shutterstock_581026324As promised in the postscript to last week’s post about the appellate ruling in the Gould case, affirming Justice Platkin’s order granting the oppressed minority shareholder’s dissolution petition involving a pair of construction firms, we now arrive at Justice Platkin’s subsequent determination of the fair value of the minority shareholder’s equity stake.

The decision raises several important issues of interest to business appraisers and business divorce counsel, including selection of tax rates, the appropriate look-back period in determining historical earnings, adjustments for non-arm’s length inter-company transactions, and use of the market approach.

Justice Platkin’s valuation ruling last month in Matter of Digeser v Flach [Gould Erectors & Rigging, Inc.], 2017 NY Slip Op 50220(U) [Sup Ct Albany County Jan. 31, 2017], is the culmination of an oppressed minority shareholder dissolution petition filed in April 2013. In his November 2015 post-trial decision, which I wrote about here, Justice Platkin found that Digeser, a minority shareholder in the two corporations, established grounds for dissolution based on oppression, but he left open the question of remedy. Continue Reading Business Appraisers Spar Over Tax Rates, Market Approach and Other Key Issues in Fair Value Buy-Out Case

Top 10aI’m pleased to present my eighth annual list of the past year’s ten most significant business divorce cases. In previous years my lists rarely included cases outside New York, but this year’s batch includes three important decisions by the Delaware Court of Chancery. Also, reflecting the growing predominance of limited liability companies over close corporations, this year’s selections include seven LLC cases and only three involving corporations. All ten were featured on this blog previously; click on the case name to read the full treatment. And the winners are:

  1. Chiu v Chiu, 125 AD3d 824 [2d Dept 2015], in which the appellate court affirmed without comment a 0% discount for lack of marketability in fixing the fair value of a membership interest in a single asset realty company pursuant to LLC Law § 509, but disagreed with the lower court’s assignment of a 10% interest to the withdrawn member — rather than 25% as reflected in the LLC’s initial tax returns — based on additional capital contributions made by the other member that, according to the appellate court, should have been characterized as loans.
  2. In re Carlisle Etcetera LLC, 2015 WL 1947027 [Del. Ch. Apr. 30, 2015], in which the Delaware Chancery Court held that the assignee of an LLC membership interest, who as a non-member and non-manager lacked standing to seek involuntary dissolution under Section 18-802 of the Delaware LLC Act, nonetheless had standing to seek equitable dissolution under the Chancery Court’s common-law authority as a court of equity.
  3. Barone v Sowers, 128 AD3d 484 [1st Dept 2015], an LLC dissolution case in which the appellate court found inadequate at the pleading stage a non-controlling member’s allegations of “oppression” involving a functioning, financially viable realty-owning LLC, and also dismissed the petitioner’s derivative claims for failure to plead facts showing demand futility.
  4. Meyer Natural Foods LLC v Duff, 2015 WL 3746283 [Del. Ch. June 4, 2015], another novel ruling by Chancery Court where, in granting dissolution of an LLC based on the termination of a supply agreement between its two members, the court looked beyond the LLC’s stated purpose in its operating agreement and instead adopted the petitioner’s “contextual interpretation” of the purpose clause.
  5. Sansum v Fioratti, 128 AD3d 420 [1st Dept 2015], a highly unusual case involving a 6% shareholder’s claim for common-law dissolution of close corporation that operated an art gallery, in which the appellate court ordered the claim’s dismissal without a hearing based on the petitioner’s “unclean hands” stemming from his guilty plea to criminal charges of embezzlement from the company, and invoked the in pari delicto doctrine in rejecting the plaintiff’s argument that the defendants used unlawful means to obtain the money he took.
  6. Goldstein v Pikus, 2015 NY Slip Op 31455(U) [Sup Ct NY County July 20, 2015], in which the court granted summary judgment dismissing an LLC dissolution petition involving a realty-holding company where the petitioner’s allegations of deadlock and misconduct by the managing member failed to establish that the LLC was financially infeasible or was unable to function in accordance with its purpose as stated in its operating agreement.
  7. Shapiro v Ettenson, 2015 NY Slip Op 31670(U) [Sup Ct NY County Aug. 16, 2015], a case of apparent first impression in which the court held enforceable under LLC Law § 402(c)(3) an operating agreement executed by the majority members over a year after the LLC’s formation, which included provisions for additional capital contributions and adjustment of member percentage interests for failure to make a requested contribution.
  8. Matter of Digeser v Flach, 49 Misc 3d 1213(A) [Sup Ct Albany County 2015]  , which I referred to as a “classic case” of minority shareholder oppression, where the court’s post-trial decision found that the petitioner established grounds for dissolution under BCL § 1104-a after the majority shareholder terminated his employment, cut off all salary and benefits, and removed him from the board of directors.
  9. Matter of Activity Kuafu Hudson Yards LLC, Index No. 650599/15 [Sup Ct NY County Apr. 14, 2015], in which the court dismissed for lack of subject matter jurisdiction a petition to dissolve an allegedly deadlocked Delaware LLC, notwithstanding a provision in its operating agreement waiving the members’ right to bring an action relating to the agreement in any court outside New York County, New York.
  10. Shawe v Elting, C.A. No. 9661-CB [Del. Ch. Aug. 13, 2015], a case in which the two 50/50 owners of an immensely successful business found themselves “locked in corporate hell” due to their personal animosity, leading the Delaware Chancery Court to grant an application under DGCL § 226 to appoint a custodian to sell the company either to one of the two owners or to an outside buyer.

