Oppressed Shareholder Claim is Arbitratable

Posted by Jay McDaniel on January 16, 2012

Disputes Between Shareholders Not Exempt from Arbration Act

An oppressed shareholder claim is not outside the reach of the New Jersey Arbitration Act, the Appellate Division of Superior Court held in litigation that appears to arise in significant part from a broken promise over the lease of a BMW.

The oppressed shareholder action was filed by dentist David Edenbaum, one of the two owners of State of the Art Smiles, P.A., alleging wrongful conduct under the New Jersey Business Coporation Act’s oppressed shareholder provision.  N.J.S.A. 14A:12-7.

Arbitration Clause in Shareholder Agreement

The allegation of shareholder oppression was made in an action filed in Chancery Division as well is an a counterclaim to a lawsuit filed by the other owner, Teresa Addeiego-Moore, claiming that Edenbuam had breached a separate agreement requiring him to transfer to her a portion of his interest in the practice equal to the leased vehicle in the event that he default on the payments.

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Business Divorce: Five Considerations You Should Consider

Posted by Jay McDaniel on January 06, 2012

It’s the Wednesday afternoon before Thanksgiving and the phone rings with a new client.  The situation in the office has become an emergency.  Either someone has been locked out or someone needs to be locked out, or someone is walking out the door with a key client. Many of our cases begin as emergencies.

The dispute between LLC members, shareholders or partners erupts into a lawsuit without warning, or so it seems, and without planning.  Here are five considerations that are important to success in a litigated business divorce.

1.         Understand the Statutory Framework.

Different types of businesses may be treated the same for taxes – partnerships, S Corporations and limited liability companies – but they are very different creatures when it comes to disputes between the principal owners.  The “default rules” for issues that have not been addressed in the business organization documents are very different, and the liability of individuals can be widely different.

A couple of examples should give you an idea.  The limited liability company and partnership statutes in many states contain provisions that permit the expulsion of a troublesome member or partner.  There are standards that have to be met, and they are significant, but the member or partner who makes it nearly impossible to continue the business with their participation can be tossed out.

Not so with the close corporation.  Most statutes permit the minority to demand the purchase of his or her shares if the majority has acted oppressively, but not the other way around.  If the majority doesn’t have the votes to fire or remove a shareholder, they may be stuck with that person.

Most partnerships and limited liability statutes have a minority veto built into their structure.  Unless it was previously agreed, you cannot change the basic operating documents – the partnership agreement or the operating agreement – without the consent of all of the members or partners.  Corporations on the other hand can usually operate with a majority vote and can change their by-laws or certificate of incorporation.

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Fiduciary Duties Change With Time

Posted by Jay McDaniel on January 03, 2012

Partnership Failed to Keep Inactive Partner Informed

The fiduciary duties owed among partners can change with time and circumstances, and the disclosures that were appropriate when all of the partners worked together in the business may become inadequate when one of the partners has ceased to take an active role.

This is the lesson of Munoz v. Perla, Docket No. A-5922-08T3 (App. Div. Dec. 20, 2011) in which the Appellate Division affirmed a trial court decision holding that the members of a partnership had failed to make adequate disclosure of the terms of the leases held by the engineering firm, of which the parties had all once been partners.

Although the case involved the now-repealed Uniform Partnership Act, and thus not all of the holdings may be applicable to partnerships formed under later law, the decision is instructive as to how the fiduciary relationships between partners my evolve as time passes and circumstances change. (For another reason decision involving fiduciary duties among partners, see our blog post here.)

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