For law bloggers, if there’s one thing more satisfying than writing about an important new court decision, it’s writing about an important new court decision that you won for your client.

Last week, the Brooklyn-based Appellate Division, Second Department, unanimously ruled in favor of my clients, construing for the first time at the appellate level two sections of New York’s LLC Law with profound effect on the ability of controlling members of LLCs to oust minority members by means of a cash-out merger.

First, reversing in part the lower court’s order, the appellate panel held that under § 1002 (g) of New York’s LLC Law, an appraisal proceeding is the cashed-out, dissenting member’s sole remedy and that, in contradistinction to the analogous statute applicable to dissenting shareholders under the Business Corporation Law (BCL), no exception exists for alleged fraud or illegality in the procurement of the merger.

Second, affirming in part the lower court’s order, the appellate panel held that LLC Law § 1002 (c), which requires member approval of the proposed merger agreement at a meeting called on at least 20-days notice, is trumped by LLC Law § 407 (a)’s default rule providing generally for member action by written consent in lieu of meeting.

Based on those unanimous rulings, the court in Farro v Schochet, __ AD3d __, 2021 NY Slip Op 00150 [2d Dept Jan. 13, 2021], granted my clients’ request to dismiss an action brought against them by a cashed-out minority member who sought to rescind the merger on grounds of alleged fraud and breach of fiduciary, and who also argued for rescission on the ground that he was not permitted to vote on the merger at a meeting of the members called on 20-days notice. Continue Reading Groundbreaking Appellate Ruling Boosts LLC Cash-Out Mergers

In 2011 and 2012, the New York Court of Appeals decided a series of difficult cases addressing the circumstances under which a contractual waiver or release included in a buyout or other agreement between co-owners of closely held firms provides insulation from subsequent claims for breach of fiduciary duty or fraud based on an alleged failure to disclose vital information concerning the firm’s financial condition or the existence of a third-party offer to purchase the firm’s assets at a significantly higher value.

The upshot of the three cases — Centro Empresarial v America Movil, Arfa v Zamir, and Pappas v Tzolis — is that it depends not only on the particular language of the waiver or release but also on the sophistication of the complaining party and whether, at the time of the transaction, the complaining party had reason to distrust the other party such that it could not reasonably rely on the latter’s representations. Centro in particular rejected any categorical rule that the non-controlling owner may “blindly trust” the alleged fiduciary’s representations or that the controlling owner owes a non-releasable fiduciary duty to disclose to the co-owner all material information bearing on the transaction. In all three cases, which you can read about in my prior posts here and here, the complaining parties lost their claims.

I’m inclined to believe that the cumulative impact of the Centro-Arfa-Pappas trilogy is responsible for the relative dearth of reported decisions by New York courts over the last eight years involving claims of the sort, and that lawyers representing business owners on both sides of buyouts and other transactions between co-owners have applied the trilogy’s lessons in negotiating and documenting agreements.

Until recently, I encountered only three post-2012 published decisions involving buyout-related lawsuits alleging breach of a fiduciary duty of disclosure, one decided in 2013 and two in 2015. In two of them, the court threw out the claims (read here and here). In the third, the court denied a pre-answer motion to dismiss (read here). Continue Reading The Duty to Disclose Third-Party Offers Amidst Buy-Out Negotiations, Revisited

Business divorce clients often arrive in the throes of a crisis, complaining of co-owners siphoning, diverting, depleting, or denying access to company assets and resources for their own personal use or for the benefit of a competing entity at the expense of the business and the client. We usually hear some variation of the question, “How do we stop it?” More often than not, the answer is: “An injunction.”

The Injunction Remedy

An injunction is a kind of court order. It usually comes in the form of a prohibition against a person or entity acting in a particular way (for example, in a business divorce case, from drawing funds from corporate accounts). Less frequently, it can come in the form of a mandate to do or engage in certain conduct (for example, in a business divorce case, to provide ongoing access to corporate books and records). The injunction has three species, each defined primarily by the temporal duration of the relief granted. Continue Reading The Injunction Remedy in Business Divorce Cases

I’m very pleased to present my 13th annual list of the past year’s ten most significant business divorce cases.

This year’s list includes important appellate and trial court decisions in New York and Delaware on a smorgasbord of interesting issues in lawsuits among co-owners of closely held business entities concerning contested buyouts, LLC member expulsion, LLC and limited partnership dissolution, freeze-out merger, the exercise of buy-sell agreements, and federal court abstention in a case seeking common-law judicial dissolution.

