The Firm’s Business Partners and Shareholders Dispute Practice has helped hundreds of individuals who have equity interests in closely held businesses avoid or resolve owner, enterprise and governance disputes. Regardless of a business’ legal structure, its partners, shareholders, members or other owners typically see themselves as "partners" with their co-owners.
Like marital partners, business partners may have internal strife and/or end-up “splitting” for any number of reasons: disagreements regarding the direction of the business; a partner’s wrongful conduct; disputes about capital contributions and/or appropriate compensation; power struggles between partners; a stale mate in the management of the business enterprise; the separation by one partner who competes with his or her former partner(s) and business; or partners who leave for personal reasons.
Practice group co-chairs Fred Mendelsohn and Craig McCrohon have extensive experience helping partners and other business owners protect their businesses and investments at all stages of a partnership dispute, and the practice has disengaged partners from their enterprises by dispute resolutions including deadlock resolutions, fair value buy out remedies and dissolution and related partnership litigation when necessary.
Non-Litigation Dispute Resolution and Prevention
When engaged during business formation (or at other times prior to vigorous partner, shareholder or owner conflict), the practice can provide appropriate exit strategies and anticipatory dispute resolution procedures for efficiently dealing with future difficulties if and when they arise – all of which can prevent a painful, protracted dissolution and/or enterprise deadlock and other litigation. The practice can implement appropriate governance structures, buy-out procedures and appraisal rights, as well as craft appropriate agreements addressing these and related issues such as executive compensation, taxation issues, and intellectual property protection. The Firm’s Business Partners and Shareholders Dispute Practice can be a resource to prevent partnership disputes from spinning out of control.
Litigation and Other Dispute Resolution Solutions
When disputes become unmanageable, the Firm’s Business Partners and Shareholders Dispute Practice group has broad experience protecting client business interests by litigating disputes involving the multiple complex laws that govern partnership disputes, such as partnership, corporate, shareholder and limited liability laws. The practice group’s experience is wide ranging, covering matters involving director, officer and/or partner liability, claims for breach of fiduciary duty, and the protection of minority owner rights. Additionally, the practice freezes out litigation to claims involving self-dealing and usurpation of enterprise opportunities, as well as shareholder derivative claims, partnership, corporate or other accounting claims, compulsory or voluntary valuations of equity interests (including fair value proceedings), and enterprise deadlock and dissolution litigation. The practice group also extends to intellectual property protection, such as the protection of trade secret and proprietary business information and unfair competition litigation.
In worst case scenarios, the attorneys in the practice group can help minimize the emotional and financial damage that can result from business owner disputes while developing and implementing strategic and tactical strategies including litigation to extricate owners from failing ventures and/or dysfunctional business relationships. The practice group is well versed in all aspects of dispute resolution, including mediation, arbitration, valuation procedures, mini-trials and litigation in state and federal courts around the country.
Conflict and Ethical Considerations
Counsel for businesses, particularly those representing closely held businesses, often times find themselves with an inherent legal and/or ethical conflict in resolving disputes between business partners, shareholders and/or owners, or otherwise addressing the countless problems that can arise from troubled business owner relationships. “Taking sides” can place existing counsel – whether in-house or outside counsel – in a complex situation, as many owners believe that person must be loyal to him or her, such that existing counsel are often unable to represent partners, shareholders and other owners in partnership disputes. Other times, existing counsel may lack the expertise in the areas involved in restructuring, disbanding a business afflicted by a failing partnership relationship, or litigation expertise associated with “business divorce.”
Business owners and partners are well served to obtain seasoned legal advice, whether before they become partners or after the business relationship is forged. The Firm’s Business Partners and Shareholders Dispute Practice can serve the needs of partners and businesses in any stage of business and work to not only prevent or minimize the fallout from partnership disputes but also to resolve such disputes as fairly and economically as possible.
Case Study Briefs
The following case studies are summaries of matters handled by the Firm’s Business Partners and Shareholders Dispute Practice:
- Successful representation at trial of a minority shareholder to establish the existence of his share interest in the corporation and recovering its fair value, defeating continuing efforts to freeze out minority shareholder from participation in electronics manufacturing corporation and contend his share interest had been transferred to a third-party.
- Obtained expulsion of a member/manager of a limited liability company that operated a successful medical equipment facility who had engaged in self-dealing and diverted corporate opportunities, by securing removal of member as a director of the limited liability company’s corporate manager, recovered diverted funds as an offset to the purchase of the rogue member’s interest in the limited liability company.
- Representation of one of several authors/partners of a well-known stage play where the those in control of the partnership had structured the payment of royalty payments to siphon off more of the royalty funds and divert other partnership opportunities (e.g., the screen play); through litigation successfully restructured the partnership that owned the copyright, to a corporation with enhanced and stronger governance provisions, secured protection of the underlying intellectual property, and obtained a substantial recovery of royalties for the represented author/partner.
- Obtained preliminary and permanent injunctive to preclude consulting employee who sold the assets including valuable trade secrets to manufacture certain battery terminals to new owners, but remained as a non-equity partner in the corporate purchaser, from secretly using the trade secrets with his son, whom he positioned to compete against the new purchaser by manufacturing terminals for a converted substantial customer. In addition, through litigation, recovered for the existing partners and their business the diverted customer, obtained substantial repayment from the non-equity partner and an additional multi-million dollar judgment and prevented publication of a patent application believed to disclose the underlying trade secrets by a first-ever injunction against the United States Patent and Trademark Office.
