Compulsory Buyout

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In the last two years, fueled by a series of high profile cases involving media executives, entertainers, and other public figures, #MeToo has gained worldwide recognition as a symbol of the burgeoning movement against sexual harassment and assault, especially in the workplace.

In our country, we have federal, state, and local statutes designed to protect employees against gender discrimination including sexual harassment and hostile workplace environment. Such laws generally do not extend protection to owners of closely held business entities against conduct of the sort by their co-owners.

Perhaps it was inevitable that the heightened consciousness of the #MeToo movement, and the willingness of female complainants to come forward, should find its way into the arena of minority shareholder oppression, leading to a ruling earlier this month in Matter of Straka v Arcara Zucarelli Lenda & Assoc. CPAs P.C., 2019 NY Slip Op 29017 [Sup Ct Erie County Jan. 9, 2019], in which, following an evidentiary hearing, the court upheld oppression allegations by a female minority shareholder of an accounting firm based in large part on her male co-owners’ toleration of offensive, demeaning, and condescending comments made primarily by a senior accountant-employee at the firm. Continue Reading Minority Shareholder Oppression in the #MeToo Era

After 35 years, Matter of Kemp & Beatley, Inc. (64 NY2d 63 [1984]), remains the leading authority in New York on oppression-based corporate dissolution. In Kemp & Beatley, the Court of Appeals announced a now-venerable legal rule: “Assuming the petitioner has set forth a prima facie case of oppressive conduct,” a shareholder wishing to “forestall dissolution” must “demonstrate to the court the existence of an adequate, alternative remedy.” In practice, what this means is that courts must consider whether a buyout will provide the petitioning shareholder a “reasonable means of withdrawing his or her investment.”

A recent decision by a Manhattan-based appeals court, Campbell v McCall’s Bronxwood Funeral Home, Inc., 2019 NY Slip Op 00182 [1st Dept Jan. 10, 2019], presents a number of interesting questions about how courts should apply Kemp & Beatley’s pronouncement that courts must consider an “adequate, alternative remedy” to dissolution in the face of a written shareholder’s agreement that provides a formula and method for buying out a shareholder’s stock. Campbell is an epic 12-year litigation with seemingly no end in sight. Continue Reading A Fresh Take on an Old Doctrine – The “Adequate, Alternative Remedy” to Dissolution

This is the final installment of a three-part series about the basics of contested New York business appraisal proceedings. The first post addresses the various ways in which business owners can steer a dispute into an appraisal proceeding. The second post addresses the legal rules and principles that apply in appraisal proceedings. This final post addresses the appraisal methodologies and principles that apply in valuation proceedings. Without further ado, let’s talk accounting.

Valuation Date

The date on which a business interest is appraised – the “valuation date” – can have a huge impact on its worth. For example, for a real estate holding company in a rising market, generally speaking, the later the valuation date the greater the value. If the valuation date is earlier, the seller may receive and the buyer may pay less for an ownership stake. For most kinds of appraisal proceedings, the valuation date is set by statute, so there is little to litigate on the subject.

Under Partnership Law 69 and 73, a wrongfully withdrawn, retired, or deceased partner is entitled to have the “value” of his or her interest determined as of the date of “dissolution,” meaning the event of withdrawal, retirement, or death. Continue Reading Basics of Valuation Proceedings – Litigating an Appraisal from Start to Finish – Part 3

New York’s business-entity statutes, like those across the nation, provide minority owners with the right to dissent from a merger and to be paid the fair value of the dissenter’s ownership interest. Now assume the dissenter also has an employment agreement with the pre-merger entity containing a non-compete provision. Can the post-merger surviving entity enforce the non-compete against an owner who exercises the statutory right to dissent? Does the answer depend solely on the terms of the employment agreement, or does the statutory protection of minority rights embedded in the merger statutes require a different analysis?

Those questions are especially important to certain professional organizations such as medical and accounting practices which traditionally bind their shareholders — or members, in the case of professional LLCs — to employment agreements containing non-compete and/or non-solicitation provisions, and which, due to accelerating market forces, experience significant merger activity.

