SushiThe Japanese word “omakase” translates as “I’ll Ieave it up to you” and is used by patrons of sushi restaurants to leave the selection to the chef rather than ordering à la carte.

The minority member of an LLC that operates a high-end Japanese restaurant in Brooklyn featuring omakase service, and who sued for judicial dissolution, recently learned a different meaning of omakase, as in, don’t leave it up to the court to protect you from being frozen out by the majority member when you don’t have a written operating agreement, much less a written operating agreement containing minority-interest safeguards.

The hard lesson learned by the petitioner in Matter of Norvell v Guchi’s Idea LLC, 2016 NY Slip Op 32307(U) [Sup Ct Kings County Nov. 18, 2016], has been taught before, starting most prominently with the First Department’s 2013 decision in Doyle v Icon, LLC and reinforced by that court two years later in Barone v Sowers, holding that minority member claims of oppressive majority conduct including systematic exclusion from the LLC’s operations and profits, in the absence of a showing that the LLC is financially unfeasible or not carrying on its business in conformity with its operating agreement, do not constitute grounds for judicial dissolution under LLC Law § 702. Continue Reading Another Frozen-Out Minority LLC Member’s Petition for Dissolution Bites the . . . Sushi?

tie-breaker[N.B. Younger readers of this post may be forgiven for not catching the title’s play on the refrain of a certain 1976 hit song by one of the oldest and most hirsute recording groups around. Click here if you’re still stumped.]

LLC deadlock’s been on my mind more than usual of late, after interviewing LLC maven John Cunningham for a podcast and last week co-presenting with John a webinar on the subject for the ABA Young Lawyer’s Division.

During the webinar’s Q&A session, a listener asked about potential liability of an appointed deadlock tie-breaker. I mentioned that I had not seen any cases involving the issue. Lo and behold, several days later up popped a decision by Queens County Commercial Division Justice Martin E. Ritholtz presenting exactly that issue, in which the court denied the tie-breaker’s motion for summary dismissal of a claim brought against her for breach of fiduciary duty by one of two 50/50 members of a family-owned LLC. Fakiris v Gusmar Enterprises LLC, 2016 NY Slip Op 51665(U) [Sup Ct Queens County Nov. 21, 2016]. Continue Reading She’s a Tie-Breaker, She’s a Risk Taker

freeze-outUnless otherwise provided in the operating agreement, majority members of LLCs formed under New York law — and under the LLC laws in most other states — effectively can expel a minority member by implementing a merger with another company owned by the majority members. The so-called freeze-out merger (a/k/a cash-out merger) compels the minority member to accept cash for his or her membership interest in lieu of equity in the surviving entity. The statutes generally protect the frozen-out member to the extent of providing the right to dissent from the merger and to demand a fair-value judicial appraisal.

As best as I can tell, until last month there were exactly four reported court decisions in New York involving challenges to LLC freeze-out mergers, each of which I’ve covered on this blog. In three of them — the Stulman case, the Alf Naman case, and the Slayton case — trial judges rejected various procedural and substantive objections to the mergers by the minority members. In the fourth case (SBE Wall), the trial judge denied a motion to dismiss an action seeking to invalidate a freeze-out merger, but the merger was never enjoined or rescinded and the case eventually settled.

Along comes a fifth case decided last month by Manhattan Commercial Division Justice Charles E. Ramos — who also decided the Stulman case — in which he denied the frozen-out minority members’ preliminary injunction motion seeking to enjoin the merger’s implementation after finding no basis for the minority members’ claim that the merger breached the operating agreement. Huang v Northern Star Management LLC, 2016 NY Slip Op 32194(U) [Sup Ct NY County Oct. 24, 2016]. Continue Reading Court Finds No Breach of Operating Agreement, No Basis to Enjoin LLC Freeze-Out Merger

CondoThis post concerns an atypical form of business organization — the condominium — in the context of disputes over access to books and records. Access to books and records is a subject that has garnered increased judicial attention in recent years as more New York litigants and their counsel discover the utility of commencing summary proceedings to enforce statutory and common-law inspection rights of shareholders in traditional corporations and of members of LLCs.

