Shareholder dispute litigation can arise at any time. When you consider that these types of cases almost always arise among business partners who once trusted one another – whether they are family members, or simply people who worked together to build a company – it highlights the fact that no one is immune from such a suit. And whether the litigation arises over a shareholder being terminated, a situation involving something as sinister as embezzlement, or simply results from an uncontrollable “power trip” by the majority shareholder, there is a common theme to all these cases: everyone attempts to re-create the past.
Sometimes the “re-creations” are founded in a genuinely-held view of how things transpired, albeit from one’s own biased point of view. For example, when the majority shareholder says he terminated the minority shareholder’s employment because the minority was lazy and useless, the majority shareholder’s own financial self-interest may actually cause him to believe this. Other times, of course, people just plain lie. Regardless of motivation, if you see a potential litigation coming down the road, it is never too early to start protecting yourself from revisionist history. Of course, it is obvious that things are easier to prove when in writing, so it goes without saying that you should, at the very least, start making a paper trail once you sense a showdown on the horizon. But many people don’t realize that it may not be too late to make a paper trail for things even in the distant past.
The existence, or lack thereof, of a shareholders’ agreement – or, in the case of an LLC, an operating agreement – may be of critical importance in shareholder dispute litigation. For example, in NJ, a member of an LLC may withdraw upon six months notice for any or no reason and be paid for his membership interest, provided such a maneuver is not prohibited in the operating agreement. Therefore, if no operating agreement exists, there may be no way to prevent a minority LLC member from withdrawing and being paid for his membership interest. As a result, whether or not an operating agreement ever existed may very well be the single most important factor that determines how any dispute is going to be resolved. Similarly, a corporation’s shareholders’ agreement may contain buy-sell provisions that may be relevant, or even dispositive, to any dispute.
With so much riding on the existence of such agreements, there is an incentive for some people to suddenly “discover” agreements that no one thought even existed. On numerous occasions, I have heard clients say that they never signed a shareholders’ agreement, only to have the majority shareholders produce one that my client swears he never signed. Since it is easy to cut and paste someone’s signature from another document onto a copy, it may not be enough to simply say “I never signed that.” More evidence may be needed.
Fortunately, there are ways to protect oneself from such obvious fraud, and even forgery, by memorializing the lack of existence of such documents. For example, the simple act of sending an email suggesting to the majority shareholders that everyone should sign a shareholders’ agreement “because we’ve never had one,” or words to that effect, that is not denied, can go a long way to prove that no such agreement even existed.
For other ways to protect oneself in the event of shareholder dispute litigation, it may make sense to speak to an attorney well in advance of any lawsuit actually being filed; sometimes the winner of a lawsuit is the party that planned better for it.