In a recent first-impression decision by an intermediate appellate court in Colorado, the court denied enforcement of non-compete and liquidated damages provisions in an anesthesiologist’s shareholder employment agreement following his dissent from a merger. While the decision explicitly refused to construe the agreement’s enforceability without consideration of the dissenter’s statutory rights, implicitly it left undecided whether a firm can contract around those rights to enforce restrictive covenants against a dissenter who exits the practice and competes post-merger. Continue Reading You Dissented From a Merger. Are You Bound by Your Non-Compete?

Under the right set of facts, New York courts occasionally find remedies for LLC owners not explicitly authorized in the Limited Liability Company Law (“LLC Law”). Judges have a natural inclination to try to find solutions for legal problems where existing law falls short, which is part of how the common law came to be.

One striking example is the LLC derivative cause of action. In Tzolis v Wolff, 10 NY3d 100 [2008], the Court of Appeals ruled that members of an LLC “may bring derivative suits on the LLC’s behalf, even though there are no provisions governing such suits in the Limited Liability Company Law,” and even though the Legislature considered, but rejected, including a derivative right of action in the LLC Law.

Another remedy not found in the LLC statutes is the so-called “equitable buyout” in LLC dissolution proceedings.

In a nutshell, an equitable buyout grants an LLC member the possibility upon dissolution of the company (under circumstances yet to be well defined by the courts) of the ability to purchase the other member’s interest as an alternative to liquidation and sale of the company’s assets at auction. An equitable buyout results in one member involuntarily selling his or her equity to the other, and the other member becoming the business’s sole owner. The entity’s existence continues post-buyout – despite ostensibly being “dissolved.” Continue Reading The LLC Equitable Buyout: Past, Present, Future

If you haven’t yet listened to prior episodes of the Business Divorce Roundtable (a) it’s time you did and (b) absolutely you won’t want to miss the latest episode (click on the link at the bottom of this post) featuring first-hand, real-life, business divorce stories told by business appraiser Tony Cotrupe of Melioria Advisors (photo left) and attorney Jeffrey Eilender of Schlam Stone & Dolan (photo right).

Tony’s and Jeff’s stories have a common element: both involve the contentious break-up of a poisonous business relationship between two brothers. The similarity ends there. In my interview of Tony, he puts us inside a fast-paced and ultimately successful effort by the feuding second-generation owners of a propane distributorship, guided by their respective lawyers working in collaboration, to avoid litigation by engineering a buy-out of one brother by the other based on Tony’s business appraisal as the jointly retained, independent evaluator. It’s a happy ending to what otherwIse could have turned into a drawn-out courtroom slugfest.

Courtroom slugfest aptly sums up Jeff’s story as counsel for the brother owning the minority interest in Kassab v. Kasab, a case I’ve featured on this blog several times including last month’s post-trial decision giving the other brother the opportunity to buy out the minority interest upon pain of dissolution if he doesn’t (read here, here, and here). Jeff’s insider analysis of the case provides unique insights into a multi-faceted, roller-coaster-ride of a case involving novel issues under the statutes and case law governing business corporations and limited liability companies.

If you’re a lawyer, business appraiser or business owner with a business divorce story you’d like to share for a future podcast, drop me a line at pmahler@farrellfritz.com.

 

Regular readers of this blog know it’s been anything but summer doldrums in the world of business divorce, what with case law developments such as the Appellate Division’s potentially far-reaching ruling on the purposeless purpose clause and LLC dissolution in Mace v Tunick reported in last week’s post, and the astonishing story of minority shareholder oppression in the Twin Bay Village case also reported earlier this month.

This year’s edition of Summer Shorts picks up the summer pace with short summaries of three must-read decisions by New York and Delaware courts on three very different business divorce topics: use of a Special Litigation Committee to evaluate derivative claims brought by LLC members (New York); grounds for dissolution and the court’s remedial powers in shareholder oppression cases (New York); and LLC deadlock dissolution (Delaware).

