BarberYet another voice, that of Greg Barber, CFA, of Barber Analytics in San Francisco, has joined the growing debate in business valuation and legal circles over the controversial application of the discount for lack of marketability in New York statutory fair value proceedings involving dissenting shareholder appraisals and elective buy-outs of minority shareholders in dissolution cases.

Greg is a corporate valuation expert who focuses on valuations for statutory and mediated minority shareholder buyouts. Greg published a thought-provoking article in the October 2016 New York State Bar Association Journal entitled Marketability Discounts in New York Statutory Fair Value Determinations in which he critically analyzes the leading New York appellate decisions applying the marketability discount in fair value cases — namely, Blake, Seagroatt, and Beway — and highlights what he argues are the “misunderstandings, miscommunications, and inconsistences” entangling the discussion among appraisers, attorneys, and the courts. A copy of Greg’s article is available on his website here.

I followed up Greg’s article with an interview of him for my Business Divorce Roundtable podcast, a link to which appears at the bottom of this post.

Continue Reading Marketability Discount Revisited: Interview With Greg Barber

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

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

Ben Means

Business divorce on steroids. That’s how I describe the tenor of litigation that can erupt when members of a family-owned business have a falling out.

No one has devoted more scholarship to the challenging intersection of law and conflict in the family-owned business than Benjamin Means, Associate Professor of Law at the University of South Carolina School of Law.

Longtime readers of this blog may recall a two-part online interview of Ben that I posted a few years ago (read here and here), in which he answered a series of questions about his groundbreaking law review article entitled Non-Market Values in the Family Business. The article uses social science and expansive notions of contractual relations in advocating for courts to give greater weight to what he calls “family values” in adjudicating corporate dissolution and other disputes among shareholder-members of the same family. Continue Reading Conflict in the Family-Owned Business: Interview With Professor Benjamin Means

RutledgeThe business community’s growing preference for the LLC entity form over the traditional corporation and partnership forms has introduced a whole new set of planning issues for lawyers who counsel clients at the formation stage in preparing the new LLC’s constitutional documents, including most importantly the operating agreement.

Tom Rutledge (photo right), one of the nation’s leading experts on LLCs and a principal drafter of his home state of Kentucky’s LLC Act among his many other accomplishments and leadership roles in the field of business organizations, recently published an article in the Journal of Passthrough Entities on the hot-button topic of LLC member expulsion with the provocative thesis that counsel need to actively consider and draft operating agreements that authorize forced expulsion of a member under specified circumstances in order to protect the venture’s ongoing activities and viability. The article is entitled “It’s Not Me, It’s You: Planning for Expulsion of LLC Members” and you owe it to yourself to read it here.

The article addresses the statutory backdrop for member expulsion; the grounds for expulsion to consider including in the operating agreement; the voting prerequisites and procedure for effectuating expulsion; the effect of expulsion including buy-out; and judicial review of expulsion decisions.

After reading the article, I asked Tom if he would discuss LLC member expulsion on my Business Divorce Roundtable podcast. I’m happy to report that Tom obliged, and you can hear my interview of Tom by clicking on the link at the bottom of this post.

The interview covers not only LLC member expulsion pursuant to the operating agreement which is the subject of Tom’s article, but also judicial expulsion of LLC members, a topic that recently generated headlines (and a post on this blog) when the New Jersey Supreme Court earlier this month issued its decision in IE Test v Carroll reversing an order of judicial expulsion under that state’s LLC Act. Judicial expulsion is destined to take on greater importance and controversy as more states adopt the Revised Uniform LLC Act which authorizes courts to expel an LLC member at the behest of the company or the other members on grounds involving breach of the operating agreement or other misconduct, or because it’s not reasonably practicable to carry on the business of the LLC with the member whose expulsion is sought.

There’s much more food for thought in Tom’s article and the podcast interview. I urge you to read and listen to both.

The tiny state of Delaware plays an enormous role in this country’s corporate life. Delaware has long been the overwhelmingly preferred state of incorporation for publicly owned companies, and its cutting-edge (many would also say pro-management) enabling acts for closely held business entities have made it an exporter to the other 49 states of countless privately owned corporations, limited partnerships, and limited liability companies that have no connection to Delaware other than their state of formation.

The Delaware judicial system serves an integral role in maintaining the state’s corporate hegemony. The Delaware Court of Chancery is widely viewed as the country’s preeminent business-law trial court by virtue of its broad jurisdiction over Delaware business entities both public and private, and thanks to a judicial selection process that promotes the best and brightest candidates for the court’s judgeships including one Chancellor and four Vice-Chancellors whose typically thorough and scholarly written opinions are closely followed by lawyers and judges throughout the country.

