Three recent court decisions from three different states — New York, Pennsylvania, and Alabama — add to the rogue’s gallery of valuation cases stemming from poorly conceived and/or poorly implemented buy-sell agreements among shareholders or LLC members.

Each one, in its own way, teaches a valuable lesson for lawyers charged with drafting such agreements, and also highlights the wisdom of consulting with appraisal experts at the time of drafting.

New York: The Nimkoff Case

The Nimkoff case is an old friend of this blog, and I do mean old. I first wrote about the case in its infancy, in 2010 (read here). Eight years later, following discovery and a dozen or so motions, the case has yet to be tried.

Nimkoff is a fight over the value of a 3.6% membership interest in a single-asset realty holding LLC owned by a group of medical doctors. The plaintiff is the wife-executrix of one of the doctors, whose death in 2004 triggered the LLC’s obligation to purchase the deceased member’s interest for a “Stated Value” in accordance with the operating agreement which also required that the Stated Value be updated annually. Continue Reading Lessons From a Trio of Dysfunctional Buy-Sell Agreements

The statutes and judge-made law governing dissolution and other claims among co-owners of closely held business entities can vary significantly from state to state. Depending on the states, there also can be much in common, which is why I like to keep an eye on developments outside New York, and not just Delaware which tends to have the most advanced business-law jurisprudence.

Below are five business divorce cases decided by appellate courts outside New York that made a splash in 2014. As you might expect, four of the five involve that relatively new business entity form, the limited liability company. The one involving a traditional business corporation, however, likely made the biggest splash.

Ritchie v Rupe, 2014 WL 2788335 [Tex. Sup Ct June 20, 2014]. The Lone Star State takes the prize for the most controversial business divorce decision in 2014, thanks to the Texas Supreme Court’s decision in Ritchie which, as one commentator put it, effectively “gutted the cause of action for shareholder oppression in Texas.” A Texas intermediate appellate court ruling in 1988, which had been followed ever since, recognized a compulsory buyout remedy for oppressed minority shareholders under a broad test for oppression mirroring New York’s reasonable-expectations standard. No more. The Ritchie court, in a 6-3 decision, narrowly defined oppressive conduct by majority shareholders as “when they abuse their authority over the corporation with the intent to harm the interests of one or more of the shareholders, in a manner that does not comport with the honest exercise of their business judgment, and by doing so create a serious risk of harm to the corporation.” The Ritchie majority then applied the coup de grâce by construing the applicable Texas statute as limiting the remedy for oppressive conduct to the appointment of a “rehabilitative receiver.” Bye bye buyout. For a more detailed analysis of Ritchie‘s impact on Texas business divorce litigation, check out my friend Ladd Hirsch’s posts here, here, and here on his Texas Business Divorce blog.   Continue Reading Round-Up of Recent Business Divorce Cases From Across the Country