Following Delaware Precedent, New York Appeals Court Rules that Indemnification of LLC Managers for Successful Defense in First Action Need Not Await Resolution of Second, Related Litigation
A little over a year ago, in the Ficus Investments case, the Manhattan-based Appellate Division, First Department, looked to Delaware case law for guidance in holding that an LLC manager named as defendant in an action brought by a member alleging conversion and fiduciary breach was entitled to advancement of his legal defense costs notwithstanding preliminary injunction rulings against him. (Read my prior post on Ficus here.)
Last month, in 546-552 West 146th Street LLC v. Arfa, 2010 NY Slip Op 01416 (1st Dept Feb. 18, 2010), the First Department again looked to Delaware precedent in another ruling of apparent first impression involving indemnification rights in the LLC internal warfare context. The issue this time: Is the defendant LLC manager entitled to indemnification for winning the non-merits dismissal of Action No. 1 prior to the adjudication on the merits of Action No. 2 asserting the same or similar claims? The Delaware Chancery Court answered "yes", and now so too does the First Department.
The Arfa litigation saga begins in 2006, when several real estate holding LLCs sued their former managers for failing to make certain disclosures to the LLC members when they were being solicited to invest in the LLCs. In February 2007, Manhattan Commercial Division Justice Charles E. Ramos dismissed the case on the ground that the LLCs lacked standing to pursue the claims, which properly belonged to their members. In September 2008, the First Department rejected the LLCs' appeal in a decision reported at 54 AD3d 543 (1st Dept 2008).
Meanwhile, even before the appeal was decided, the law firm that initiated the first suit on behalf of the LLCs started a second lawsuit on behalf of the members asserting the same claims against the managers. The second case remains pending.
Continue Reading..."Unusual Actions Breed Unusual Outcomes": Delaware Court Dismisses Non-Voting Trust's Action to Dissolve LLC Born of Estate Plan
A bench ruling and supplemental letter opinion last month in an unusual case called The Homer C. Gutchess 1998 Irrevocable Trust v. Gutchess Companies, LLC, C.A. No. 4916-VCN, adds another chapter to the growing book of Delaware Court of Chancery decisions addressing judicial dissolution of limited liability companies under §18-802 of the Delaware LLC Act. In Gutchess's dismissal of a dissolution petition, we see once again the Delaware court's elevation of the private ordering of LLC affairs, as expressed in the operating agreement, over challenges to the LLC's ongoing existence based on "equitable" factors. The transcript of counsel's argument and the bench ruling on February 16, 2010, can be read here. The supplemental letter opinion dated February 22, 2010, can be read here.
What makes Gutchess particularly interesting is the subject LLC's origin as an estate planning device and its design featuring an almost complete division of the economic interest, held by an inter vivos trust, and the voting control and management exercised originally by the grantor and subsequently by his wife and son.
The story begins in 1904, when George Gutchess founded a small lumber mill called Gutchess Lumber in upstate New York. His grandson and successor, Homer C. Gutchess, greatly expanded the company's operations, turning it into a leading supplier of hardwood lumber in the Northeast U.S. In 2002, around the same time the company transitioned to employee ownership, Homer and his estate planning advisors formed Gutchess Companies, LLC to hold Homer's shares in the operating company. The LLC's operating agreement reflects an almost complete split of the voting interest from the equity interest, with Homer retaining 100% of the voting interest but only 1% of the equity, his wife, Martha, holding another 1% equity, and the rest of the equity (98%) being held by The Homer C. Gutchess 1998 Irrevocable Trust. Later, on the advice of counsel, Homer transferred the voting interest to Martha. Homer died in 2006, after which Martha designated their son, Gary, as the LLC's sole manager.
Continue Reading...The Perils of For-Cause Expulsion Provisions in LLC Agreements
A number of valuable lessons can be learned from a recent decision by Manhattan Commercial Division Justice Melvin L. Schweitzer (pictured) in Jain v. Rasteh, Decision and Order, Index No. 109920-09 (Sup Ct NY County Feb. 1, 2010), where the court summarily dismissed a complaint by a minority member of a limited liability company who was expelled from the LLC for breach of its operating agreement.
