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
When a business owner dies, his or her ownership interests often become part of a probate estate or are transferred to one or more trusts in order to continue the operations of the business. But sometimes the decedent’s business is distressed at the time of death and of questionable value to the estate or to the trust beneficiaries. In that case, executors or trustees, along with their beneficiaries, should understand what fiduciary standards apply to the use of estate or trust resources in connection with the continued management, operation and ownership of the business. Continue Reading Should an Estate or Trust Operate a Decedent’s Family-Owned Business?
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
Shareholders of family-owned businesses sometimes assert claims of misconduct against their co-owner relatives. These claims can take the form of oral complaints or written claim letters. However, actual lawsuits based on such claims must be timely filed in court or else they may be barred by the applicable statute of limitations, leaving the shareholder with no ability to pursue the claims. A United States District Court in Ohio recently dismissed certain claims by a sister against her brother in connection with a family-owned business because, the court ruled, the sister waited too long before filing suit. Continue Reading Watch the Calendar When Considering Claims in Connection With a Family-Owned Business
An Indiana Court of Appeals recently ruled upon a dispute between a mother and her daughter and son-in-law (and their business) concerning the lease of commercial property and the repayment of loans the mother made on the business’ behalf. The Court began its decision in Wayt v. Maschino (December 29, 2017), by noting: “This case can be added to an unfortunately long list of cautionary tales concerning the perils of going into business with family members.” Continue Reading Court Ruling Highlights The “Perils Of Going Into Business With Family Members”
As 2018 looks to be a favorable M&A environment, many business owners may come to the conclusion that it is time to sell the family business. While it is true that some businesses sell as a result of an offer that comes “out of the blue,” the reality is that most sales occur as a result of a well-designed process intended to maximize value for the seller. Sellers should consider allocating considerable time preparing for a sale, sometimes as much as a year. A well-run sale process can take considerable time as well. The time is well-spent though, as thorough preparation and an organized sale process typically lead to higher valuations and quality buyers. Continue Reading Thinking of Selling? Start Early, Build Your Team
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
In connection with the purchase of a family-owned business, the buyer may seek a non-compete agreement from the selling owners and certain family member employees. Such agreements are intended to protect the buyer from a seller’s competition with the business post-sale and from diversion of the customer relationships and goodwill that typically are part of the purchased assets. Courts will generally enforce a non-compete agreement negotiated as part of a business sale as long as it is reasonable in geographic scope and duration. What is reasonable will depend on factors such as the type of business being purchased, the pre-sale geographic reach of the business, and the consideration paid for the restriction on the seller’s future competition. Parties to a non-compete should therefore carefully consider these factors when drafting the agreement. The parties also should carefully define what type of “competitive” conduct will be restricted. Continue Reading Is A Non-Compete Agreement In Connection With The Purchase And Sale Of A Family-Owned Business Enforceable?
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