OppressionNew York and most other states have judicial dissolution statutes protecting minority shareholders in close corporations against “oppressive actions” by controlling shareholders and directors. In many of those states, including New York, courts define oppression as conduct that defeats the minority shareholder’s “reasonable expectations.” The reasonable-expectations standard necessarily is a flexible one that allows courts to address the myriad circumstances under which minority shareholders, who generally lack exit rights and whose shares have no public market, face squeeze-out or freeze-out by the majority.

If I had to describe the classic case of minority shareholder oppression, it would be (1) an owner-operated business (2) that pays no stock dividends (3) in which the majority shareholder terminates the minority shareholder’s employment (4) thereby cutting off the minority shareholder’s sole source of economic benefits in the form of salary and bonus (5) while also removing the minority shareholder from the board of directors (6) thereby depriving the minority shareholder of any voice in company management.

I’ve pretty much just described the circumstances present in Matter of Digeser v Flach, 2015 NY Slip Op 51609(U) [Sup Ct Albany County Nov. 5, 2015], a post-trial decision handed down earlier this month by Albany County Commercial Division Justice Richard M. Platkin in which the court concluded that the petitioning minority shareholder established grounds for dissolution of two affiliated construction companies. Continue Reading A Classic Case of Minority Shareholder Oppression

It’s hard enough to explain to clients in business divorce cases the complicated statutory and judge-made law governing the substantive rights of the parties, for example, what constitutes shareholder oppression, or what kind of deadlock between 50/50 owners warrants dissolution, or how a stock interest gets valued in a buy-out proceeding.

But try explaining to clients the confoundingly intricate rules of civil procedure that dictate how a lawsuit must be prosecuted and defended, and, well, let’s just say you tend to get a lot of blank stares in return.

Whatever clients do or don’t comprehend, lawyers know that the rules of civil procedure present pitfalls and opportunities that can make or break a case, regardless of the more meaningful questions about who did what to whom, and which side should win or lose on the merits.

So primarily for all you lawyers reading this, I present below a series of short summaries of recent court decisions addressing a potpourri of procedural issues in dissolution cases, including service of the petition, time to answer, consolidation and intervention, and seeking unpleaded relief. Continue Reading A Potpourri of Procedural Issues in Dissolution Cases