Archive

Archive for June, 2015

Recent Delaware Law and Closely Held Business Disputes

June 29, 2015 1 comment

I just read in the ABAJournal article that Delaware passed a law favorable to shareholders in litigation.

“A law banning corporate bylaws that impose a hefty price on investors who file unsuccessful shareholder derivative suits has been signed by Delaware’s governor.”

The Delaware legislature apparently recognizes  the challenges that minority shareholders can face in closely held businesses.

In my practice, one fundamental challenge that I have seen is this:

In a closely held company it is very easy for one group of owner[s] to freeze out another owner.

I guess the first question is, “freeze out from what*?”

                         Control – Decision-making

                         Disclosures of Company Business

                         Profits in the Company

                         Employment in the Company.

What should a business owner/operator do to protect himself/herself?

Well, you have two readily apparent choices – address the issue before the business is formed, or address it once the problem arises.

     1. addressing the problems before the business starts.

The easiest way is this option: Get an Attorney involved at the onset of the business relationship.

Many of these business disputes in closely held companies could be resolved if, before going into business, the parties openly communicated their expectations, concerns, and clearly articulated in the formation documents (articles of incorporation/organization, Bylaws, Operating Agreement) a way out of the business relationship.

This could be the most cost-effective way to ensure to resolve business disputes – address them before they happen – with open communication, and clearly and concisely drafted (and executed!) documents.

       2. addressing the problems once they occur: Shareholder/Member Oppression Lawsuit.

I have had several clients recently who have had to proceed with this second option – in one instance my client, the minority shareholder, wanted out of the business and the controlling shareholders, who had not made distributions to my client in over a decade, while they paid themselves hefty salaries, would not “buy him out” according to, based upon our interpretation, the proper mechanism called for in the formation documents.

The problem was that the documents did not clearly spell out the proper mechanism for buying a shareholder out  (and  importantly to me, this document was drafted by some other law firm :))

So, Michigan law provided my client a cause of action against the shareholders:

Minority Shareholder Oppression, MCL 450.1489

“A shareholder may bring an action…to establish that the acts of the directors or those in control of the corporation are:illegal; fraudulentor willfully unfair and oppressive to the corporation or to the shareholder.” (*this is most often the scenario where these cases arise – from the “freezing out” the minority owners from the business)

If the shareholder establishes grounds for relief, the circuit court may make an order or grant relief as it considers appropriate, including, without limitation, an order providing for any of the following:(a) The dissolution and liquidation of the assets and business of the corporation.(b) The cancellation or alteration of a provision contained in the articles of incorporation, an amendment of the articles of incorporation, or the bylaws of the corporation.(c) The cancellation, alteration, or injunction against a resolution or other act of the corporation.(d) The direction or prohibition of an act of the corporation or of shareholders, directors, officers, or other persons party to the action.(e) The purchase at fair value of the shares of a shareholder, either by the corporation or by the officers, directors, or other shareholders responsible for the wrongful acts.”

Although this Statute applies to closely held corporations, there is also a similar Michigan statute that applies to LLCs.

Therefore, if a court finds that those in control of the business committed misconduct against a minority owner, it has broad discretion to create the type of relief it deems is best.

Although sometimes filing a law suit for Minority Oppression is warranted due to the egregious misconduct of those in control of the company- it is always best to avoid litigation when possible.  The obvious take away points are two-fold:

1. Get an attorney involved before the business relationship begins and clearly document the business relationship, especially an exit strategy.

2. If you are being frozen out of control in a business – Michigan law gives you broad remedies, including the minority shareholder oppression statute.

Questions? Comments? 

e-mail: Jeshua@dwlawpc.com

www.dwlawpc.com

Advertisements

Michigan Startups: Funding through Crowdfunding

I read an article this morning on MIBiz

Filling the Funding Gap: More capital required to meet $1.3 billion need from existing Michigan companies

Recognizing this gap in funding, John Kerschen, managing partner of  Charter Capital Partners said this:

“Institutional investors have been reluctant to put money into the small, first-time funds in Michigan that have formed over the last decade and first want to see a track record of success”

This is a point well-taken. Small business start-ups have traditionally suffered from a lack of conventional funding options.

As the MiBiz article recognizes – there is a funding gap in Michigan – particularly related to early-stage businesses.

While we are consistently seeing crowdfunding being utilized in Michigan for community revitalization, particularly through the MEDC’s matching grant program,  we are still at the beginning stages of seeing the utilization of equity crowdfunding through Michigan’s MILE Act.

Questions? Comments?

e-mail: Jeshua@dwlawpc.com

http://www.dwlawpc.com

Crowdfunding News Update

Happy Friday!

For those of you who’ve read my posts in the past, you know I promote crowdfunding as a untapped resource for social entrepreneurs. Below are a few headlines about what’s going on in the world of crowdfunding.

Locally:

Localized crowdfunding platforms grow through grant matching program

Michigan’s MEDC matching grant program has been a great way for local communities to utilize crowdfunding to fund community development.

Across the U.S.

NextSeed Becomes First Texas Crowdfunding Platform to Leverage Intrastate Rules |

Like Michigan, Texas enacted its own intrastate crowdfunding exemption, it was recently utilized by NextSeed to raise $25,000 in equity for a small business – Texas’ first.

One of NextSeed’s co-founders, Youngro Lee is a private equity lawyer who provided some good in-sight into what he sees as the untapped upside in reaching unaccredited investors through local crowdfunding exemptions.

Across the Ocean…

Crowdfunder UK Launches Community Shares to “Revolutionize” Community Funding 

“Crowdfunder UK just launched a new concept in crowdfunding on their platform: Community Shares. A type of hybrid mix between charity and ownership, investors in these organizations own part of an entity they believe in supporting.”

a type of hybrid mix between charity and ownership” sounds a  lot like L3Cs – which are viable business entities for social entrepreneurs.

It’s great to see innovative ways that social entrepreneurship is being promoted in other parts of the world.

Questions? Comments?

e-mail: Jeshua@dwlawpc.com

www.dwlawpc.com

Robin Williams’ Estate: Lessons to be learned from Estate Litigation.

June 2, 2015 2 comments

I previously wrote an article on the dispute between Robin Williams’ widow and his children, you can check out that post here

Today, the ABAJournal posted an update on this lawsuit – you can check that out here

This story is an example of the problems that can erupt after a loved one passes away – even if that loved one had a well thought out estate plan.

Here, a large part of the dispute centers around ownership of Robin Williams’ personal belongings.

Latest Development…

Per the ABAJournal’s article, It appears that the family members are making headway through mediation.

It is great news because, as I’ve indicated in prior posts

Mediation works.

Not every case that is mediated ends in a successful resolution. But more often than not, the cases that I have been involved in where both parties submit to mediation have been successfully resolved.

Mediation makes sense.

In estate litigation, such as the Robin Williams’ estate, mediation makes sense.

When I am representing a business in a business dispute, it can be much easier to avoid a lengthy drawn out court battle, given that business owners are much more inclined to make a good business decision and settle the case.

Not so with estate lawsuits. the issues are much more emotionally charged.

Locally, there are mediators who understand this dynamic – such as Anne Bachle Fifer

I wonder how much cost and emotional turmoil could have been avoided if the parties agreed to mediate the case prior to filing suit….

Questions? Comments?

e-mail: Jeshua@dwlawpc.com

http://www.dwlawpc.com