The last time I wrote on the subject (read here) I noted that, unlike some other states, New York's LLC Law has no express provision authorizing or prohibiting member expulsion, although LLCL Section 701(b) mentions member expulsion in the context of various events (death, retirement, bankruptcy, etc.) not requiring the LLC's dissolution. Jain involved an LLC formed under Delaware's LLC Act, which, unlike New York's law, expressly authorizes the LLC agreement to provide for the elimination or forfeiture of a member's interest for failure to comply with the LLC agreement, or under any other circumstances specified in the LLC agreement (see Delaware LLC Act Section 18-306 and Section 18-502(c)).
The subject of Jain is a New York based, two-member company formed in Delaware in 2008 to provide investment management and advisory services for a hedge fund. The defendant Majority Member contributed most of the firm's capital and held an 83% profit interest. The plaintiff Minority Member held the balance. Section 5 of the LLC agreement designated the two as co-managers, however it also gave the Majority Member the final say in case of disagreement on any issue with specified exceptions such as dissolution and admission of new members.
Section 12 of the LLC agreement, entitled "Withdrawal of a Managing Member," included a subsection (a)(ii) governing involuntary withdrawal by the Minority member, authorizing the Majority Member to "require" him to withdraw at any time for "Cause" as defined. The definition included conviction for felony or violation of securities laws, fraud, or "a material breach of this Agreement." Section 13 of the LLC agreement entitled the Minority Member to be paid specified percentages of the firm's net profit over the three years following any such involuntary withdrawal, depending on the number of years of service. For termination after less than two years -- which is what happened -- the Minority Member's share of net profit goes from 4.25% in the first year down to about 1.4% in the third year. Under Section 17 of the LLC agreement, following his termination for any reason the Minority Member is prohibited for six months from competing with the company or soliciting any of its clients or employees.
Continue Reading...Interview with Delaware LLC Experts and Practice Manual Co-Authors John Cunningham and Vernon Proctor: Part II
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Last week's post presented an interview with John Cunningham who, along with co-author Vernon Proctor, recently published the pictured practice manual called Drafting Delaware LLC Agreements. John, whose practice focuses on entity formation, addressed some important issues involving Delaware LLCs from the perspective of the drafter of the LLC agreement. In this Part II of the interview, we get Vern's perspective on Delaware LLCs as a seasoned litigator. As John explained last week, "Vern is the guy who makes sure that the book’s analysis of Delaware law is correct. Vern has an amazing knowledge of Delaware statutory and common law."
It's no surprise that John teamed up with Vern as his Delaware law expert. Vern is a founding partner of Proctor Heyman LLP in Wilmington, Delaware, where he has a diverse corporate litigation and counseling practice relating to Delaware business entities, primarily in the Delaware Court of Chancery. Vernon has lectured widely on subjects of Delaware corporate and limited partnership law, and he has served on the editorial boards of leading Delaware law publications. For ten years, he was a member of the Corporation Law Council of the Delaware State Bar Association, a group of attorneys that considers and recommends proposed changes to the Delaware General Corporation Law. He is currently a member of the Alternate Entities Committee of the Delaware State Bar Association, which serves the same function with respect to Delaware statutes governing general partnerships, limited partnerships, and limited liability companies.
In the following interview, Vern answers questions that I suspect are on the minds of many Delaware and non-Delaware lawyers, particularly litigators, whose practices deal with the evolving LLC form.
Mahler: There's a vast body of Delaware case law that lawyers should be aware of in forming Delaware LLCs. If you had to mention just the three or four most important cases, which would they be?
Proctor: As we say in the book, the most important (and, until recently, the only) Delaware Supreme Court opinion construing the Delaware Limited Liability Company Act is Elf Atochem N.A. v. Jaffari, 727 A.2d 286 (Del. 1999). There, the Court provided a comprehensive overview of the structure of the statute, highlighting freedom-of-contract principles and the manner of ascertaining mandatory, default and permissive provisions of the Act. Last month, the Supreme Court decided Olson v. Halvorsen, 2009 WL 4846616 (Del. Dec. 15, 2009), in which it affirmed a Chancery Court holding that the statute of frauds applies to Delaware LLC agreements, notwithstanding the Act’s express allowance of oral and implied LLC agreements. One of the most significant recent trial court decisions in the LLC area is Bay Center Apartments Owner, LLC v. Emery Bay PKI, LLC, 2009 WL 1124451 (Del. Ch. Apr. 20, 2009), where the Court of Chancery examined the efficacy of certain contractual attempts to restrict or eliminate common law fiduciary duties and applied the USACafes doctrine (directors of corporate general partners may owe fiduciary duties to the limited partners of the limited partnership, not just to the corporate general partner and its owners) in the LLC context. Finally, in R&R Capital, LLC v. Buck & Doe Run Valley farms, LLC, CA # 3803-CC (Del. Ch. Aug. 19, 2008), the Court of Chancery held as a matter of first impression that an LLC member could contractually waive its statutory right to seek judicial dissolution of a Delaware LLC, despite the absence from the statute of the phrase “unless otherwise provided in the LLC agreement.” As always in Delaware, check the unreported decisions!
