of Contract and Shareholder Oppression Identifying Causes of Action; - - PowerPoint PPT Presentation

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Presenting a live 90-minute webinar with interactive Q&A

Litigating Closely Held Business Disputes: Breach of Fiduciary Duty, Breach

• f Contract and Shareholder Oppression

Identifying Causes of Action; Pursuing Emergency Injunctions, Partition and Dissolution; Tackling Valuation Issues

Today’s faculty features:

TUESDAY, AUGUST 4, 2015

Michele Lorbieski Anderson, Member, Frost Brown Todd, Indianapolis Aaron Chausmer, Member, Chausmer Law, Atlanta

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

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Litigating Closely Held Business Disputes

Michele Lorbieski Anderson Member 201 North Illinois Street, Suite 1900 Indianapolis, IN 46244-0961 317.237.3216 manderson@fbtlaw.com

Today’s Topics

• Causes of Action
• Remedies
• Valuation Issues
• Derivative vs. Direct Claims

6

Causes of Action

• Appointment of Receiver
• Breach of Fiduciary Duty
• Breach of Contract
• Fraud

7

Do you have a claim?

• Commingling of Funds
• Officer Compensation
• Restrictions on Dividends
• Reduced Repurchase Price
• Self-dealing
• Waste

8

Appointment of Receiver

Indiana

• Dissolution
• Insolvent
• Imminent danger of insolvency
• Forfeiture of corporate rights

Delaware

• Insolvency plus

9

Inspection of Corporate Records

• Limited Access

Statute

Governing Documents Shareholder Agreements

• Proper Purpose

Whether the request for inspection is reasonably

related to the individual’s interest as a shareholder.

• Confidentiality Agreements

10

Inspection of Corporate Records

• Ind. Code§ 23-1-52-2
• Minutes of board of directors, committee of

the board of directors, or shareholders.

• Records of action taken by the shareholders
• r board of directors without a meeting.
• Accounting records.
• The record of shareholders.

11

Inspection of Corporate Records

• Del. Code Ann. tit. 8,§ 220
• Stock ledger.
• List of stockholders.
• Other books and records.
• Subsidiary books and records (with caveats).

12

Breach of Fiduciary Duty

• Duty of Loyalty

Usurpation of Corporate Opportunities Self-Dealing

• Duty of Care

Business Judgment Rule Entire Fairness

13

Shareholder Meetings

• Meetings
• Ind. Code§ 23-1-29-1; Del. Code Ann. tit. 8,§ 211
• Notice Requirement
• Ind. Code§ 23-1-29-5; Del. Code Ann. tit. 8,§ 222
• Shareholder Consent
• Ind. Code§ 23-1-29-4; Del. Code Ann. tit. 8,§ 228

14

Breach of Contract

• Governing Documents
• Shareholder Agreements
• Implied Covenant of Good Faith

and Fair Dealing

15

Fraud

• Fraudulent Inducement
• Securities Fraud
• Pleading Requirements
• Evidentiary Issues

16

Remedies

• Temporary Restraining Order
• Preliminary Injunction
• Permanent Injunction
• Partition
• Dissolution

17

Injunctions and TROs

• Reasonable likelihood of success
• n the merits
• No adequate remedy at law
• Irreparable harm
• Balancing test
• Public interest

18

Injunctions and TROs

• Forum
• Expedited Discovery
• Bond

19

Partition

• Physical division by sale and

distribution of net proceeds.

• Sale of a co-owner’s interest by another

co-owner.

• Partition by appraisal.
• Action for partition with appointment of

referee.

20

Dissolution

• Limited Liability Companies
• Partnerships and Corporations

21

Other Relief

• Money Damages
• Punitive Damages
• Attorneys’ Fees
• Contribution
• Indemnification
• Constructive Trust

22

CLOSELY HELD BUSINESS DISPUTES

Derivative or Direct Claims

• and-

Valuation Concerns

August 4, 2015

1050 Crown Pointe Parkway, Suite 340 · Atlanta, Georgia 30338 404.856.3992 P · 404.478.8494 F · chausmerlaw.com

Aaron B. Chausmer

24

Derivative

• r Direct?

KNOW the Applicable Law!

Is the entity a domestic or foreign entity?

◊ Many entities may operate solely in one jurisdiction, but have been incorporated in a different jurisdiction, such as Delaware. ◊ See, e.g., O.C.G.A. § § 14-2-747 and 14-11-807 (“In any derivative action in the right of a foreign [corporation or limited liability company], the matters . . . shall be governed by the laws of the jurisdiction of organization of the foreign limited liability company . . .”).

24 24

25

Derivative

• r Direct?

Is the Entity a Formal “Close” Corporation?