What I find most interesting is the seemingly expansive approach the courts have taken in upholding inspection rights regardless of business form based on common law rather than statute, as reflected in two cases decided last month involving condominiums.

Unincorporated Condo vs. Incorporated Co-op

The most recent government census data tallies over 300,000 co-op apartment units in New York City and over 100,000 condominium units. The approximate 3:1 ratio is destined to shrink, however, as the number of new and converted condominium buildings coming onto the market in recent years has far exceeded new and converted co-op buildings, among other reasons, due to the strong preference for condominium ownership by foreign buyers and less onerous restrictions on re-sale. Continue Reading Courts Expand Books and Records Access for Condo Owners

Hirsch 2015 bio picture“What’s a marital business divorce?” you ask. Just what it sounds like: a business divorce wrapped inside the marital divorce of spouses who hold joint ownership interests in a closely held business entity.

Fighting over kids, money, the house, and the business? Sounds messier and possibly more destructive of business value than an ordinary, non-marital business divorce. But it needn’t be, says attorney Ladd Hirsch in a recent interview for the Business Divorce Roundtable podcast, a link to which appears at the bottom of this post.

Ladd is a partner at the Dallas office of Diamond McCarthy LLP where he focuses his practice on complex business litigation including business divorce, which is how our paths crossed some years ago. Ladd has carved out a niche within a niche, working with family law practitioners in marital divorce cases to optimize value for the soon-to-be-exes who either legally co-own a business or, in community property states, are deemed to co-own a business whose shares are held by one spouse but nonetheless included in the marital estate and subject to division or sale by the family court. Continue Reading Optimizing Value in a Marital Business Divorce

4CThe case I’m about to describe involves an unusual clash of two fundamental principles of corporate governance for closely held corporations:

Principle No. 1:  Stock transfer restrictions may be used to preserve continuity of ownership and management within a family or other control group, without violating the common law rule against unreasonable restraints on alienation of property.

Principle No. 2:  Controllers owe a fiduciary duty to treat all shareholders fairly and evenly when authorizing and issuing new shares, and must have a bona fide business purpose for any departure from precisely uniform treatment.

The clash came to a head in a decision this month by Brooklyn Commercial Division Justice Lawrence Knipel involving 4C Foods, a well-known, fourth generation, family-owned business that manufactures and markets under the 4C® brand grated Italian cheeses, bread crumbs, iced tea, and drink mixes. The suit pits Nathan Celauro, a non-managing, minority owner holding directly or beneficially about 22% of 4C’s voting and non-voting shares, against his cousin John Celauro, the managing majority shareholder who controls or has aligned with him the remaining 78%. (Disclosure: Farrell Fritz represents the minority shareholder in the case.)

The case and Justice Knipel’s decision in Celauro v 4C Foods Corp., 2016 NY Slip Op 31917(U) [Sup Ct Kings County Oct. 12, 2016], is the latest in a series of litigations and court rulings between two factions of the Celauro family beginning around 2005, following the death of Nathan’s father the year before. About 20% of the father’s voting and non-voting shares passed to his wife either directly or to trusts under her control, with the remaining 2% going directly to Nathan. Continue Reading Too Clever By Half? Court Permits Suit Challenging Share Increase Tied to Transfer Restrictions

door“Marriage is tough, business relationships may be tougher.”

Wise words from someone who should know — Nassau County Supreme Court Justice Timothy S. Driscoll, who presided over matrimonial cases before joining the Commercial Division where he has adjudicated some of the thorniest business divorce cases such as the AriZona Iced Tea donnybrook.

