Archive for March, 2012
New Case Reaffirms the Difference Between Corporations and LLC’s When It Comes to Rights of Minority Owners
I have written extensively about the difference between the law in New Jersey protecting a minority shareholder in a corporation, and the law protecting a minority member in a limited liability company (LLC). Most lawyers practicing extensively in this area of law have long argued, and believed, that the statute protecting minority shareholders in a corporation from what is considered “shareholder oppression” does not apply to LLC’s (much as we may want it to). The New Jersey Appellate Division reaffirmed this principle in a recent, unreported decision, Hopkins v. Duckett.
The importance of this legal distinction cannot be stressed enough. Actions such as the failure to give dividends to shareholders (in certain circumstances), termination of a shareholder as an employee, and excess payments to themselves by the majority shareholders have all been held to constitute shareholder oppression, often giving rise to the right to be bought out of a NJ corporation. However, these same acts may not give rise to the right to be bought out of an LLC. Instead, the rights of a minority member of an LLC may be much more complicated, and the remedy may not include a buyout of the minority member’s interest.
Of course, the rights and obligations under an LLC in New Jersey may also be much simpler, assuming the LLC’s Operating Agreement does not prohibit withdrawal. If it does not, in NJ, a member may simply withdraw from the LLC and have the statutory right to be paid for his membership interest a much less expensive, procedure than a shareholder oppression lawsuit. However, the Operating Agreement often bars such withdrawal, and then a very careful analysis of the facts is necessary to determine a minority member’s rights.
A minority member of an LLC may still protect himself, even if the majority members insist on prohibiting withdrawal at the time the Operating Agreement is drafted. Absolutely nothing prevents the members of an LLC from adopting the rights and remedies set forth in the shareholder oppression statute, thus making them applicable to an LLC by contract. This could be a fair compromise between simply permitting withdrawal, and providing no relief at all. What is absolutely critical, though, is to utilize the services of an attorney who is well-versed in this area of law. Lawsuits brought by minority members against my corporate clients have been thrown out because the attorney on the other side based his entire case on the shareholder oppression statute, when the company at issue was an LLC. Those clients learned the hard way that this area of law can be complicated and wished they had done more due diligence in hiring their attorney.
Email as Evidence – The Difficulty of Email Between Business Partners
You and your business partner are having a serious dispute, and litigation may be inevitable. How do you communicate with each other prior to the suit being filed?
In some cases, you and your business partner both work in the same building, while in others one of you works from home or does not actually work for the company. When disputes about how to run the business appear serious enough that they may result in litigation, how you communicate with each other may be critical regardless of your respective roles in the company.
Documentation of facts is always important, and the lead-up to shareholder litigation is no different. Obviously, most written communication today occurs via email. How you word these emails matters. For example, no matter how much your co-owner’s conduct has annoyed you, or even harmed you, the tone and tenor of your written communications may matter in court. They are likely to be evidence of relevant issues. In fact, their use as evidence is, in some instances, the main reason that they are being written. So it is critical to keep in mind that it is very likely that a judge will be reading these emails at some point in the future.
Why is this important? In most shareholder dispute litigation, the judge is going to decide the case, not a jury (at least inNew Jersey). Therefore, his or her opinion of you is critical. If your emails to your business partner (and future litigation adversary) seem overly harsh, or are written in a way that inadvertently puts you in a bad light, unintended repercussions down may result. While documenting the facts, you must appear reasonable at all times. When you are involved in shareholder dispute litigation, you want to be the one in the white hat while your adversary is the perceived outlaw.
In one case, a 1/3 shareholder let his frustrations boil over at the female majority owner who was using the company as her personal piggy bank, and in his anger used a slur that should not be used against a woman. Although he was totally justified in all of the allegations that he made in the email, the female judge did not appreciate his choice of words when the document wound up as an exhibit in court three years later.
To protect yourself in such a situation, follow these two rules:
- First, when attempting to document the facts, imagine that the email (or letter) is being copied to the judge who will preside over your likely future lawsuit against your partner.
- Second, make sure you are accurately documenting what you want to memorialize, and that what you are attempting to say comes across clearly. More than once I have had to tell a client that the email he thought confirmed a date or an event was not written clearly enough to ensure that the other side was not left any “wiggle room” to weasel out of the issue. A client who was sure his email instructed his business partner not to do something was sickened when I had to tell him that the email was not strong enough because it said only that he “didn’t think” his partner should do it. That’s a far cry from directing him not to.
Although no one likes to spend money on legal fees, the best approach is to consult with an attorney well versed in shareholder dispute litigation as soon as you suspect there may be an issue. Having an attorney trained to handle business partner litigation review critical emails before they are sent just may prove invaluable down the road.