more heavily on contracts to prohibit solicitation and disclosures.

Restrictive covenants such as non-compete and non-solicitation agreements are vital to the stability of a closely-held business. Let’s examine how these agreements can be used to protect the value in the most important drivers of value, the intangible assets in your businesses.

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Female entrepreneur in casualwear sitting at wooden table and signing contract after successful completion of negotiations with business partner, close-up shot

Intangible assets are things like intellectual property, customer relationships, and proprietary information. Businesses can prevent employees or rivals from misappropriating these assets by implementing effective restrictive covenants.

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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.

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Securing these intangible assets is essential in the business world for preserving a competitive edge, achieving long-term success, and increasing a company’s worth.

Are Restrictive covenants Becoming Unenforceable?

The restrictive covenant, however, is under attack from a number of sources. They may be difficult to enforce and in some states unlawful. Continue reading

March 5, 2024

Intangible Capital Holds the Key to Value in Closely Held Businesses

by Jay R. McDaniel, Esq.

Intangible Capital are the elements that define a company’s real earnings capacity and its value.
The Exit Planning Institute recognizes four intangile capitals in a business: human capital, structural capital, customer capital and social capital.
Intangible capital is closely tied to the intangible assets of a business, which commonly represents 80 percent of the value of a business.

We talk a great deal about how the most important assets of your business are those that can’t be seen or touched. I want to discuss something that exIt planners refer to as intangible capital. Intangible capital groups your intangibles into four classes that a business owner can identify, strengthen, and, in the process, grow their companies and make it more valuable.

Understanding Intangible Assets and Their Effect on Value

The most important and valuable assets of almost every business are the intangibles. They’re something that you can’t find on a balance sheet, but something that you need to understand, protect, and cultivate.

And they are critical to the business owner who is seeking to maximize the value of the business and who is planning an exit strategy.

Tangible assets are things like machinery, real estate, inventory, intangible assets, or things like intellectual property, patents, trademarks, copyright, brand recognition, customer relationships, goodwill, unique processes, and other kinds of proprietary technology. Continue reading

March 4, 2024

Court Relies on Implied Contract Theory To Hold Partner to Agreement

by Jay R. McDaniel, Esq.

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. Lerner-David

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.

March 3, 2024

Human Divorce, Meet Business Divorce

by Jay R. McDaniel, Esq.

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.

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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

November 8, 2023

Retroactive Expulsion of LLC Member

by Jay R. McDaniel, Esq.

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?

October 31, 2023

Defending the Oppressed Minority Lawsuit

by Jay R. McDaniel, Esq.

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.

October 24, 2023

Arbitration Fails to Resolve Business Divorce Dispute

by Jay R. McDaniel, Esq.

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

September 18, 2023

When Courts Issue Injunctions in Trade Secret Cases

by Jay R. McDaniel, Esq.

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.

September 15, 2023

Equitable Accounting Opens the Black Box of Business Finances

by Jay R. McDaniel, Esq.

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.

More Questions? Learn More. You can call me at 973-602-3915 or use our Contact form to reach me by email.

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. Equitable Accounting Provides Transparency in Finances for LLC, closely held corporations

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.

August 15, 2023

When Are Limited Liability Companies Required to Distribute Profits?

by Jay R. McDaniel, Esq.

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.

More Questions? Learn More. You can call me at 973-602-3915 or use our Contact form to reach me by email.

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. New Jersey minority oppressed LLC member attorney

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

Agreements that limit former employees from soliciting customers or disclosing confidential information are critical to protecting the value of a closely held business.

Restrictive covenants and non-compete agreements are difficult to enforce and must be carefully drafted to assure that they are enforceable.

Closely held businesses should rely more heavily on contracts to prohibit solicitation and disclosures.

Are Restrictive covenants Becoming Unenforceable?

Intangible Capital are the elements that define a company’s real earnings capacity and its value.

The Exit Planning Institute recognizes four intangile capitals in a business: human capital, structural capital, customer capital and social capital.

Intangible capital is closely tied to the intangible assets of a business, which commonly represents 80 percent of the value of a business.

Understanding Intangible Assets and Their Effect on Value

Court Discounts Literal Language of Partnership Statute; Implies Consent to Adopt Partnership 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.

Business Divorce Issues Related to Divorcing Business Owners

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.

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.

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.

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.

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.

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.

Limited Liability Companies Often Do Not Have Operating Agreements