The quoted words appear in an oral argument transcript in a case called Cardino v Feldman pending before Justice Driscoll involving a fight between 50-50 owners of a construction company operated by the defendant Feldman. It’s a factually and procedurally complex matter, the details of which I’ll spare readers in favor of focusing on the main takeaway from Justice Driscoll’s recent decision in the case, namely, that once a business owner asserts a claim for judicial dissolution under Section 1104-a of the Business Corporation Law — even if not pleaded in strict accordance with the statute — it’s very difficult to reverse course after the other shareholder timely elects to purchase the petitioner’s shares for fair value under BCL Section 1118. Continue Reading Once Opened, The Door to Judicial Dissolution and Buy-Out Is Hard to Close

subsidiary

Two decisions do not a trend make, but I can’t shake the feeling that the Appellate Division, First Department, is telling trial judges to take a broader view of shareholder statutory and common-law rights to inspect corporation books and records.

The first decision, two years ago, was the McGraw-Hill case which I reported on here. In that case, the First Department reversed a lower court’s ruling denying a shareholder’s inspection petition under Section 624 of the Business Corporation Law and common law. The petitioner sought records concerning the McGraw-Hill Board of Directors’ oversight of purported wrongdoing by its wholly-owned subsidiary, the Standard & Poor’s credit rating agency. The appellate ruling focused on the proper-purpose standard, holding that the petitioner’s stated purpose to investigate alleged misconduct by McGraw-Hill’s management and obtaining information that may aid in litigation are proper purposes “even if the inspection ultimately establishes that the board had engaged in no wrongdoing.” Essentially, the ruling eliminated the Catch-22 of requiring outside shareholders to tender proof of management wrongdoing to gain access to company records enabling them — or not — to show wrongdoing.

The petition in McGraw-Hill sought records of the parent company in which the petitioners held shares, not the subsidiary. Last week, in Matter of Pokoik v 575 Realties, Inc., 2016 NY Slip Op 06648 [1st Dept Oct. 11, 2016], in a decision of apparent first impression, the First Department again reversed a lower court ruling denying inspection rights and held that the petitioner was entitled under the common law to inspect records of the corporation’s wholly-owned subsidiary. Continue Reading Ruling Upholds Shareholder’s Right to Inspect Subsidiary’s Books and Records

SurchargeHidden in plain view in Section 1104-a (d) of the New York Business Corporation Law, which authorizes an oppressed minority shareholder to petition for judicial dissolution, is a provision empowering the court to adjust stock valuations and to “surcharge” those in control of the corporation for “willful or reckless dissipation or transfer” of corporate assets “without just or adequate compensation therefor.”

A second, fleeting reference to surcharge appears in Section 1118 (b) of the buy-out statute, empowering the court in its determination of the stock’s fair value to give effect to any surcharge “found to be appropriate” under Section 1104-a.

The ordinary definition of surcharge, at least in the context of settling accounts, is to show an omission for which credit ought to have been given. But what does it mean in its statutory setting, and how has it been applied by the courts? Continue Reading The Elusive Surcharge in Dissolution Proceedings

DouglasMollThe combination of majority rule and lack of exit rights leaves minority members of LLCs vulnerable to freeze-out and other oppressive conduct by the majority, yet unlike in the large majority of states which provide statutory dissolution and buy-out remedies to oppressed minority shareholders in close corporations, most states (including New York) do not offer similar protection and remedies for minority LLC members.

Perhaps no one has studied and written about the problem of minority oppression in LLCs and other closely held business entities more and with greater insight than Professor Douglas K. Moll, who teaches at the University of Houston Law Center. Back in 2009 I posted here an online interview of Doug on the subject of shareholder oppression in closely held corporations, in which he also commented on minority oppression in LLCs.

Since then the LLC’s growing hegemony has continued full throttle, with that form of business entity in most if not all states far surpassing the traditional corporation as the preferred form for newly formed firms, making all the more pressing the problem of trapped-in minority LLC members. A few months ago, Doug posted at the Business Law Prof Blog a short piece called Minority Oppression in the LLC in which he echoed many of the themes more fully developed in his 2005 article in the Wake Forest Law Review called Minority Oppression & The Limited Liability Company: Learning (or Not) from Close Corporation History (available here on SSRN). Continue Reading Minority Oppression in LLCs: Interview With Professor Douglas Moll