Norris, McLaughlin & Marcus

Posts Tagged ‘shareholder disputes’

Creative Ways to Contractually Minimize the Chances of Shareholder Dispute Litigation

When two new clients recently came in to have an Operating Agreement prepared for their newly created LLC, they indicated that they had read my website.  Since I had experience in litigating shareholder disputes, they wanted to know how to make a “bulletproof” Operating Agreement, so that there would never be litigation if they disagreed over an issue.

We spent a considerable amount of time trying to come up with a dispute resolution mechanism, but they could not agree on a third party to decide any significant disputes if they ever had one.  The only person they both trusted was a minister, but they did not want him making business decisions on their behalf.

After going several rounds trying to figure out how to contract against every possible contingency, they finally realized that what I told them in the first meeting we had was correct – you can’t possibly guard against, and contract around, every single contingency.  The best you can do is limit the odds of such litigation by making the agreement as fair to everyone as possible.

We came up with the idea of creating spheres of expertise for both of them and ensuring that the other was comfortable ceding control over such area.  For example, at the end of their negotiation, one of them had the final word on all matters relating to sales and marketing, while the other had final say on personnel, staffing and salary issues.  They also agreed that, if they could not agree on something truly major – like whether they should construct a new facility instead of leasing, or whether to expand the company – the business partnership likely would not work in the long run if a solution were forced upon them from the outside.

The compromise reached was, if one of them wanted to undertake a major change (like expansion) and the other did not, the one who wanted to take action had the right to buy out the other at fair market value.

As a shareholder dispute litigator, I found it truly refreshing that these two business owners found a way to contractually limit, as much as possible, the risk of costly litigation in the future.  By taking the time to really think through these issues at the outset, and spending just a few thousand dollars in legal fees, they went a long way toward ensuring that they would not some day have to spend hundreds of thousands of dollars on shareholder dispute litigation.

If everyone thought through these issues as carefully as these clients at the outset, shareholder dispute litigators would be all but out of business.

Email Today, Evidence Tomorrow

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 in New 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.