All too often, family businesses are run in an “informal” fashion, with insufficient attention being paid to corporate formalities, including requirements set forth in a corporation’s bylaws. The Delaware Chancery Court recently ruled in Rainbow Mountain, Inc. vs. Begeman (March 23, 2017), that even in a family-owned business where all of the parties to a dispute are family members, the bylaws will control corporate actions.

In Rainbow Mountain, the defendant Terry Begeman was a member of the family that had founded the corporation.  After a falling out among the family members, the group that held a controlling interest sought to remove Terry from the board of directors of the corporation, and in 2008 voted him off of the board of directors.  Terry refused to accept this removal, and in 2014 the corporation filed an action for declaratory judgment seeking to confirm that Terry had been removed from the board.


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In a recent decision, the United States Bankruptcy Court for the Eastern District of Massachusetts sent a reminder to practitioners and family business owners that it is critical to maintain corporate formalities in order to avoid unintended liabilities.  In the case of  In re Cameron Construction & Roofing Co., Adv. P. No. 15-1121, 2016 WL 7241337 (Bankr. D. Mass. December 14, 2016), the Bankruptcy Court applied the concept of substantive consolidation and made the assets of a non-bankrupt related entity available to creditors in the bankruptcy proceeding.

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