Business divorce practice nationwide is no less susceptible to the influence of the Delaware legislative and judicial juggernaut. In New York, as in other states that are home to many Delaware-formed business entities, the internal affairs doctrine mandates application of Delaware law to disputes among entity co-owners, and jurisdictional constraints require owners seeking the ultimate remedy of judicial dissolution to do so in the Delaware Chancery Court. The Chancery Court’s interpretation of Delaware business entity statutes governing internal relations among co-owners of closely held business entities also has had significant influence over the interpretation of counterpart statutes in other states by their judiciaries. (A prominent example of this is the Second Department’s 2010 decision in the 1545 Ocean Avenue case which drew heavily upon Delaware Chancery Court precedent in setting the standard for judicial dissolution of LLCs under Section 702 of New York’s LLC Law.)

HeymanLadigAll of which is why I’m excited to invite readers to listen to my most recent podcast episode on the Business Divorce Roundtable entitled “Business Divorce, Delaware Style” featuring my interview of two leading Delaware litigators — Kurt Heyman (photo left) and Pete Ladig (photo right) — talking about what it’s like to litigate business divorce cases in the Chancery Court and current developments in Delaware law affecting such cases including important decisions I’ve written about on this blog in the TransPerfect, Carlisle, and Meyer cases.

Click on the link at the bottom of this post to hear the interview.

Kurt Heyman is a founding partner of Proctor Heyman Enerio LLP in Wilmington, Delaware, where he focuses his practice on corporate governance, partnership and limited liability company disputes in the Delaware Court of Chancery. Kurt lectures and writes extensively on business divorce and other corporate governance topics, he’s Co-Chair of the Business Divorce Subcommittee of the ABA Business Law Section, and he leads the Business Divorce and Private Company Disputes group on LinkedIn.

Pete Ladig is Vice Chair of the Corporate and Commercial Litigation Group at Morris James also in Wilmington. Pete concentrates his practice in the areas of corporate governance and commercial litigation, stockholder litigation, fiduciary duties, partnership and limited liability company disputes, and class action and derivative litigation. He’s also active in the ABA Business Divorce Subcommittee and has published articles on business divorce topics including a must-read post on his firm’s blog called What Is Business Divorce? Pete also co-hosts a podcast called CorpCast discussing corporate and commercial law in Delaware.

If you’re interested in business divorce, you’ll certainly enjoy listening to my interview of Kurt and Pete, both of whom speak on the subject with great authority, insight, and passion.

Molk_Peter

Peter Molk, an Assistant Professor of Law at Willamette University College of Law and a rising young star in legal academia, has written a groundbreaking article entitled How Do LLC Owners Contract Around Default Statutory Protections? slated for publication in the University of Iowa College of Law’s Journal of Corporation Law and currently available here on SSRN.

The article also is the subject of my podcast interview of Professor Molk embedded at the bottom of this post.

Professor Molk’s article deserves attention because it asks and attempts to answer based on empirical evidence a vital question: Is the freedom of contract promoted by the LLC statutes’ default rules being used as theory would predict, to promote economic efficiency and to craft more efficient owner protections? In fact, his study finds that LLCs with more vulnerable owners adopt fewer owner safeguards, suggesting that contractual freedom may be used by LLC controllers opportunistically rather than to achieve efficiencies.

Professor Molk’s first-of-its-kind study tests theory with the reality of what is actually happening in the world of LLC operating agreements. He does this by carefully examining almost 300 operating agreements of LLCs involved in litigated cases mostly in Delaware but also in New York, looking for provisions that either weaken or strengthen owner protections granted by the statutory default rules. The patterns his study finds have a direct impact on business divorce practitioners and also should influence choice of entity decisions and the drafting of agreements by practitioners involved in entity formation.

In his own words, here’s the abstract of Professor Molk’s article:

Limited liability companies are built on the idea of contractual freedom. Unlike other business organization forms, most owner protections apply only by default to LLCs, which are free to waive or modify them as desired. This freedom promises economic efficiency if parties are sophisticated but raises the potential for opportunism by relatively more sophisticated managers and majority owners. While companies ranging from small landscape firms to Chrysler and Fidelity organize as LLCs, remarkably little is known about whether or how LLCs use this contractual flexibility.

I analyze the operating agreements of 283 privately owned LLCs organized under Delaware and New York law to determine when and how parties alter default provisions. I find widespread use of LLC statutes’ flexibility to decrease default owner protections, as well as widespread adoption of substitute owner protections that do not apply by default. There is little evidence, however, that the contractual freedom is used to craft more efficient owner protections. Instead, using a proxy for owner vulnerability, I find that LLCs with more vulnerable owners adopt significantly fewer owner safeguards, suggesting that contractual freedom may be used more for opportunism, not efficiency.

Professor Molk has much, much more to say on the subject in my podcast interview which I hope you’ll listen to and enjoy.

 

This is the second installment of a two-part interview of Claudia Landeo (photo right; read bio here), Associate Professor of Economics at the University of Alberta, and Kathryn Spier (photo left; read bio here), the Domenico de Sole Professor of Law at the Harvard Law School, on their forthcoming article in the Yale Journal on Regulation called “Shotguns and Deadlocks” [available on SSRN here].

