Disputes and Litigation
No one starts a company on the lookout for disputes. However, in the world of business, news of shareholder oppression, business disagreements, deadlock, and illegal board conducts are not uncommon. We can help prepare smart exit mechanism to protect your fair share of investment.
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- Provide counseling against shareholder oppression
- Formulate exit strategies or mechanism
- Facilitate exit negotiations
- Arrange buy-out solutions
- Plan for ownership transfer or succession
- Adjust business organizations or structures
- Procure fair valuations of business contributions/interests
- Perform detailed documentation review
- Analyze business history for breach, fraud, and misrepresentations
- Assist with shareholder freeze-out or squeeze-out
- Handle fraud on the minority and ownership issues
*Not limited to the above mentioned
Tips on Minimizing Conflicts
Planning in advance
Early planning is essential for each shareholder to safeguard themselves against shareholder oppression. Tools commonly employed for protection include: shareholders’ agreement, supermajority requirements, buy-sell provisions, put or call rights, and employment agreements in the case of employee-shareholders.
Memorialize all agreements in writing
A business investor will always be in a better position to argue for remedy with a well-conceived contract at hand. The best time to have a contract drafted is when you and your business partners hold deep trust in each other. The drafting process will force you to identify your respective objectives and think through the worst-case scenarios, which will save business costs in the long term.
Hire an accountant
To minimize prolonged disputes about valuation, consider hiring an independent certified public accountant to submit an annual or semi-annual statement of the value of your company’s stock.
Arbitrate to avoid negative publicity
Keep in mind that negative publicity may harm the reputation of your business. Where publicity might be concern, use arbitration to avoid public litigation.
Retain an independent counsel
Take care to identify which party the lawyer drafting a contract is representing—the company or the individual shareholders. A lawyer retained to represent a company is not obligated to formulate solutions that serve the best interests of individual shareholders. Oftentimes, disputes occur because parties do not retain independent counsel to protect their personal interests.
Shareholder Derivative Suits
Definition of a derivative suit
A derivative suit is a litigation brought by a shareholder on behalf of a company against corporate officers or directors who have engaged in misconduct that harms the company. Because a derivative suit is filed in the name of the company, the remedies awarded by court will be directed to the company—not to the suing shareholders. In theory, the suing shareholders benefit indirectly from the company winning the court remedy.
Examples of corporate improprieties
Corporate improprieties take many forms; they may be misappropriation of funds, self-dealing, dishonesty, or actions leading to corporate wastes.
Derivative suit v. direct suit
Other than a derivative suit, a shareholder can bring a direct suit against corporate officers or directors for corporate improprieties. Distinction must be made between the two types of suits. Whereas a derivative suit is a claim belonging to the company of the suing shareholder, a direct suit is a claim that individual shareholders bring for harm to their personal interests. Mischaracterizing a direct suit as a derivative one may result it being dismissed by the court. Therefore, it is important to identify the victim of corporate improprieties before bringing a lawsuit.
Derivative suit and demand
The law requires that shareholders make a demand to the board of directors before bringing a derivative suit. This means the shareholder must inquire the board of directors about the adequacy of bringing the suit unless it can be shown an inquiry will be futile even if made. On receipt of demand, the board must discuss whether to pursue the suit at proposal. If the board decides to not pursue it and yet good reasoning is lacking, the proposing shareholder may bring the derivative suit on his or her own.
Continuous ownership requirement
Some courts require shareholders who bring a derivative suit to continue to own shares of the company while the suit is pending. It is therefore advised that shareholders talk to a lawyer before selling shares during the pendency of a derivative suit.
Why does it occur? – In a closely owned company, minority shareholders are particularly vulnerable to the abuse of power by majority shareholders because the shares they hold usually do not have a ready market for sale. As a result, shareholders facing majority oppression often have no choice but to sell shares at a loss.
What is oppression? – Oppression is not yet clearly defined in courts. The New York courts determine oppressive conduct based on whether the conduct frustrates the reasonable expectation of a minority shareholder. Example oppressive conducts include:
- Denying access to financial records of the company
- Entering into transactions at the expense of minority shareholders
- Excluding the minority shareholder from management of the company
- Declining the minority shareholder his or her share of dividends when company is profitable
- Siphoning off corporate earnings or assets to the majority shareholders
- Mergers structured to dilute the power or control of the minority shareholder
Appraisal Rights (Dissenter’s Rights)
Appraisal rights are rights exercised by minority shareholders who dissent to a merger. Minority shareholders who dissent to the merger but do not have enough shares to vote against it will be forced to withdraw from the company. As a result, they will be forced to sell their shares at low price. In recognition of the unfairness, the law offers appraisal rights as a remedy, the exercise of which will ensure that fair value be paid to the dissenting minority for their shares.
Minority Shareholders in New York
Judicial Dissolution under Section 1104-a: Minority shareholders facing oppression from majority shareholders may ask the court to dissolve the company. The New York statute for intra-shareholder dissension is the New York Business Corporation Law Section 1104-a, which provides that minority shareholders owning more than 20% of the outstanding shares of a New York corporation can ask a court to judicially dissolve the corporation.
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