Wanted: Business Divorce Stories

Are you a business owner who’s been through a contentious break-up with your business partners and would like to share your experience with others? Are you a lawyer with a great war story to share about a business divorce case you handled? If so, and if you’re interested in telling your story for my Business Divorce Roundtable podcast, call me at 212-687-1230 or email me at pmahler@farrellfritz.com.


2of3A company has four founding shareholders each of whom is a director-employee. Their agreement provides that the votes of three out of four founders are required to terminate the employment of any founder or to approve a series of other major decisions such as making distributions, issuing or redeeming shares, amending the certificate of incorporation or bylaws, etc.

When one of the founders no longer is employed and thereby automatically loses his seat on the Board, under the same provision the number of votes required to approve termination of another founder or the other enumerated major decisions drops to two out of three.

Sounds simple so far, right?

Now let’s complicate things. Under another provision, any amendment of the agreement requires the approval of the company and of the founders holding at least 75% of the voting shares, which raises the following questions:

  • What happens when only three founders remain, two of them vote to terminate the third, and the remaining two hold less than 75% of the voting shares?
  • Can the business be managed with less than three founders who lack the voting power to amend the agreement to allow the them to make the enumerated major decisions?
  • Is the vote to terminate the third founder invalid absent a concurrent amendment of the agreement authorizing management of the company by only two founders?
  • If so, does that render the two-out-of-three voting authorization meaningless? Continue Reading Then There Were Two: Court Rejects Minority Shareholder’s Claim of Wrongful Termination Under Founders Agreement

StandingThe rules of “standing” in business divorce litigation generally require that the plaintiff have an ownership interest in the business entity at the time of the alleged wrongful conduct and, for derivative claims brought on the entity’s behalf, throughout the litigation.

In Lewis v Alcobi, 2017 NY Slip Op 30664(U) [Sup Ct NY County Apr. 6, 2017], Manhattan Commercial Division Justice Anil C. Singh considered whether a parent’s assignment of her young daughter’s membership interest in a limited liability company as security for the other parent’s unpaid debt deprived the daughter of standing to sue, despite the daughter’s claim to have received no consideration for the assignment.

The case provides useful lessons for litigating disputes of this sort and, perhaps more importantly, for transactional attorneys considering the use of LLC membership interests to secure payment obligations. Continue Reading Assignment of LLC Interest Defeats Standing Despite Alleged Lack of Consideration

egregiousKurt Vonnegut observed in his novel Deadeye Dick that the word “egregious,” which “most people think means terrible or unheard of or unforgivable has a much more interesting story than that to tell. It means ‘outside the herd.'”

He’s right. The original Latin ēgregius did indeed translate as “standing outside the herd” in the non-judgmental sense of exceptional, and it wasn’t until the late 16th century that the word took on its modern, disapproving sense.

I’ll grant you it’s a bit of a leap from etymology to business divorce, but in the court decision I’m about to describe, the meaning of the word “egregious” took center stage in a minority shareholder’s lawsuit seeking common-law dissolution of a closely held corporation.

The court’s decision last month in Braun v Green, 2016 WL 4539488 [Sup Ct NY County Aug. 31, 2016], sprang from a dispute between fellow shareholders in a Florida corporation whose sole asset is a commercial realty development near Houston, Texas. The plaintiff 8% shareholder, Braun, sourced the investment opportunity and presented it to the defendant 92% shareholder, Green, who provided all of the needed capital. Continue Reading Non-Egregiously Aggrieved Minority Shareholder Can’t Sue for Common-Law Dissolution

Good faithIf, as appears likely, the drafters of the LLC membership interest repurchase provisions at issue in Saleeby v Remco Maintenance, LLC, 2016 NY Slip Op 31447(U) [Sup Ct NY County July 25, 2016], thought they were helping the company avoid the possibility of litigation over the value assigned to the outgoing member’s interest, as it turns out they were sorely mistaken.

Poorly drafted or not, the LLC’s managers also likely did themselves and the company no favor by assigning a zero-dollar value to the membership interest of the terminated member in the Saleeby case, and by muddling the timing of the company’s exercise of its repurchase option.

Here, in a nutshell, is what happened in Saleeby as described in Manhattan Commercial Division Justice Anil C. Singh’s decision: In 2005, the defendant company Remco Maintenance, a New York based Delaware LLC, hired plaintiff Saleeby as its President and CEO. Saleeby’s employment agreement granted him a 7.5% Class B membership interest which fully vested by the time he was terminated without cause in February 2012. Over the next two years, Saleeby and the company attempted without success to negotiate their dispute over his termination, severance, vacation pay, and rights to unemployment insurance. In 2014, the company informed Saleeby that in 2013 it had exercised its option under the LLC Agreement to repurchase his membership units at a “fair market value” of zero dollars. Saleeby subsequently filed suit against the LLC for breach of contract and conversion. Continue Reading Good Faith Trumps Sole Discretion in LLC Agreement’s Repurchase Provision

Your client, a 50% shareholder of a New York close corporation, tells you that the business is in complete disarray due to irreconcilable disputes with the other 50% shareholder and that he believes the other shareholder has misappropriated the corporation’s assets and diverted business opportunities.

The client accepts your recommendation to bring a judicial dissolution proceeding. You review Article 11 of the Business Corporation Law before drafting the dissolution petition. You come across two dissolution statutes denominated § 1104 and § 1104-a. Section 1104, called “Petition in case of deadlock among directors or shareholders,” confers standing on a 50% shareholder and, as the name straightforwardly suggests, authorizes a court to dissolve based on deadlock precluding board action or election of directors, or other “internal dissension” warranting dissolution.