Continue Reading...Interview with Delaware LLC Experts and Practice Manual Co-Authors John Cunningham and Vernon Proctor: Part I
In almost all states, the limited liability company in recent years has become the business organization form of choice for closely held entities. By far the most popular LLC Act for use in forming sophisticated LLCs is the Delaware Act. There are presently something like 7 million U.S. LLCs of which approximately 600,000 are Delaware LLCs.
As a New York practitioner who handles all types of messy disputes between business co-owners, I know first hand the outsized claim of Delaware law on jurisdictional choice of entity as well as the powerful influence of Delaware decisional law even in disputes involving non-Delaware entities. I also know -- because it's written right into the Delaware LLC Act -- that freedom of contract is the cornerstone of Delaware LLC jurisprudence, and therefore nothing contributes more to the long-term health and welfare of a Delaware LLC -- or any LLC, for that matter -- than having a carefully planned, comprehensive, forward-looking, well-drafted operating agreement.
In 2009, Wolters Kluwer Law & Business published what quickly has become the preeminent formbook and practice manual on forming Delaware LLCs entitled Drafting Delaware LLC Agreements. The co-authors are John M. Cunningham and Vernon R. Proctor. I am very pleased to present this first of a two-part interview of the authors of this extremely well-written and user-friendly manual, which also includes a CD containing over two dozen sample Delaware operating agreements.
In this first part of the interview I talk with John Cunningham (pictured left), a member of the New Hampshire and Massachusetts bars whose practice focuses on forming LLCs for business start-ups and on restructuring existing businesses. Among his many achievements John was a principal drafter of the New Hampshire LLC Act. He is not only the co-author of Drafting Delaware LLC Agreements but also is the sole author of Drafting Limited Liability Company Operating Agreements, the leading U.S. general (i.e., non-state specific) LLC formbook and practice manual. I hope you find the interview, which begins after the jump, as interesting and useful as I did.
Continue Reading...Two-Member LLC Operating Agreement Contains Recipe for Dissension and Litigation
Last month, in Lola Cars International, Ltd. v. Krohn Racing, LLC, No. 4479-VCN (Del. Ch. Nov. 12, 2009), Vice Chancellor John W. Noble of the Delaware Court of Chancery issued a 31-page letter opinion addressing a number of important issues, including the adequacy of a deadlock dissolution claim, in a dispute involving a two-member Delaware LLC that built and sold Daytona-class Lola race cars (pictured). The case is noteworthy in the business divorce arena for two reasons, one spot-lighted by the decision and the other further off-stage.
The plaintiff, Lola Cars International, Ltd. ("LCI"), as 51% member teamed with defendant Krohn Racing, LLC ("Krohn"), as 49% member, to form Proto-Auto, LLC ("Proto") to manufacture and sell Grand Am Series professional race cars. Despite LCI's majority interest, under Proto's operating agreement the two members were equally represented on its governing board. As one of Krohn's primary obligations under the Operating Agreement, it agreed to provide the services of its manager, Jeff Hazell, as Proto's chief executive officer. LCI and Krohn had a falling out within the first two years of their venture, prompting LCI to sue for dissolution.
Center stage in Lola is Vice Chancellor Noble's analysis of the standard for judicial dissolution of LLCs under Section 18-802 of the Delaware LLC Act, which substantially resembles Section 702 of New York's LLC Law in requiring a showing that it is "not reasonably practicable to carry on the business in conformity with" the LLC operating agreement. Lola makes no new law. Rather, it builds on Chancellor Chandler's analysis in Fisk Ventures, LLC v. Segal, 2009 WL 73957 (Del Ch. Jan. 13, 2009) (read my prior post on Fisk with a link to that decision here), summarized as follows in Lola:
Continue Reading...Delaware Supreme Court Upholds Application of Statute of Frauds to Oral LLC Operating Agreements
Around a year ago I wrote about Delaware Chancery Court's ruling in Olson v. Halvorsen, in which it held that the statute of frauds applies to oral LLC operating agreements. I pointed out that Delaware's LLC law expressly permits oral operating agreements, whereas New York's LLC law defines the operating agreement as a written agreement. To my knowledge, no New York court has yet grappled with the issue.
