July 15, 2020

Volume X, Number 197

July 14, 2020

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July 13, 2020

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Potential Alternatives to Shareholder Dispute Litigation in Your Business Divorce

Shareholder dispute litigation may often be an effective way to achieve a remedy for wrongdoing committed by the majority, such as getting paid for your shares. However, filing litigation against your business partners may not be the most cost-effective way of obtaining such relief.

Business Divorce Litigation

In business divorce litigation, you must prove that significant wrongful acts were committed by the majority. However, some shareholder agreements (or operating agreements, in the case of an LLC), may provide a remedy that does not depend on proving wrongful conduct. For example, a shareholder agreement may provide that an owner can be paid for his shares simply when his employment ends, or whenever he wants to withdraw from the company.

The potential problem with such cases is that the agreement often sets forth a calculation of value that does not reflect what the company is truly worth. Or, it could provide a realistic valuation approach, but mandate that minority and marketability discounts should apply, which could be as high as thirty-five to forty percent.

Oppression Cases

In an oppression case, courts will often declare that no discounts should apply because of the bad acts of the oppressive majority. So, a shareholder looking to “cash out” is often faced with a difficult choice – take the easier path and get paid without a fight but less the discount, or sue for oppression and fight to have no discount applied.

Obviously, the more one’s shares are worth, the easier this decision is to make. But there are often additional considerations at play. Just because a shareholders’ agreement says you are entitled to be paid, does not mean they will pay you. Often majority shareholders will offer a fraction of what you are owed. Or the problem is that the books and records do not accurately reflect value since there are numerous improper transactions on the books that lower the valuation. If the very oppression you are claiming is that the majority drastically overpays themselves by way of salary, it hardly seems fair to value the minority interest as if the purchaser would have to continue paying such above-market salaries, when a third-party purchaser clearly would not do so.

Making the Best Decision

You need to make the most well-informed, strategic decision that you can at the outset to ensure that you are spending your money wisely. Making the best decision might entail hiring a valuation expert at the beginning, which should always be done by your attorney, not you, to maintain the privilege with that expert. But the first step should be to have an experienced attorney review your documentation to see what choices you have available.

©2020 Norris McLaughlin P.A., All Rights ReservedNational Law Review, Volume X, Number 13

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About this Author

David C. Roberts Member  New Jersey fraud, fraudulent transfers, trade secret, restrictive covenant litigation, employment litigation, environmental matters, and insurance coverage litigation.
Member

David C. Roberts, Co-Chair of the firm’s Litigation Practice Group, devotes his practice to handling complex commercial litigation matters, such as fraud, fraudulent transfers, trade secret, restrictive covenant litigation, employment litigation, environmental matters, and insurance coverage litigation.

His practice has a particular emphasis on partnership and shareholder disputes, including oppression and dissenter’s rights cases, with a focus on attempting to resolve matters through mediation, if such an approach fits within client’s goals and objectives.  In 2007, Dave launched...

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