Click here to read Part One of the interview, here to view Professor Landeo’s SSRN home page linking to her numerous published articles and discussion papers, and here to view Professor Spier’s lengthy list of academic publications.

Part One covered some of the basics of the shotgun buy-sell mechanism, its utility in resolving deadlock disputes, and the challenges posed by asymmetries of information and financial capabilities as between the owners. The discussion continues in Part Two, focusing on judicial implementation of the shotgun and the experimental data supporting selection of the better-informed owner as the offeror.

Mahler: You told us that, unlike in the context of ex ante private agreements, judges might have the ability to address problems with asymmetries that can better ensure equitable outcomes for shotgun mechanisms. What are some of the things judges can do?

Spier: The judge might use her discretion when one party is under financial duress. Specifically, the judge might mitigate the negative effects of financial asymmetries by giving parties adequate time to arrange for financing of the buy-sell operations. If the financial asymmetries cannot be mitigated by judicial order, then the judge can certainly consider alternative mechanisms or approaches. Continue Reading Interview With Professors Claudia Landeo and Kathryn Spier on Shotguns and Deadlocks: Part Two

Dissolution cases involving deadlocked 50/50 owners of closely-held business entities present some of the most intractable problems likely to be encountered by business divorce practitioners and judges. In states such as New York, the problems are greatly exacerbated by the absence of a statutory buy-out remedy in deadlock dissolution cases — unlike dissolution cases brought by oppressed minority shareholders where the statute gives the corporation or the other shareholders the ability to avoid dissolution by acquiring the complaining shareholder’s stock for fair value. The LLC laws in New York and many other states likewise have no statutory buy-out mechanism in dissolution proceedings.

The difficulties with deadlock cases also frequently stem from the absence of a “natural” buyer and seller, that is, each of the 50% owners may be vying to buy out the other; from the owners’ divergent valuations of the business assets and operations, which may be tied to the owners’ personal know-how and/or their transient relationships with customers and vendors; and from the challenges, expense and time involved in getting appraisals for closely-held firms in an adversarial environment.

When both deadlocked owners are potential buyers, and under the right circumstances, the “shotgun” buy-out mechanism can be one of the most efficient means of getting to a business separation. For those not familiar with the shotgun, it’s when owner #1 sets the buy-out price and owner #2 has the option either to buy or sell at that price. Lawyers who prepare shareholder agreements sometimes feature the shotgun in the agreement’s buy-sell provisions, its exercise being made contingent on specified trigger events. Some weeks ago, I wrote about the Fulk case, involving a deadlock dissolution lawsuit before the Delaware Court of Chancery, in which the court compelled one of the company’s two owners to make a shotgun buy-out proposal.

I discovered the Fulk case in a fascinating and highly informative article called Shotguns and Deadlocks (available on SSRN here), authored by Professors Claudia M. Landeo and Kathryn E. Spier and slated for publication in the Yale Journal on Regulation. Professor Landeo (pictured above right; read bio here) is an Associate Professor of Economics at the University of Alberta in Edmonton, Canada. Professor Spier (pictured above left; read bio here) is the Domenico de Sole Professor of Law at Harvard Law School. Their collaborative article advocates greater judicial utilization of shotgun buy-outs in business deadlock cases and, using economic theory and data from laboratory experiments, argues that courts should assign the role of offeror to the better-informed owner. It’s a must-read article for members of the bar and bench who litigate and preside over deadlock dissolution cases. Continue Reading Interview With Professors Claudia Landeo and Kathryn Spier on Shotguns and Deadlocks: Part One

This is the second installment of a two-part interview of Benjamin Means, a law professor and legal scholar who has published several law review articles on shareholder disputes in closely held business entities. His most recent article, entitled Non-Market Values in Family Businesses, explores legal theory and uses social science in support of his thesis that courts should give greater weight to “family values” in adjudicating corporate dissolution and other disputes among shareholder-members of the same family.
To read Part One of the interview, click here. To download any of Ben’s articles including Non-Market Values in Family Businesses, click here for Ben’s SSRN home page.

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Mahler:  Your article on family businesses discusses social identity theory which, to my minimal understanding, has something to do with explaining how people behave in a group. How does social identity theory help explain the interaction between workplace values and family values?

Means:  The basic idea is that we all play a number of different roles in life, and that each role has its own set of expectations concerning appropriate behavior and values. These cohere into distinct identities, and we may shift effortlessly among several over the course of a day—we go to the office, spend time with a spouse, care for our children, and so on. In a family business, it is much harder for participants to compartmentalize a family and a workplace identity. For instance, if a founder is deciding issues of succession, the temptation to treat all children equally may conflict with the identification of those children who are willing and able to carry on the business. Continue Reading Interview with Law Professor Benjamin Means on Conflict in Family-Owned Businesses: Part Two