Owners of family-owned businesses sometimes enter into agreements between each other for the purchase and sale of shares in the business. Ideally, these agreements are negotiated, documented and implemented in a way that each party is satisfied with the result – e.g., one owner acquires additional shares while the other owner receives the agreed-to cash value for the shares and exits the business. But sometimes one party (often the seller) will claim that the deal was not fair, that he or she did not in fact receive the full value of the shares or that the agreement should be voided due to “economic duress.” Continue Reading Watch Out For Claims Of Economic Duress After Purchasing Shares In A Family-Owned Business
Corporate shareholders with voting shares have the right to elect a corporation’s directors. Elections typically occur at an annual shareholder meeting. If the company does not schedule an annual meeting, a shareholder may have the right under the applicable state corporation statute to ask a court to order that such a meeting be scheduled. In Ielmini v. Patterson Frozen Foods, Inc. (Court of Appeals of California, Fifth District, September 12, 2018), a California Court recently ordered that an annual meeting be held in the context of a family-owned business where certain directors and controlling shareholders had previously refused to hold a meeting. Continue Reading Court Orders Family-Owned Business to Hold Annual Shareholder Meeting
A judge in the Supreme Court for the State of New York recently allowed a petition for “common law dissolution” of a family-owned business filed by one shareholder to proceed despite the arguments of the other shareholders that the case should be dismissed. Yu v. Bong Yu, Docket No. 656611/2016, Supreme Court, New York County (August 15, 2018). Patrick Yu claimed that he was a shareholder of Moklam Enterprises, Inc. The remaining owners allegedly include his father, Bong Yu, his brother, Raymond Yu, and his sister, Catherine Yu. Moklam was an entity that funded the Yu family’s various real estate and business activities. While the remaining family members all had roles in Moklam’s business operations, Patrick, a lawyer, was employed only as counsel to Moklam and the other Yu family entities. Continue Reading Son’s Lawsuit to Dissolve Family Business Based Upon Relatives’ “Vendetta” Against Him Allowed To Proceed
On August 10, 2018, Massachusetts Governor Charlie Baker signed into law a piece of legislation entitled “An Act Relative to Economic Development in the Commonwealth.” This new legislation brings long-awaited non-compete reform to Massachusetts, and lays out some new guidelines for business owners to consider when determining whether or not to require employees to sign true non-compete agreements that would prohibit a departing employee from engaging in competitive activities. Continue Reading What Business Owners Should Know About Massachusetts’ New Non-Compete Law
As the M&A market stays active, more and more family-owned businesses are selling to third parties. Many of these transactions involve sophisticated buyers, who spend a lot of time, money and effort on due diligence of a seller. While there are many elements that go into a successful sale of a business, sellers can take a few steps prior to starting on the sale process to help ensure smoother negotiations (and hopefully a smooth transaction). Continue Reading Thinking of Selling Your Family Business? Some Preliminary Steps.
Many operating businesses in Massachusetts are set up as limited liability companies rather than corporations. Limited liability companies can engage in many of the same activities as corporations, including participating in M&A transactions as both buyers and sellers. The rights of members in LLC’s engaging in such transaction are set forth in M.G.L. c. 156C, the Massachusetts Limited Liability Company Act (the “Act”). Generally, a member in a Massachusetts limited liability company who dissents from a merger has limited rights under Section 60 (b) of the Act, to resign and receive the distributions owed in respect of the member’s interest ( “The exclusive remedy of a member of a domestic limited liability company, which has voted to consolidate or to merge with another entity under the provisions of [the Act], who objects to such consolidation or merger, shall be the right to resign as a member and to receive any distribution with respect to his limited liability company interest, as provided in sections thirty-one to thirty-seven, inclusive.”) Continue Reading MA SJC Rules on Merger-Related Fiduciary Duties
In a recent decision, the Massachusetts Supreme Judicial Court ruled that governmental entities have great flexibility to terminate agreements with contractors where the agreement includes a “termination for convenience” provision. Many family-owned enterprises do business with the Commonwealth of Massachusetts or other governmental entities, and should be aware that the parties to those arrangements will have greater freedom to terminate these arrangements as a result of this decision. Continue Reading MA SJC Rules on “Termination for Convenience” Provisions
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