- Successfully represented a shareholder who had been frozen out by his fifty percent partner in a multi-location physical therapy business, including having his name removed from the door, the locks changed, the bank accounts re-titled without the locked out shareholder. After enjoining the shareholder in control, forced a split of the businesses so each partner would have their own practice, implemented non-competition provisions to protect the markets for each treatment facility, and obtained payment for the frozen out shareholder of the fair value of his stock and payment of other amounts due him, plus attorney’s fees in having to bring an action against his would-be partner.
- Obtained preliminary and permanent injunctive relief against a partner of a medical practice that secretly left to join a competitor and who solicited patients before he departed; by the end of the case, negotiated the redemption of the partner’s interest in the enterprise at substantially reduced amount, reflecting the damages and decrease in value due to the rouge departure of the partner.
- Successful arbitration of claims brought by one joint-venture partner against its corporate joint venture partner in the construction equipment business for millions of dollars in damages under various legal theories relating to the relationship between the join-venture partners and recovery of over a half-million dollar judgment in favor of the victorious joint venture partner. After a weeklong trial, and full post-hearing briefs, a three member panel of arbitrators found in favor of the Firm’s client on all claims and against the claimant joint-venture partner awarding all relief requested.
- Representation of an original shareholder in a substantial insurance brokerage business who had over time been legally diluted due to various transactions and held a minority interest in the entity when it sought to be sold to a large insurance industry business. At the time, the original shareholder was operating his own family insurance brokerage business, but the conditions for sale of the shares in the family business included non-competition agreements and the value was deemed to be insufficient for this original family shareholder. Through the use of dissenter’s rights and an independent valuation of the insurance brokerage shares, we successfully closed the transaction for this original shareholder resulting in payments of greater amounts for the shares, the waiver of any non-competition covenants and substantial additional payments to warrant the purchase of the shares of this original family member shareholder.
- Obtained a multi-million dollar judgment against a one key man partner in a closely held business who had engaged in a number of schemes to defraud his shareholder partner of hundreds of thousands of dollars; upon discovery of these various schemes, the key man partner was successfully removed from the business and continues to pay significant amounts toward the judgment owed to his shareholder partner on the judgment obtained against the key man partner.
- Represented and successfully resolved an arbitration proceeding involving disputes between former venture partners in the management of multi-million dollar vacation property ownership and management resulting in a confidential settlement of disputes between the two venture partners. The dispute involved limited liability company, corporate and equitable accounting and other laws and avoided significant concerns to of the client including disclosure of sensitive financial information.
- Successfully mediated a dispute between various corporate partners in a complex structure of over a dozen interrelated entities that managed cellular towers arising out of claims of breach of fiduciary duty by one partner. After conclusively proving that there was no breach by the represented partner of any fiduciary duty (or any other wrong doing), and after significant discovery and depositions, there was a successful mediation of the multiple litigations arising out of the dispute that exonerated the accused partner and allowed recovery of significant amounts incurred.
- In a bitter, on-going shareholder and partnership dispute between two warring siblings, successfully defeated a motion to appoint a receiver to take control of the key operating business owned by the two siblings, and postured the litigation to affect a successful resolution of the entity.
- Successfully restructured a limited liability company involving two corporate partners, one of whom was a subsidiary of a larger group of consolidated business corporations, after failed accounting advice led to tensions between the partners. A successful suit against the accounts for professional negligence and a successful restructuring allowed the restricting, that involved the resolution of significant tax ramifications for both the restructured entity as well as the controlled group of related businesses.
- Obtained a complete “business divorce” between two individuals who were shareholder/ partners, officers and directors in several interrelated financial recovery businesses whereby the individual represented was released from all obligations associated with the existing business, including those tied to existing bank loans and non-competition restrictions by successfully opposing a challenge to and pursuing enforcement of the validity of an underlying arbitration award arising out of prior shareholder disputes between the two individuals. The resolution involved fair value payment to the separating partner for his share ownership interest is each of the related corporations.
- Successfully represented several individuals in resolving partnership disputes, winding down their business ventures, and separating them from their partners, in a variety of businesses, whether by litigation, negotiation and/or alternate dispute resolution, including an electrical wiring business, cosmetic surgery day spa, temporary staffing business, health aid computer programming operation, medical practices involving anesthesia, urology, internal medicine, physical therapy, orthotics and prosthetics and thoracic surgery, and a mortgage brokerage.
- Recently resolved by way of an extensive agreement disputes between two joint-venture partners, one who served as the issuing agent of the other, relative to complex international customs documents governed by international treaty, such that the parties avoided complex litigation arising out of the business relationship and entered into a long term contract that preserves the value of the represented agent’s business for an infinite period, correspondingly provided the joint-venture principal with long-term commitments from the agent, and established formerly missing governance between the parties.
- Recently resolved multiple litigations including litigation before the United States Tax Court arising out of disputes between a father and son who were in business together and who had disputes as to whether each were shareholders in the business, as well as who owned various assets relating to the business. After the son left the business, disputes erupted not only as to share and asset ownership, but also whether the son converted proprietary property and/or improperly solicited patients for his new employer. After successfully demonstrating the son’s blamelessness on these points, prevailing in court on certain of the asset ownership issues, the matter was positioned to be successfully resolved between the parties.
- Successfully resolved disputes between two family factions who joined forces through a myriad of complex limited liability companies and corporations to develop, own and manage commercial real estate projects, including forming and operating various related businesses, arising out of allegations by one family faction who provided the financing that the other family faction had engaged in self-dealing, theft and mismanagement of the projects. Through a series of derivative and direct lawsuits, including removing the operations partner as managers of the various projects, filed by the partner financing the business relationships, the disputes were successfully resolved, including the return to the financing partner significant amounts and the separation of the operation partners relative to the underlying projects.