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“Under any standard of value, the true economic value of a business enterprise will equal the company’s accounting book value only by coincidence . . .” says the late business valuation expert and author Shannon Pratt.  So why do so many shareholder buy-sell agreements require that the shares be purchased for book value? This week’s post explores.
Continue Reading And the Award for Most Creative Attempt to Evade a Book Value Buy-Sell Provision Goes To . . .

When a closely-held business is profitable, self-interested owners naturally want a bigger slice of the pie, especially where the personal relationships among the owners are frayed.  Perhaps that’s why we often discuss the value of freeze-out mergers as a mechanism for those in control of a closely-held corporation or limited liability company to squeeze a minority owner out of the business’ future profits. 

Equity dilution is another common method by which those in control of a corporation or LLC attempt to squeeze out a minority owner.  For one, stock dilution impairs the minority owner’s ability to influence company action by voting his shares, and it lessens the owner’s right to participate pari passu in the distributions or dividends of the company.  Perhaps more importantly, a minority owner can see his or her ownership interest diluted below certain critical thresholds—for instance, the 20% ownership required to petition for dissolution under BCL 1104-a.

Despite the potentially drastic consequences of stock dilution, many closely-held businesses we encounter fail to adequately address the issue of dilution in their governing documents.  And New York caselaw on the issue leaves plenty to be desired.  Let’s interpret those factors as an invitation to review the basics, key caselaw, and the current status of the improper dilution claim.Continue Reading Let’s Talk About Dilution

Can a shareholder use the implied covenant of good faith and fair dealing inherent in the corporation’s shareholders agreement to plead what otherwise would be derivative claims as direct ones? Find out in this week’s post.
Continue Reading Derivative into Direct and Waived into Preserved: The Transformative Power of the Implied Covenant of Good Faith and Fair Dealing