Section 1104-a, with the more cryptic name, “Petition for judicial dissolution under special circumstances,” confers standing on a shareholder with 20% or more of the corporation’s voting shares, and authorizes dissolution when the controlling shareholders or directors engage in “illegal, fraudulent or oppressive actions” against the petitioning shareholder, or have “looted, wasted, or diverted” the corporation’s property.

You quickly realize that your 50% shareholder-client has standing to seek dissolution under both statutes. Which one should you choose? If you believe you have facts sufficient to obtain dissolution under one of them, is there any reason to consider the other? Can you choose both? Does it really matter?

It most certainly does matter, for a couple of reasons mainly having to do with the different remedies offered by the two statutes. Continue Reading Choose the Right Dissolution Statute for the Right Remedy

 

I’m pleased to present my sixth annual list of picks for the past year’s ten most significant business divorce cases. This year’s selections, featuring seven appellate decisions, include significant rulings on a variety of issues in dissolution and appraisal cases involving closely held corporations, partnerships and limited liability companies. All ten were featured in this blog previously; click on the case name to read the full treatment. And the winners are:

 

  1. Holdrum Investments, N.V. v. Edelman, 2013 NY Slip Op 30369(U) (Sup Ct NY County Jan. 31, 2013), in which Manhattan Supreme Court Justice Anil C. Singh followed a 1994 First Department precedent in rejecting the argument that a New York court lacks subject matter jurisdiction to dissolve a foreign entity, in that case a Delaware limited partnership.
  2. Doyle v. Icon, LLC, 103 AD3d 440, 2013 NY Slip Op 00797 (1st Dept Feb. 7, 2013), where the First Department dismissed a complaint seeking judicial dissolution of an LLC, holding that allegations by a minority member of systematic exclusion by the controlling members, without more, fail to state adequate grounds for relief under LLC Law § 702.
  3. Sullivan v. Troser Management, Inc., 104 AD3d 1127, 2013 NY Slip Op 01634 (4th Dept Mar. 15, 2013), a 10-year litigation over a stock buy-out where the parties never updated the called-for Certificate of Value, in which the Fourth Department rejected the purchasing shareholder’s contention that the buy-out price should be based on book value.
  4. Gelman v. Buehler, 20 NY3d 534, 2013 NY Slip Op 01991 (Ct App Mar. 26, 2013), in which the Court of Appeals construed the phrases “definite term” and “particular undertaking is specified” as used in Section 62 of the Partnership Law in dismissing a complaint for wrongful termination of an oral partnership agreement.
  5. Mizrahi v. Cohen, 104 AD3d 917, 2013 NY Slip Op 02056 (2d Dept Mar. 27, 2013), where the Second Department ordered a buy-out of the defendant 50% member by the plaintiff 50% member as an equitable remedy in an LLC dissolution case.
  6. Born to Build LLC v. 1141 Realty LLC, 105 AD3d 425, 2013 NY Slip Op 02193 (1st Dept Apr. 2, 2013), in which the First Department ordered dismissal of a complaint for judicial dissolution of an LLC, brought by a party who purportedly acquired an undocumented membership interest at a judgment execution sale, where the LLC agreement negated the existence of the membership interest at issue.
  7. Matter of Sunburst Associates, Inc., 106 AD3d 1224, 2013 NY Slip Op 03368 (3d Dept May 9, 2013), an unusual case in which the Third Department dismissed a deadlock dissolution petition brought by a putative 50% shareholder on the ground that he had transferred his stock to the other 50% shareholder, notwithstanding evidence that, even after the transfer, the respondent shareholder had signed corporate tax returns reflecting the two of them as 50/50 shareholders. 
  8. Breidbart v. Wiesenthal, 108 AD3d 492, 2013 NY Slip Op 05040 (2d Dept July 3, 2013), where the Second Department held that a retired partner, or the estate of a deceased partner, who elects to receive post-withdrawal profits in lieu of interest under Section 73 of the Partnership Law is not entitled to recover appreciation on the value of the partnership assets.
  9. Ruggiero v. Ruggiero, 2013 NY Slip Op 31955(U) (Sup Ct Suffolk County July 29, 2013), in which Suffolk County Justice Emily Pines opted for one appraiser’s income approach over the other appraiser’s market approach in a stock valuation contest involving a family-owned kosher deli.
  10. Feinberg v. Silverberg, Decision and Order, Index No. 3120-11 (Sup Ct Nassau County Sept. 6, 2013), a decision by Nassau County Justice Vito DeStefano in which the court ruled that the petitioner’s alleged bad faith and creation of feigned deadlock is a cognizable defense in a proceeding for judicial dissolution under Business Corporation Law § 1104.

A recent decision by a Manhattan trial judge in Holdrum Investments, N.V. v. Edelman, 2013 NY Slip Op 30369(U) (Sup Ct NY County Jan. 31, 2013), brings into sharp relief the longstanding state of uncertainty surrounding the authority of a New York court to entertain a lawsuit seeking the involuntary dissolution of a New York-based foreign business entity.

Holdrum is a lawsuit brought in Manhattan Supreme Court by a limited partner of a New York-based, Delaware limited partnership formed in 1996 known as Museum Partners L.P.  The general partner is the former corporate raider, Asher Edelman, who, in the late 1980’s, left Wall Street and turned his considerable energies and resources to the fine arts and art financing. (Read here a 2010 Wall Street Journal profile of Edelman entitled The Art World’s Gordon Gekko.)

Holdrum’s Second Amended Complaint (read here) alleges that Museum Partners was formed for the purpose of obtaining an ownership position in a French publicly-traded company controlled by the Taittinger family, whose holdings included banking, hotel and champagne producer interests. Edelman sought either to obtain control of the company or to force the Taittinger family to purchase Museum Partner’s holding at a large profit. Continue Reading Judicial Muddle Persists Over Power to Dissolve Foreign Entities