Appellate Ruling Rejects Appointment of Special Litigation Committee in LLC Derivative Suit Where Not Authorized By Operating Agreement

LNYC Loft, LLC v Hudson Opportunity Fund I, LLC, 2017 NY Slip Op 06147 [1st Dept Aug. 15, 2017].  In Tzolis v Wolff, New York’s highest court recognized a common-law right of LLC members to sue derivatively on behalf of the LLC. Subsequent lower court decisions have clarified other aspects of the right by analogy to corporation law, such as requiring the plaintiff LLC member to allege pre-suit demand or demand futility. In shareholder derivative suits involving corporations, the board’s inherent authority to appoint a Special Litigation Committee composed of independent and disinterested directors to assess derivative claims is well established and, when properly implemented, can result in the court’s dismissal of derivative claims based on the SLC’s conclusion that the claims do not merit prosecution by the corporation. Continue Reading Summer Shorts: Three Must-Read Decisions

Who paysThere are two breeds of buy-outs in corporate dissolution proceedings: voluntary and involuntary.

When a minority shareholder petitions for judicial dissolution on grounds of oppression, New York’s statutory scheme gives respondents the option to avoid a dissolution contest voluntarily by electing within 90 days to purchase the petitioner’s shares for “fair value” in an amount either to be agreed upon by the parties or determined by the court in an appraisal proceeding.

The buy-out statute (Business Corporation Law § 1118) grants the right of election to “any other shareholder or shareholders or the corporation” which, as a practical matter, leaves it up to the controlling shareholders whether to purchase the shares individually or through the corporation. Not surprisingly, in my experience the election overwhelmingly is made by the corporation. After all, who wants to undertake personal liability voluntarily, especially before the court determines the value of the petitioner’s shares and the terms of payment? Continue Reading Who Pays When the Court Compels a Buy-Out?

LLCIf there’s a common theme to the trio of LLC cases highlighted in this post, it’s that having a well-crafted written operating agreement is no guarantee there won’t be a litigation dust-up, while not having a written operating agreement greatly enhances the odds of a legal dispute among members at some point down the road.

Let’s start with the well-crafted operating agreement in Estate of Calderwood v Ace Group International LLC, 2016 NY Slip Op 30591(U) [Sup Ct NY County Feb. 29, 2016], in which Manhattan Commercial Division Justice Shirley Werner Kornreich ruled that upon the death of the subject Delaware LLC’s majority member, under the express terms of Sections 9.7 and 7.1 of the LLC Agreement (read here), his estate was deemed a “Withdrawing Member” with no management rights and retaining solely the right to receive distributions. Continue Reading LLC Case Notes: Member Expulsion, Withdrawal, and LLC Purpose

DiscountOn the heels of last week’s post titled The DLOM Debate Heats Up, a timely new ruling by a New Jersey intermediate appellate court adds yet another interesting twist to the application of the discount for lack of marketability in fair value proceedings involving dissenting shareholder appraisals and oppressed minority shareholder buyouts.

New Jersey courts have a more restrictive approach to DLOM in fair value contests than New York courts, generally reserving it for “extraordinary circumstances” involving inequitable or coercive conduct by the seller. This latest New Jersey ruling doesn’t make new law but, to this observer at least, its application and quantification of DLOM seem equally if not more reliant on legal doctrine and, in particular, free-floating equity considerations than on empirically-based appraisal theory and methodology.

The New Jersey Appellate Division’s unpublished decision in Wisniewski v Walsh, 2015 N.J. Super. Unpub. LEXIS 3001 [App. Div. Dec. 24, 2015], caps an astonishing 20-year litigation saga involving a family-owned trucking business taken over from the founding father by three siblings, one of whom sued the other two under New Jersey’s oppressed shareholder statute. In 2000 the trial judge ruled that the petitioner himself was the oppressor and ordered him to sell his one-third interest to the company or his siblings for fair value to be determined by the court. Continue Reading Court Applies 25% Marketability Discount Despite “Strong Indicators of Liquidity”