The Olson ruling was appealed to the Delaware Supreme Court, which yesterday affirmed Chancery Court's ruling (read decision here). In a posting today on his Ideoblog, Professor Ribstein quotes at length from the decision and offers his always-incisive analysis, including his take on how the Olson ruling might play out in a jurisdiction like New York that requires written operating agreements.
It's an important issue for practicing attorneys who help form and give counsel to LLCs, so if you fall into that category -- or even if you don't -- I recommend you read the Professor's post.
Delaware Chancery Court Rulings Interpret Member Rights to Inspect LLC's Books and Records
Last year I wrote about the uncertainty surrounding the rights of members of New York LLCs to gain access to company books and records primarily due to the paucity of court decisions construing the inspection statute, LLC Law Section 1102 (read here). At the time I knew of only two, significant New York cases on the subject, Matter of Hay and Matter of O'Neill, which took markedly different approaches to the problem.
It's been over a year since, and those apparently remain the only two cases of significance. However, in the last few months there have been several, interesting decisions by the Delaware Chancery Court resolving disputes over access to LLC books and records. (HT: Delaware Corporate and Commercial Litigation Blog) The decisions address important issues concerning standing to seek inspection; the meaning of the phrase "books and records" as commonly used in inspection provisions in operating agreements; whether the right of access includes the right to photocopy records; and, perhaps most importantly, the degree to which a court will scrutinize the "proper purpose" basis for the member's inspection demand. Given the similarities between the Delaware and New York statutes, these decisions could be persuasive in resolving books and records actions in the New York courts. Here's a summary:
1. Court may consider evidence outside the operating agreement to determine if party is a "member" entitled to demand access to books and records.
Section 18-305(a)(1) of Delaware's LLC Act gives each LLC "member" defined rights to obtain LLC records, as does its New York counterpart. In a letter ruling in Mickman v. American International Processing, LLC, Del. Ch. C.A. No. 3869-VCP (Apr. 1, 2009), Vice Chancellor Parsons denied the defendant LLC's motion for summary judgment seeking to dismiss a books and records action on the ground that the plaintiff was not listed as a member in the operating agreement and therefore lacked standing under the statute. The plaintiff, who was divorced from one of the two members identified in the operating agreement, submitted an LLC tax return identifying her and her ex-husband as co-owners of a membership interest. She also submitted her ex-husband's Offer in Compromise to the IRS in which he stated under oath that his "only assets are his house . . . and stock in a number of closely held companies owned jointly by Taxpayer and his wife."
Continue Reading...Appellate Rulings Clash Over Subject Matter Jurisdiction to Dissolve Foreign Business Entities
The Appellate Division, Second Department, last week issued a decision in a dissolution proceeding involving a New York-based Delaware limited liability company (LLC) in which it broadly pronounced that New York courts lack subject matter jurisdiction in such cases. The decision in Matter of HMS Venture Management Corp. (UtiliSave, LLC), 2009 NY Slip Op 04906 (2d Dept June 9, 2009), agrees with an appellate ruling two years earlier by the Third Department, also involving the requested dissolution of a Delaware LLC, in Rimawi v. Atkins, 42 AD2d 799, 840 NYS2d 217 (3d Dept 2007).
HMS and Rimawi both rely on precedents in which New York courts dismissed petitions seeking dissolution of foreign business corporations based on the hoary internal affairs doctrine under which courts traditionally declined to exercise jurisdiction where the determination of the rights of the litigants involves regulation and management of the internal affairs of a foreign corporation. What makes things particularly interesting, however, is a 1994 appellate decision by the Manhattan-based First Department, in Matter of Hospital Diagnostic Equipment Corp., 205 AD2d 459, 613 NYS2d 884 (1st Dept 1994), where that court expressly rejected the argument, made by no less a personage than the state Attorney General, that New York courts lack subject matter jurisdiction to dissolve foreign corporations.
Let's first look at HMS. The subject Delaware LLC, called UtiliSave, operates in New Rochelle, New York, where it audits utility bills and usage of corporate clients. Its only connection to Delaware is its legal formation there. In 2007, 40% member and co-manager MHS Venture filed a petition to dissolve UtiliSave in Westchester County Supreme Court. Its petition sought dissolution under the terms of the operating agreement, allegedly based on the company's failure to make certain distributions, and on the statutory ground that it was no longer reasonably practicable to carry on the business in conformity with the operating agreement. It's unclear whether the petition invoked statutory dissolution under Section 702 of the New York LLC Law or under Section 18-802 of the Delaware LLC Act or both.
