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DIVORCE BUSINESS STYLE: LITIGATION AMONGST CORPORATE SHAREHOLDERS OR LLC MEMBERS

DIVORCE BUSINESS STYLE: LITIGATION AMONGST CORPORATE SHAREHOLDERS OR LLC MEMBERS. BY VINCE LOUWAGIE ANTHONY OSTLUND & BAER. COMMON SOURCES OF GOVERNANCE RULES. Articles and By-laws Minn. Ch. 302A/322B Common Law Company Policy or Practice Shareholder Voting or Control Agreements

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DIVORCE BUSINESS STYLE: LITIGATION AMONGST CORPORATE SHAREHOLDERS OR LLC MEMBERS

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  1. DIVORCE BUSINESS STYLE:LITIGATION AMONGST CORPORATE SHAREHOLDERS OR LLC MEMBERS BY VINCE LOUWAGIE ANTHONY OSTLUND & BAER

  2. COMMON SOURCES OF GOVERNANCE RULES • Articles and By-laws • Minn. Ch. 302A/322B • Common Law • Company Policy or Practice • Shareholder Voting or Control Agreements • Employment Agreements • Buy Sell Agreements

  3. BUY-SELL AGREEMENT • Can be found in bylaws, shareholder control agreement, or elsewhere • Provides for events that give rise to right or obligation to purchase or sell • Provides mechanism for determining price • Provides payment terms

  4. FREEZE-OUT • Terminating minority shareholder’s employment • Terminating minority shareholders board or management participation • Terminating minority shareholder’s access to information • Terminating minority shareholder’s return on investment • Other means as varied as the imagination

  5. SOURCES OF COURT AUTHORITY • Broad equitable authority • 302A.467 • 302A.751 • Common Law

  6. Buyout Under 302A.751 • Deadlock • Fraud or illegality • Unfairly prejudicial conduct – reasonable expectations • Corporate assets being misapplied or wasted – but see Wessin

  7. DIRECT V. DERIVATIVE Derivative claims are those claims which belong directly to the corporation, but which can be asserted indirectly, by a shareholder, on behalf of the corporation under certain circumstances.

  8. ASSESSING SHAREHOLDER EXPECTATIONS • Written agreements not dispositive • Controlling shareholder have a substantive obligation of fairness • Obligation of complete candor in negotiations • But see Berreman v. West Pub. • “Associative bargaining”

  9. REASONABLENESS OF EMPLOYMENT EXPECTATION • Employment part of investment? • Known and accepted by other shareholders? • Shareholder misconduct or incompetence? • Agreement specifically providing for termination? • Any capital investment? Or part of compensation package?

  10. FAIR VALUE v. FAIR MARKET VALUE

  11. DISCOUNTS • Minority Discount • Not allowed. MT Properties v. CMC Real Estate Corp. • Marketability Discount • Allowed to prevent an unfair wealth transfer

  12. VALUATION DATE • “as of the date of the commencement of the action or as of another date found equitable by the court.”

  13. Valuation Formula • “if the shares in question are then subject to sale and purchase pursuant to the bylaws of the corporation . . . unless the court determines that the price or terms are unreasonable under all the circumstances of the case.”

  14. Best Means of Avoiding Shareholder Disputes • Clear agreements. • Exit strategy understood and accepted by all. • Clearly articulated expectations for sharing the benefits of ownership. • Avoid secrecy of compensation.

  15. BEWARE OF CONFLICT • Evans v. Blesi • Miller Waste Mills v. Mackay

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