When a shareholder claims that a director or officer has harmed a corporation through his or her improper conduct, these claims typically must be brought through a derivative action, in which the shareholder sues on behalf of the corporation. Ordinarily, however, a corporation’s board of directors has the authority to bring lawsuits on the company’s behalf, for the benefit of all of the shareholders. Thus, a shareholder who wants the company to pursue claims must first make a demand upon the board to file a lawsuit, unless such a demand would be futile. As courts in Delaware and elsewhere have determined, so-called “demand futility” may be found where there is a “reasonable doubt that, as of the time the complaint is filed, a majority of the board could have properly exercised [their] independent and disinterested business judgment in responding to a demand.” In these situations, a demand would be futile because “a shareholder would be effectively asking a majority of the board of directors to cause the corporation to sue themselves.” If a shareholder attempts to bring a derivative suit without first making a demand or without showing futility, that suit may be dismissed on a motion by the defendants. Continue Reading Do Shareholders Need to Make a Demand Upon the Board of Directors Before Filing Suit on a Family-Owned Corporation’s Behalf?
Many family businesses run smoothly for years, until the business is sold or passed on to the next generation(s). There are, however, those circumstances where the family or closely-held business runs into a deadlock among management where the parties are unable to agree on a course of action to move the business forward. In these circumstances, one party can petition the appropriate court for a judicial dissolution of the business. The other party may be opposed to this prospect, but can do little other than defend the claim or try to work out a solution with the party filing suit. Owners of family or closely-held businesses should be familiar with the applicable judicial dissolution standards and should try to include language in a shareholder agreement or operating agreement to avoid this problem, especially where management and stockholdings are divided 50/50. An ongoing deadlock can be severely damaging to a business, taking time, attention and funding away from other matters. Continue Reading Family Business Owners Should Be Aware Of Statutory “Deadlock” Provisions
A corporation ordinarily is not liable for the debts of other entities or for the debts of its owners in the absence of an express agreement, such as a guarantee. However, a creditor of one company may try to impose liability on one or more non-debtor entities under “alter ego” or “successor liability” theories in certain circumstances. In these circumstances, a creditor often alleges that there has been a transaction between a predecessor debtor entity and successor non-debtor entity through which: (1) the successor expressly or impliedly has assumed the liabilities of the predecessor; (2) the transaction has resulted in a de facto merger between the entities; (3) the successor is a mere continuation of the predecessor; or (4) the transaction is a fraudulent effort to avoid liabilities of the predecessor. If the creditor is successful, a non-debtor entity may then become liable for debts that it did not incur in its own name and that non-debtor entity’s assets also may be reachable to satisfy the debts. Continue Reading Beware of Successor Liability Claims in Connection with Family-Owned Businesses
After a somewhat choppy 2017, many experts are calling for a busy 2018 in the M&A space. The Intralinks Deal Flow Predictor Report suggests that the pace of M&A activity will increase in 2018, based in large part on “a combination of gradual acceleration in global economic growth, low inflation in advanced and emerging economies, buoyant asset markets and low-interest rates that continue to bolster the M&A markets.” While there are concerns that could impact the potential increase in deal flow (such as a rise in economic protectionism or a global equity sell-off) the prevailing view is that the positive conditions for M&A activity will continue to rule the day and drive increasing dealmaking. Continue Reading Expect A Busy 2018 On The M&A Front
Controlling shareholders and managers of family-owned businesses often direct the use of company funds and other resources to provide employment and other benefits to non-shareholder family members. In a business that is wholly-owned by close family members, there may be little concern that other family member shareholders will complain about the use of such resources, as long as there is disclosure and perceived fairness concerning the use of company funds and access to employment opportunities. The risk of a potential claim for breach of fiduciary duty or minority shareholder oppression may increase, however, when non-family members are admitted into the ownership structure. At that point, historic and perhaps informal practices concerning family member involvement in, and benefits from, the company may not be acceptable to a new owner. The controlling family member owners must therefore be careful to follow good corporate governance practices when making decisions on the company’s behalf. Continue Reading Watch Out For Minority Shareholder Oppression Claims After Admitting Non-Family Shareholders To The Family-Owned Business
Disputes between and among owners of family-owned businesses are sometimes unavoidable. When such disputes progress to litigation, they can be extremely costly, time-consuming, and disruptive for the business and its owners. However, most civil lawsuits still settle before reaching a trial before a judge or jury. More specifically, many of those suits settle through mediation. Indeed, judges routinely encourage parties to attempt to settle their disputes, through mediation or otherwise, before setting a trial date.
Mediation is a process through which parties to a dispute select a neutral third-party – often a retired judge or an attorney with subject-matter experience – to attempt to broker a deal between the opposing sides. Mediation sessions are confidential and provide an opportunity for parties to explore a variety of options for resolving their dispute that otherwise may become unavailable once the case is put in a judge or jury’s hands. If done early in the life of a case, mediation can also allow the parties to avoid substantial litigation costs and business disruption.
Owners of family-owned corporations often enter into shareholder agreements that spell out whether and to whom corporate shares can be transferred. Frequently, these agreements provide for rights of first refusal by the other stockholders or a stock repurchase by the company if a shareholder wishes to transfer shares during his or her lifetime. These agreements also typically address whether shares may be transferred to any heirs upon a shareholder’s death. Unless the language regarding permitted transfers is clear, claims may arise between generations of owners concerning the proper ownership of shares upon a shareholder’s death.
A recent California Court of Appeal decision – Saccani v. Saccani – is illustrative of the type of dispute that can arise between family members over a deceased owner’s shares. Albert Saccani started Saccani Distributing Company in 1933. According to the Court, Albert’s “desire was that the company would always be kept in the family.” When he died, each of his sons – Donald, Roland, and Gary – received one-third of the company’s shares. Continue Reading Definitions in Shareholder Agreements Matter When Transferring Family-Owned Business Stock
Family-owned businesses often employ multiple family members. Even if there is an expectation that employment will continue indefinitely, the company and the family member employees both usually reserve the right, explicitly or implicitly, to terminate the employment “at-will,” meaning at any time and for any reason. The terms of such at-will employment need not be set out in writing, though sometimes they are. However, where the parties contemplate the right and obligation of lifetime employment, they should put the employment terms in writing to avoid the potential application of the statute of frauds.
The statute of frauds, generally, bars a party from bringing a claim for breach of an agreement that cannot by its terms be performed within one year, unless the agreement is in writing. In some states, such as Massachusetts, an otherwise enforceable oral agreement for lifetime employment does not fail due to the statute of frauds, because, the courts reason, the agreement could theoretically be fully performed if the employee dies or the company goes out of business within one year of the contract date. In other states, such as Illinois, an oral lifetime employment agreement is not enforceable under the statute of frauds, because, as the courts reason, a lifetime employment agreement “anticipates a relationship of a long duration – certainly longer than one year.” Courts in those states apply the statute of frauds to such agreements in recognition of the evidentiary concern that memories can and do fade over time and thus become unreliable and in order to protect defendants and the court from “confusion, uncertainty and outright fraud.” Continue Reading If You Expect to Work in the Family-Owned Business for Life, Be Sure to Get It in Writing