dissolution

October 1, 2022

Anatomy of a Business Divorce Lawsuit

- A business divorce is the process by which the owners of a business separate their business interests. The process involves negotiation and may also require litigation.
- These cases can be divided into four phases: the emergent phase, the examination phase, the valuation phase and the resolution phase.
- Most owner lawsuits end in a negotiated transaction because it gives the parties more flexibility over the manner in which the case is resolved.

We’re going to look at business divorce in terms of the four phases that the typical case goes through from its start to the time that is resolved, either through settlement or trial.We should start with the most basic definition of what is a business divorce. I use the term to describe the process by which people who were in a business together disentangle themselves. Continue reading

February 13, 2017

Unanimous Consent of LLC Members Not Required to Continue Company

by Jay R. McDaniel, Esq.

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.

Limited Liability has Limited Term of Existence

September 22, 2016

Lockout of a Minority Member from the Closely Held Business

by Jay R. McDaniel, Esq.

Oh, the fine art of the lockout. For a business divorce litigator, a lockout or expulsion of a minority member is a relatively common occurrence. Managing the lockout, from either the majority or the minority’s perspective, is a key issue that will set the tone of the litigation.

WHY LOCKOUTS MATTER

The minority who is locked out of a business has a very clear disadvantage. In a closely held business, whether it is a limited liability company, a corporation or a partnership, most principals participate in the day-to-day management of the business. A lockout separates the minority from management.

August 19, 2011

Book Value is Not Fair Value in Partnership Buyout

by Jay R. McDaniel, Esq.

Socialite’s Family Partnership Interest

Book value can have a few different meanings. The best definition is simply the value of assets and liabilities that a company carries on its books. Is it different than the “fair value” standard applied in statutory buyouts? Yes– a lot different.

There are many partnership agreements and corporate buy-sell agreements still in effect with a book value buyout provision. They tend to be older entities, often involving family businesses, and I cringe whenever I look at the agreement and see the term applied to the company’s value.

Book Value Used to Buy Socialite’s Interest

A recent decision involving the estate of socialite Claudia Cohen demonstrates why. Estate of Claudia Cohen v. Booth Computers, et al., Docket No. A-0319-09T2. Estate of Cohen App Div.pdf. (Thanks also to Peter Mahler’s NY Business Divorce blog for finding the trial decision. Cohen Chancery Div.pdf.) In that decision, the Cohen’s estate argued that the book value of a successful business was just less than 2 percent of its fair value – $ 178,000 as opposed to $11.526 million – and sought to reform the partnership agreement. The effort failed and the Appellate Division affirmed the trial court’s enforcement of the agreement. The disparity between book value and fair value was not, in the court’s opinion, reason to alter an otherwise unambiguous document.

The result was a windfall for the last surviving partner, Claudia’s bother James, and the same result is likely to occur in most agreements that set the value of the business at book value rather than fair value.

The Cohen case involved a partnership formed by the late Robert Cohen, an entrepreneur who amassed a considerable fortune through various entities including the Hudson News Group. He had three children – Claudia, Michael and James. Claudia, well known in Manhattan and Hamptons social circles, was also an editor of Page 6 of the New York Post and the ex-wife of entrepreneur Ronald Perelman.

The estate, with Perelman as executor, brought suit against Booth Computers and Claudia’s brother, James, after Claudia’s interest in a family partnership was valued at a fraction of the fair value of the partnership’s holdings.

April 12, 2011

LLC Does Not Distribute Clients on Dissolution

by Jay R. McDaniel, Esq.

When a limited liability company dissolves, it pays its creditors and distributes the remaining assets in the winding-down process. Many professional practices are organized as LLCs, and their principal assets are the clients they serve. That does not mean, however, that the professional limited liability company in dissolution has to divide up the clients.

This is an important holding for lawyers, accountants, doctors and other professionals that are practicing in New Jersey as a limited liability company. According to a New Jersey appeals court, the clients that the professionals, such as an accountant, bring to the LLC represent personal goodwill that belongs to the individual professional, rather than goodwill belonging to the enterprise. Thus, clients of professional limited liability companies are not considered assets of the LLC and on dissolution are not subject to distribution.

Accountants Seek Dissolution of Firm

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.

A business divorce is the process by which the owners of a business separate their business interests. The process involves negotiation and may also require litigation.

These cases can be divided into four phases: the emergent phase, the examination phase, the valuation phase and the resolution phase.

Most owner lawsuits end in a negotiated transaction because it gives the parties more flexibility over the manner in which the case is resolved.

Limited Liability has Limited Term of Existence

Socialite’s Family Partnership Interest

Book Value Used to Buy Socialite’s Interest

Accountants Seek Dissolution of Firm

The Pitfalls of Misinformation