Over the last several years, the books-and-records proceeding and its corresponding shareholder rights of inspection seem to have entered a bit of renaissance period in the courts. We here at New York Business Divorce have reported on at least nine decisions primarily addressing the topic since September 2014, going on record to proclaim the phenomenon as a “boost” for the summary proceeding, by which minority owners in closely-held businesses can get a window into the management and operation of the companies from which they’ve been shut out. We’ve even gone so far as to suggest that books-and-records proceedings may be “on a roll” of late, both in terms of an expansion what constitutes a “proper purpose” for bringing the proceeding, as well as in terms of the scope of information attainable.

That trend, at least with respect to the frequency with which issues related to inspection rights are being litigated, appears to be continuing into 2018. What follows are summaries of three of this year’s more notable decisions addressing inspection rights – all from Manhattan Supreme Court, as it happens.

But first, a quick refresher on the subject matter at hand… Continue Reading Inspection Rights, Oral Operating Agreements, and Other Pop-Diva Delights

The Nobel Prize symbolizes the apex of human achievement in the arts and sciences. It is no guarantee, however, that its recipients are equally adept when it comes to their own business endeavors.

Dr. Günter Blobel, pictured accepting his Nobel Prize in Medicine in 1999 for his revolutionary work in molecular cell biology, shortly afterward formed a business venture with two others — one his research assistant, the other a corporate lawyer — to commercialize a patented process called Chromovert, used in cell discovery assays. Almost two decades later, their company, Chromocell Corp., appears to be flourishing.

Not so for Dr. Blobel’s relationship with his fellow shareholders, eventually naming them defendants in a lawsuit he brought in Manhattan Supreme Court, seeking to enforce an alleged oral agreement to equalize his ownership stake. It didn’t turn out well for Dr. Blobel, whose suit was dismissed earlier this year by Manhattan Commercial Division Justice Andrea Masley in Blobel v Kopfli, 2018 NY Slip Op 30298(U) [Sup Ct NY County Feb. 13, 2018].

Five days after the court’s decision, Dr. Blobel succumbed to cancer at the age of 81. Continue Reading No Prize for Nobel Laureate in Fight for Bigger Stake in Biotech Company

NY

DelawareThe common perception among practitioners familiar with the business entity laws of New York and Delaware is that Delaware law generally is friendlier to, and more protective of, majority ownership and management interests.

Two recent cases — one from each state — highlight at least one important area where the common perception does not apply: majority rights under the statutory default rules to adopt or amend an LLC operating agreement without the consent of all the members.

The difference between the two states can have critical consequences for both majority and minority members of the many LLCs that, for better or worse, are formed without a written operating agreement.

The New York case is one I previously wrote about on this blog. Last January, in Shapiro v Ettenson, the Appellate Division, First Department, in a case involving a three-member LLC that was formed without a written operating agreement, affirmed a lower court’s decision construing Section 402 (c) (3) of the New York LLC Law (“except as provided in the operating agreement . . . the vote of a majority in interest of the members entitled to vote thereon shall be required to . . . adopt, amend, restate or revoke the articles of organization or operating agreement”) to permit the two-member majority to adopt a written operating agreement almost two years after the LLC was formed and began operating, without the third member’s consent and notwithstanding certain provisions in the agreement that modified the statutory default rules adversely to the third member. Continue Reading Delaware Ruling Highlights Difference With New York Over Amending LLC Agreements

Around a year ago I wrote about Delaware Chancery Court’s ruling in Olson v. Halvorsen, in which it held that the statute of frauds applies to oral LLC operating agreements.  I pointed out that Delaware’s LLC law expressly permits oral operating agreements, whereas New York’s LLC law defines the operating agreement as a written agreement.  To my knowledge, no New York court has yet grappled with the issue.

The Olson ruling was appealed to the Delaware Supreme Court, which yesterday affirmed Chancery Court’s ruling (read decision here).  In a posting today on his Ideoblog, Professor Ribstein quotes at length from the decision and offers his always-incisive analysis, including his take on how the Olson ruling might play out in a jurisdiction like New York that requires written operating agreements.

It’s an important issue for practicing attorneys who help form and give counsel to LLCs, so if you fall into that category — or even if you don’t — I recommend you read the Professor’s post.

Update June 22, 2010:  Over at the Unincorporated Business Entities Law blog, Gary Rosin reports that the Delaware legislature has enacted an amendment to the definition of "limited liability company agreement" in § 18-101(7) of the Delaware LLC Act which overrules the Supreme Court’s Olson ruling by explicitly stating that "[a] limited liability company agreement is not subject to any statute of frauds."  How’s that for plain-English drafting?