Continue Reading...Delaware Court of Chancery Grants Deadlock Dissolution Petition for LLC
The Delaware Court of Chancery last month granted a petition to dissolve a deadlocked Delaware limited liability company (LLC). Chancellor William B. Chandler III's carefully reasoned decision in Fisk Ventures, LLC v. Segal, 2009 WL 73957 (Del. Ch. Jan. 13, 2009), is likely to set the standard for cases of this sort inside and outside Delaware. It is must reading for business divorce practitioners whom increasingly are being called upon to handle breakups of LLCs as they become the predominant form of closely held business entity.
As important as the case is, I'm not going to give it my usual full-blown analysis, for two reasons. First, I'm in the middle of a trial and don't have the time. Second, excellent treatments already have been published by law professor bloggers Larry Ribstein (here) and Gary Rosin (here). So I'll just make a few quick observations on the Fisk case:
- Delaware's statute governing judicial dissolution of LLCs uses language substantially similar to New York's statute (LLC Law 702), authorizing dissolution "whenever it is not reasonably practicable to carry on the business in conformity with a limited liability company agreement."
- Chancellor Chandler sums up Delaware case law construing the statute as follows: "The text of § 18-802 does not specify what a court must consider in evaluating the “reasonably practicable” standard, but several convincing factual circumstances have pervaded the case law: (1) the members’ vote is deadlocked at the Board level; (2) the operating agreement gives no means of navigating around the deadlock; and (3) due to the financial condition of the company, there is effectively no business to operate."
New York Court Follows Delaware Law to Construe Advancement and Indemnification Provisions of Florida LLC's Operating Agreement
Presiding Justice Jonathan Lippman of the Appellate Division, First Department, who was recently nominated by Governor Paterson to become New York's Chief Judge on the Court of Appeals, has written a significant decision addressing rights of advancement and indemnification for litigation expenses in the limited liability company setting. Ficus Investments, Inc. v. Private Capital Management, LLC, 61 AD3d 1, 2009 NY Slip Op 00263 (1st Dept Jan. 20, 2009).
Not only is the substantive issue in the case -- affirming the right of an LLC member-manager to require the LLC to advance legal expenses defending an action brought by another LLC member -- one of great importance, the decision also reads like a legal travelogue in which a New York court looks to Delaware law to construe an operating agreement of a Florida LLC headquartered in New York.
Private Capital Group (Capital) is a Florida LLC owned 80% by the plaintiff Ficus Investments, Inc. (Ficus) and 20% by defendant Private Capital Management, LLC (Management). Capital buys, manages and sells non-performing mortgages, and was capitalized by loans from Ficus over $300 million. Capital began operations in December 2005. A dispute arose after Management's two owners, Thomas Donovan and Lawrence Cline, transferred about $10 million from Capital to Management. Under Capital's operating agreement, Donovan served as Capital's CEO and Cline as its President. In March 2007, Ficus adopted resolutions taking over Capital's management and it also commenced a lawsuit against Donovan, Cline and Management for breach of fiduciary duty, conversion and unjust enrichment.
Continue Reading...Delaware Court Applies Statute of Frauds to LLC Operating Agreement
Limited liability company statutes in Delaware and a number of other states -- but not New York -- expressly authorize oral operating agreements, as does Section 102(13) of the Revised Uniform Limited Liability Company Act (2006). Most if not all states also have a general statute of frauds that bars enforcement of an agreement that cannot be performed within one year unless it is contained in a writing signed by the party against whom the agreement is to be enforced.
What happens when the two statutes collide? Deciding an issue of first impression, the Delaware Court of Chancery has ruled that the statute of frauds applies to an LLC operating agreement under Delaware law. The court therefore dismissed a lawsuit seeking enforcement of an alleged oral operating agreement the performance of which necessarily extended beyond one year. Olson v. Halvorsen, C.A. No. 1884-VCL (Del. Ch. Oct. 22, 2008). Click here to read the decision.
The decisive facts in Olson were largely undisputed. In 1999 the parties founded a hedge fund known as Viking Global. The ownership and administrative structure comprised a Delaware limited partnership and three Delaware LLCs. The plaintiff, Olson, held a 22.5% interest. Short-form operating agreements were signed for the LP and LLCs #1 and #2. Long-form operating agreements for those three entities also were drafted (only one of them was signed), each of which provided that a partner or member who leaves Viking is only entitled to his capital account balance and compensation owed.