All ten decisions were featured on this blog previously; click on the case name to read the full treatment. And the winners are:

Busher v Barry  This S.D.N.Y. federal court decision was handed down in late December 2019 but I’m dragging it across the 2020 line not only because I wrote about it in 2020 but because of its first-impression ruling, applying the Burford abstention doctrine to dismiss a claim for common-law dissolution of a closely held corporation that owns the realty leased to a golf club with overlapping ownership. Citing the Second Circuit’s seminal decision in Friedman v Revenue Management, Inc., the District Court saw no distinction in the application of Burford to common-law dissolution versus statutory dissolution in its impingement upon New York’s strong interest in the uniform development and interpretation of its comprehensive system of corporate governance including the creation and dissolution of its corporations. Continue Reading Top 10 Business Divorce Cases of 2020

“I don’t get no respect” was a famous Rodney Dangerfield comedy routine. It also could be ascribed albeit less comedically to tiebreakers assigned the often thankless task of resolving deadlock between 50/50 owners or managers of closely held business entities. If the deadlock concerns a heated, major issue, the tiebreaker’s vote favoring one of the two factions is likely to alienate and sow mistrust or worse in the other. Or, if prior to putting a decision in the tiebreaker’s hands, faction #1 perceives that the tiebreaker has developed a bias favoring faction #2, faction #1 may seek to remove or otherwise disenfranchise the tiebreaker.

The latter scenario generally describes what happened in Franco v Avalon Freight Services LLC, C.A. No. 2020-0608-MTZ [Del Ch Dec. 8, 2020], in which the plaintiff, representing a 50% ownership faction of a Delaware LLC, sought a declaration that he had the right unilaterally to remove the mutually agreed tiebreaker director designated in the LLC agreement.

The novel issue presented to the court was whether the terms of the governing provision, which did not address removal of any directors,

  • as the plaintiff agued, required the continually renewed, mutual agreement of the two factions to his appointment such that either faction could at any time withdraw its agreement and unilaterally demand removal, or
  • as the defendants argued, referred only to the one-time, past event of designating and appointing the tiebreaker director without any reference to future or ongoing agreement regarding the continued service of the tiebreaker and therefore did not authorize unilateral removal. Continue Reading It Takes Two to Remove a Tiebreaker

Many business divorce practitioners are familiar with a phenomenon one might call “petitioner’s remorse” – an often abrupt abandonment of one’s desire to dissolve a closely-held business entity when the opposing party unexpectedly declines to oppose or consents to dissolution. The dissolution petitioner’s rationale in bringing the claim may have been an expectation that the opposing party would fear the prospect of dissolution, oppose it mightily on the merits, and ultimately be forced into some sort of negotiated or compelled buyout. In that case, when the response is lack of opposition or consent to dissolve, the in terrorem effect and leverage is lost.

A recent decision from a Rochester-based appeals courts, Yehle v Rich, ___ AD3d ___, 2020 NY Slip Op 06631 [4th Dept Nov. 13, 2020], involved an egregious case of petitioner’s remorse, one in which the petitioner sued for dissolution, stipulated with the respondent to much of the relief sought in the petition, and then litigated for years in an attempt to undo the stipulated order of dissolution. Continue Reading An Extreme Case of Petitioner’s Remorse

BCL 626 governs shareholder derivative actions, or suits brought by individual shareholders on behalf of, and for injury to, the corporation. Subsection (e) provides that if the plaintiff—the individual shareholder asserting the right of the corporation—is successful in recovering anything of value for the corporation, the court in its discretion may award reasonable expenses, including attorney’s fees, to be paid from the award to the corporation.

While BCL 626(e) sets forth the fee-sharing framework in derivative actions brought in the name of a corporation, and New York’s Revised Limited Partnership Law section 121-1002(e) mirrors the BCL and applies to partnerships, there is no corresponding fee-sharing statute for derivative suits commenced and litigated on behalf of other entities, such as LLCs. Without a statutory analogue, is the same fee-sharing framework available?

I have not yet seen a case squarely addressing the issue, but the First Department’s recent decision in Bd. of Managers of 28 Cliff St. Condominium v Maguire, 2020 NY Slip Op 06844 [1st Dept Nov. 19, 2020] may open the door for a successful LLC-member derivative plaintiff to argue that the common law includes the right to recover fees from any award rendered in favor of the LLC.