If so, claimant may be able to proceed directly. Statutory “close” corporations often have special statutory considerations. See, e.g., O.C.G.A. § 14-2-940 (“a shareholder of a statutory close corporation may petition the superior court” for relief); see also Grace Bros., Ltd. v. Farley Indus., Inc., 264 Ga. 817, 819, 450 S.E.2d 814, 816 (1994) (“outside the context of a close corporation, a shareholder must be injured in a way which is different from the other shareholders or independently of the corporation to have standing to assert a direct action”)

25 25

26

Derivative

• r Direct?

Is the Claim Direct or Derivative?

To determine if claim is direct or derivative, look at the nature of the alleged wrong. ◊ Who was harmed? ◊ Is the claim an asset of the Entity? ◊ Who needs to be protected?

26 26

27

Derivative

• r Direct?

Is the Claim Direct or Derivative?

For a direct claim, Owner must generally allege a separate and distinct injury or a right that exists independent of any right

• f the Entity.

For a derivative claim, the Owner acts on behalf of the Entity because the Entity was harmed. ◊ Conversion or misappropriation

• f Entity assets

◊ Breach of Fiduciary Duty by Officers and Directors ◊ Corporate waste

27 27

28

Derivative

• r Direct?

Is the Claim Direct or Derivative?

Reasons for to require derivative suit: ◊ prevents multiple lawsuits ◊ protects corporate creditors by putting proceeds back in the Entity ◊ protects all Owners, instead of benefitting only one Owner ◊ Owner is compensated by increasing value of interest

See Thomas v. Dickson, 250 Ga. 772, 301 S.E.2d 49 (1983)

28 28

29

Derivative

• r Direct?

Who Gets Recovery?

Under Delaware and other states’ laws: ◊ any recovery obtained in a derivative suit must go to the corporation – then may be used in

• rdinary course of business or

distributed to Owners in accordance with Corporate Documents ◊ while any recovery in a direct action flows directly to the Owners, not to the corporation.

29 29

30

Derivative

• r Direct?

Derivative Claims Have Special Conditions

◊ There is generally a pre-litigation demand requirement. ◊ See, e.g., O.C.G.A. § 14-2-742 (shareholder must make written demand for “suitable action” and Entity has 90 days to act, unless demand would be futile or irreparable injury would result) ◊ Because claim belongs to Entity, Owner must give the Entity a chance to act on the claim.

30 30

31

Derivative

• r Direct?

Derivative Claims Can Face Early Dismissal

◊ Courts may defer to the Entity’s “business judgment” and dismiss the derivative case if exercised in good faith and by independent decision-makers. ◊ See, e.g., O.C.G.A. § 14-2-743 (may stay proceedings pending inquiry) and -744 (may dismiss action if is “not in the best interests of the corporation” as determined by independent directors or persons). ◊ Because the Claim belongs to the Entity, not the Owner.

31 31

32

Derivative

• r Direct?

Derivative Claims Can Face Early Dismissal (Cont’d.)

◊ Suggested Reading. Cox Enterprises, Inc. v. News-Journal Corp.,

• -- F.3d ---, 2015 WL 4461615 (11th Cir.

July 22, 2015) :

• Good summary of case history,

where derivative suit “dismissed” under FL’s election-to-purchase statute (at “fair value”);

• But process did not end well

when Company became insolvent and Cox’s claims became subordinate to claim of Pension Benefit Guaranty Corp.

32 32

33

Derivative

• r Direct?

Derivative Claims Remain Subject to Court Oversight

◊ Because Claim belongs to the Entity, the Owner cannot unilaterally dismiss or settle the Claim without Court approval. ◊ And Court may require notice to non-party shareholders or members. ◊ See, e.g., Fed. R. Civ. P. 23.1(c) (“derivative action may be settled, voluntarily dismissed, or compromised

• nly with the court's approval”); see also

O.C.G.A. §§ 14-2-745 and 14-11-804.

33 33

34

Valuation

What is the Valuation For?

◊ Different Claims May Have Different Items being Valued. ◊ Is minority interest contesting treatment or bring a claim? ◊ What state or statute applies? ◊ “Fair Value” is not “Fair Market Value” ◊ Valuing Interest at Issue or Entity as a Whole (then pro rata value)

34 34

35

Valuation

Different Valuation Methodologies ◊ Income or Capitalized Earnings Method ◊ Market Approach Method ◊ Cost Approach Method ◊ Others? Valuations May Be More Art Than Science.

35 35

36

Valuation

Know Thy Entity

Valuation methodology may be influenced by Entity-specific factors: ◊ Professional Services ◊ Newspapers / “New” Media ◊ Financial Services or Banks ◊ Agricultural/Farming ◊ Manufacturing ◊ Real Estate

36 36

37

Valuation

Minority Interests are Routinely “Discounted” as Part of Valuation Discount is because a bona fide purchaser would not likely pay full price for interest: ◊ Interest May Have Limited Marketability or Transferability ◊ Lack of Control over Entity (dividends, policies, etc.) ◊ Cannot Force Sale of Corporate Assets or Dissolution

37 37

38

Valuation

Other Potential Areas of Valuation Information ◊ Divorce Cases ◊ IRS Matters

38 38