LLC #3 had a draft, unsigned long-form operating agreement with an earnout provision not included in any of the other operating agreements. The earnout gave a member varying percentages of the LLC's income over the six years following retirement. The unsigned agreement also contained provisions requiring the remaining members to adjust the profit percentage of the retiring member so as to maintain his economic interest; preventing the remaining members from taking any action to reduce the retiring member's interest; and restricting the remaining members' right to reduce their investments below a specified level.
Continue Reading...Delaware Court of Chancery Narrowly Construes LLC Dissolution Statute
When it comes to rulings by its Court of Chancery, what happens in Delaware definitely does not stay in Delaware.
Each year Delaware breeds for export thousands of corporations, LLCs and limited partnerships. Many of those Delaware entities have their principal place of business in New York; their internal affairs, when adjudicated by New York courts, are governed by Delaware statute and case law. In addition, the unsurpassed quality, scholarship and keen attention to precedent that characterize Chancery Court decisions make them a powerful guiding force in the judicial formulation nationwide of domestic business laws and policy.
All that being said, as I've commented before, one area of growing divergence between Delaware and New York law has been in the areas of LLC governance and judicial dissolution. The Delaware Chancery Court's pronouncements strongly emphasize the members' virtually unfettered contractual freedom to order their own relationships in the operating agreement, including enforcement of fiduciary outs and judicial dissolution waivers, and the Court's concomitant aversion to judicial intervention. In contrast, New York courts by and large have not hesitated to impose fiduciary obligations on LLC managers and to import dissolution principles developed in the context of shareholder corporation breakups.
Case in point: In re Seneca Investments, LLC, 2008 WL 4329230 (Del. Ch. Sept. 23, 2008) (read decision here), in which the Delaware Chancery Court recently dismissed a petition to dissolve a Delaware LLC brought by a minority member who'd been removed from his management positions by the majority. This is one of the few cases construing Delaware's LLC dissolution statute, and the result stands as a warning to any minority member who does not bargain for status protection and/or fair exit mechanisms in the operating agreement.
Continue Reading...WWDD (What Would Delaware Do) With an In Terrorem LLC Dissolution Waiver Clause?
I can't resist asking the above question in the wake of two recent decisions, one from Delaware Chancery Court invoking freedom of contract to enforce an LLC operating agreement's waiver of a member's right to seek judicial dissolution, and the other from New York's Commercial Division refusing on public policy grounds to enforce an operating agreement's in terrorem provision forfeiting the interest of any member who files for judicial dissolution.
The names if not the issues in both cases may sound familiar to regular readers of this blog.
The Delaware case is R&R Capital, LLC v. Buck & Doe Run Valley Farms, LLC, 2008 WL 3846318 (Del. Ch. Aug. 19, 2008) (read decision here). The factions in R&R have been waging a multi-front battle for years, with simultaneous lawsuits in Pennsylvania state and federal courts, New York state court, and most recently Delaware Chancery Court. At issue is control of nine Delaware LLCs that own and operate a number of horse farms. The Russet brothers put up most of the almost $10 million capital but gave 50% member Linda Merritt sole management authority under the operating agreements.
Continue Reading...Delaware and New York Courts Agree that 50% LLC Member May Not Hire Lawyer to Represent Company Adverse to Other 50% Member
There's been a recent flurry of courtroom battles over the authority of one 50% owner to engage counsel to represent the company adverse to the other 50% owner in dissolution proceedings or other types of internecine corporate warfare. I've previously written about some of these cases, including Sports Legends, Inc. v. Carberry, in which the court dismissed as unauthorized a suit by the corporation initiated by one 50% shareholder against the other for conversion of company assets (read here), and the infinitely fascinating Caplash v. Rochester Oral & Maxillofacial Surgery Associates, LLC, where one 50% LLC member hired company counsel in a multi-faceted litigation with the other 50% member that included dueling dissolution applications (read here and here).
Two new decisions reinforce the general proscription against the hiring and militant alignment of company counsel by one 50% owner against the other. One comes out of the Delaware Court of Chancery, which many -- present company excluded, I'm a dyed-in-the-wool New York partisan -- consider the premier business law court. The other decision appears to be the final word in the Caplash saga.
Continue Reading...