Continue Reading Fee Sharing in LLC Derivative Suits: A Common Law Right and a One Way Street 

Gurney’s Inn is an iconic oceanside resort located in Montauk, New York, on the eastern tip of Long Island’s South Fork affectionately known as “The End.”

The history and growth of Montauk over the last century — from small fishing village to summer hot spot catering to high-end, party-seeking New Yorkers — mirrors the transformation of Gurney’s from a modest 20-unit hotel opened in 1926 by a local resident to its current incarnation as luxury resort, spa and beach club owned by a private equity fund, featuring 109 rooms, suites, and beachfront cottages plus facilities for weddings, conferences, and other special events.

Gurney’s fortunes had faded under prior ownership when the property was operated for decades as a timeshare cooperative. According to a local news report, the resort “was plagued by high maintenance costs and special assessment fees, which led to a shareholder lawsuit against management. At the time, many owners decided to give up their units, leaving those who remained burdened with an ever-burgeoning share of the upkeep.”

In 2013, a supermajority of the remaining timeshare owners entered into an agreement (the “2013 MOU”) under which the new majority owner would invest tens of millions to renovate the resort which would cease operating as a timeshare cooperative after five years. At that point the timeshare owners’ shares would be sold either to a third-party purchaser or to the majority owner at a price based on an independent appraisal of the resort as a going concern plus a premium based on a percentage of gross sale proceeds in excess of $50 million.

In March 2018, again with approval by a supermajority of the timeshare owners, the majority owner completed the de-cooping process via merger and tender offer at $118.81 per share based on the $84 million valuation of the resort property as appraised by CBRE Hotels.

A small group of shareholders who had rejected the 2013 MOU, holding less than 1% of Gurney’s issued and outstanding shares, dissented from the merger and demanded to have the fair value of their shares judicially determined under Section 623 of the Business Corporation Law. This is the story of what happened next. Spoiler alert: it did not end well for the dissenters. Continue Reading Dissenting Shareholders’ Challenge to Appraisal of Famed East End Resort Hits Dead End

The restaurant business is on the skids amid the COVID-19 pandemic. Yelp reports that 60% of closed restaurants won’t re-open.

Apart from the pandemic, the success rate for new restaurants is dauntingly low. Surveys show a 60% failure rate for new restaurants within the first year and 80% within five years of opening. High rents and labor costs, especially in urban centers. High food costs. Byzantine health and safety regulations. Stiff competition. Low profit margins. It’s a tough business by any measure.

It can be even tougher when co-owners of a restaurant have a falling out, as seems to happen with disproportionately high frequency in the restaurant business. With the exception of real estate holding companies, I can’t think of any business category that, over the last 13 years that I’ve been publishing this blog, has racked up more posts about litigation between co-owners than the restaurant business. The reasons are many: divergent interests between outside investors and inside managers and talent, opportunity for siphoning cash receipts, sloppy accounting, poorly drafted or no owner agreement, an owner opening a competitive business, and more.

In the last few months, unrelated to the pandemic, there’s been a mini-surge of reported court decisions in business divorce cases among restaurant owners. Below you’ll find summaries of five such cases — four decided by judges in the Manhattan and Brooklyn Supreme Courts, and one from Delaware Chancery Court. Bon appétit!

Continue Reading Business Divorce on the Menu

A recent decision from Bronx County Supreme Court Justice Llinet M. Rosado, Sebrow v Sebrow, 2020 NY Slip Op 20269 [Sup Ct, Bronx County Oct. 9, 2020], is a stark reminder to corporate shareholders, attorneys who plan their estates, and their prospective beneficiaries, to exercise due diligence before attempting to make, draft, or receive testamentary dispositions of corporate stock.

The Stockholders’ Agreement

In 1997, two father-and-son pairs, Abraham, Joseph, Zvi, and David Sebrow, all four of whom owned 25% of the shares of stock of Worbes Corporation (“Worbes”), entered into a written Stockholders’ Agreement, Section 6 of which imposed the following stock transfer restriction:

No stockholder of . . . Worbes . . . shall sell, transfer, assign, mortgage, [or] hypothecate his shares . . . without the unanimous consent of all the other stockholders with the sole exception that any stockholder may make a testamentary disposition of his shares to his issue in which event his issue shall own the shares of his deceased father but subject nevertheless to any terms and conditions contained in this agreement. Any other attempted transfer of such shares shall be a nullity and unenforceable (emphasis added).

Continue Reading When Estate Plans and Stock Transfer Restrictions Collide