The Corporate Freeze-Out: Court Must Step In to Enforce Minority Shareholder Protections

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We’ve written frequently on this blog about the importance of entering clear, written contracts governing the rights of LLC members. A recent case decided by Judge Leibensberger in the Business Litigation Session demonstrates that despite clear contractual protections of minority shareholders, the enforcement of those protections sometimes requires a court’s intervention. In Penebre v. Kurland, the parties’ company, Shakensoft, sold a successful software application to bars and restaurants that allowed convenient processing of customer orders. The LLC had three members: Dylan Penebre, a minority shareholder, and Daniel and Scott Kurland, who combined owned 77% of the LLC. After an unresolved … Continue reading

No Way Out, Part II: Minority Shareholders Not Entitled to Buy-out

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The Delaware Supreme Court recently affirmed the Court of Chancery’s dismissal of a suit seeking a corporate buy-out of a minority shareholder’s interest in a closely-held corporation. In Blaustein v. Lord Baltimore Capital Corp., the plaintiff owned about 17% of the voting stock of a closely-held corporation called Lord Baltimore Capital Corporation (“LBCC”).  The plaintiff alleged that she invested in LBCC based on the controlling shareholder’s oral promise to repurchase her shares at full value after 10 years.  However, this arrangement was never incorporated into the corporate shareholders’ agreement.  Ten years came and went, and when plaintiff sought to enforce … Continue reading

No Way Out? Delaware Court of Chancery Finds LLC Agreement Waived Members’ Right to Judicial Dissolution

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The Delaware Court of Chancery recently took the concept of freedom of contract to a new level.   Under Delaware’s LLC statute, 6 Del. C. § 18-802, an LLC member may apply to the Court of Chancery for judicial dissolution of an LLC “whenever it is not reasonably practicable to carry on the business in conformity with a limited liability company agreement.”  The Court of Chancery has already determined that this statutory right to judicial dissolution is not mandatory, but, instead, may be expressly waived by the terms of an LLC agreement.  But what happens when waiver language in an … Continue reading

Everyone Wants a Say: Determining Who Gets to Vote on an LLC Derivative Suit

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The Massachusetts Appeals Court recently issued an interesting decision concerning the authority a group of LLC members needs to bring a derivative suit under Massachusetts law. The case, Williams v. Charles, involved an LLC called Frowmica, which was organized for the purpose of negotiating and financing the purchase of a taxicab business.  Within a year after entering into the operating agreement, relations between the LLC members began to deteriorate.  Some members claimed that the managing member, Jean Bernard Charles (“Charles”), had taken various actions adverse to Frowmica, such as terminating the operations manager without cause, wrongly paying himself a salary … Continue reading

No Duty To Buy Back Minority Shares

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A Court of Chancery of Delaware recently held that majority shareholders of a close corporation have no fiduciary duty in the buy back of a minority shareholder’s interest in the corporation.  The decision specifically mentions that Massachusetts differs from Delaware in that shareholders of a Massachusetts close corporation owe each other a fiduciary duty.  After reading the Delaware decision, one might jump to the erroneous conclusion that majority shareholders of a Massachusetts close corporation have a duty to purchase shares from minority owners who want to liquidate their investment.  But that is not true. As a blanket rule under the … Continue reading

Plaintiffs Satisfy Delaware Pre-Suit Demand Requirement by Rejecting Own Demand

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In Nekoroski v. Mathai, 2012 WL 3126434 (Mass.Super. – Business Litigation Session), the directors and shareholders of OpenRisk, LLC brought suit against the former officers for, inter alia, theft of trade secrets and breach of fiduciary duty.  OpenRisk, formed under Delaware law in January 2011, is a technology company that provides a platform for insurance companies to better assess risk. The defendants, who were “service members” of the LLC until resigning a few months after joining the company, had entered into not only an Operating Agreement with the plaintiffs, but also a Service Agreement.  Defendants moved to dismiss the complaint, … Continue reading

Tricky Transfer of an LLC Interest

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The Suffolk Superior Court recently issued a decision on a motion for judgment on the pleadings in Furman v. Gossels.[1]  The Plaintiffs, four sisters, brought suit against their aunt and uncle, Elaine Gossels and Jerome Furman, alleging various claims regarding the sisters’ claimed one-third interest in a family company. The sisters’ father, Walter Furman, had formed 200 High LLC with his siblings Elaine and Jerome.  The company owns the commercial building at 200 High Street in Boston.  In 2008, Walter and his siblings executed an operating agreement for the LLC and in 2010, Walter passed away leaving his estate (including … Continue reading

Developer Takes Assets, Pins Debt on Daughter

Recently, after an eight day trial, a Suffolk Superior court jury determined that a father was liable to his daughter for breach of fiduciary duty in commandeering the family company’s assets while pinning his daughter with all the debt.[1] In 2002, while the plaintiff/daughter was still a student at Northeastern University, the defendant/father, who had worked in real estate for most of his life, created a real estate development company with the daughter for purchasing, permitting and subdividing real estate. The father made the daughter the sole shareholder and president of the newly created entity (due to his prior credit … Continue reading

Even Success Can Breed Failure

In a recent Suffolk Superior Court decision[1], Judge Lauriat determined that defendants, majority owners of Boylston Cypress LLC (“BC”), were not liable to plaintiffs, the minority members, for breaches of fiduciary duties and contract regarding the LLC’s accounting practices.  BC was created for the sole purpose of developing the Cypress Lofts in Brookline.  It spent $20 million acquiring the property and constructing the condominiums and parking spots.  Although the project seemed to be a success by all standards, with all condo units and parking spaces being leased or sold and both parties (and the main real estate broker) making a … Continue reading