I love endurance sports, and I work out incessantly. But I don’t watch sports or know much about them. Before hanging out with a group other men, I ask my wife to give me a summary of which local sports teams have recently won a match so I don’t embarrass myself. Results have been mixed. So forgive me if my football analogies are a little off here.

In football, wide receivers have little control over whether they’ll be thrown the ball on any given play. Though they might end up making a big play once the ball is thrown to them, they’re powerless without it in their hands. Even plays that are designed to get them the ball might be impacted by the defense, leaving them high and dry.

Unlike a wide receiver, a court-appointed receiver can exert control over the situation. A receiver is a court-appointed neutral steward of a business. They have independent authority to manage operations, make business decisions, and preserve (or strategically wind down) the business’s assets while litigation grinds forward. In some situations, they’re given limited marching orders from a court, and they must take action that’s within the confines of those orders.

But at other times, they have broad authority to call the shots, including whether to buy or sell company assets, and how to wind down a business.

A recent Pennsylvania Superior Court decision, Toth v. Toth, 324 A.3d 469, offers a detailed look at just how broad authority a receiver can have to protect the assets of a closely held business when feuding co-owners threaten to destroy it from the inside out.

Toth v. Toth: When a family business leads to a family war

Toth concerned a battle over Learning Sciences International, LLC (“LSI”), a company founded by Michael Toth in 2002. The company provides solutions for professional development and performance management in education. Over the years, Michael gave ownership interests in LSI to his brother Bryan, his father Eugene, and his mother Marie. Michael and Bryan each held 50% in voting rights and 25% in ownership rights, while Eugene and Marie held only 25% in ownership rights.

In late 2020, their relationships deteriorated dramatically. By January 2021, Bryan, Eugene, and Marie executed a series of documents that they believed amended LSI’s operating agreement to change the company’s headquarters to Florida, remove Michael as CEO, and strip him of his management role. They based this attempted coup on a technical reading of the voting provisions in the original operating agreement.

There was just one problem. They were wrong.

Continue Reading THIS AIN’T FOOTBALL: PA. SUPERIOR COURT LETS A RECEIVER CALL THE PLAYS

My sense is that it’s mostly other lawyers reading this blog – either to get some insight on one of their cases or to check me out when I’m one of their adversaries. But this post is for the non-lawyers out there who find themselves involved in complex business litigation.

We represent closely held businesses and business owners in high-stakes litigation. Many of our clients do not have a general counsel to help align litigation decisions with broader business goals. To fill the gap, we proactively advise clients on the risks, rewards, and costs of each various approaches in litigation.

We have watched hundreds of clients ingest this information, process it and make decisions based on it. Some clients thrive in the uncertainty associated with litigation; others struggle with it. The difference? It often comes down to how they make decisions. Here are three habits of the most effective decision-makers we’ve worked with.

Continue Reading HOW SMART BUSINESS OWNERS MAKE BETTER LEGAL DECISIONS

Some attorneys believe that a shareholder seeking books and records from the corporate entity they own shares of is an effective use of time and resources. I’m not one of them.

Traditionally in a books and records action, a shareholder will argue that they are entitled under the law of the state where a corporate entity was incorporated to access the entity’s books and records. (In Pennsylvania, that’d be 15 Pa.C.S. § 1508 for corporations and § 8850 for LLCs). Often, they’re making a request because they’re investigating a potential breach of fiduciary duty claim.

But rarely do entities respond to books and records requests. And even when they do—surprise!—their responses are usually woefully inaccurate.

Continue Reading CLOSE, BUT NO BOOKS, RECORDS, OR CIGAR: THE ROLE OF STATUS AND LOCATION WHEN SEEKING BOOKS AND RECORDS IN PA.

In Pennsylvania, Manufactured Deadlocks are Unlikely to Trigger Judicial Dissolution

In disputes among the owners of a closely held company, involuntary judicial dissolution is the nuclear option.

When a group of shareholders successfully petitions a court to dissolve and then liquidate their company because the owners reached an impasse they could not overcome, there will be no more company to speak of. While that might have been the intended outcome for the petitioning shareholders, the fire-sale price the company’s assets will probably fetch on the open market is an unpleasant accompanying pill they’ll have to swallow.

Despite the risk of a fire sale, in many shareholder disputes at least one party will threaten to seek judicial dissolution of their company. They argue that dissolution is required because of some irreconcilable difference that makes it impossible to continue operating the company.

Continue Reading AIN’T NOTHING LIKE THE REAL THING

When shareholders of a company believe the leaders of the company have breached their fiduciary duties to it, they can bring a lawsuit against those leaders in one of two ways. Shareholders can bring the suit in their own names (a direct suit), or they can bring it on behalf of the company if the company failed to bring claims against the leaders on its own (a derivative suit). If the injuries the shareholders are alleging were only suffered by the company, they cannot move forward with any direct claims.

When bringing a derivative claim in federal court, the plaintiffs must comply with Federal Rule of Civil Procedure 23.1. The rule, besides explaining what a derivative complaint must include, prevents a plaintiff from bringing a derivative lawsuit if the plaintiff “does not fairly and adequately represent the interests of shareholders or members who are similarly situated in enforcing the right of the corporation or association.”

Continue Reading PENNSYLVANIA’S ALTERNATIVE PATH FOR MINORITY SHAREHOLDERS WHO CAN’T PASS FEDERAL RULE OF CIVIL PROCEDURE 23.1’S “ADEQUATE REPRESENTATION” TEST FOR DERIVATIVE CLAIMS

There is perhaps no richer vein of literary gold than conflict between fathers and sons. Hamlet, Robinson Crusoe, multiple characters drawn by Charles Dickens, not to mention the mother of all family contretemps, Oedipus Rex, touch on this deeply human power struggle.

One such conflict was the backdrop for the Pennsylvania Superior Court’s recent decision in MBC Development, LP v. James W. Miller, 281 A.3d 332 (Pa. Super. Ct. 2022). The decision serves as an important reminder that courts overwhelmingly favor arbitration as a means of dispute resolution, and gives us an opportunity to think about the virtues of arbitration provisions in organizational documents like limited partnership and operating agreements.

Continue Reading A FATHER-SON FIGHT HELPS DEFINE THE SCOPE OF ARBITRATION PROVISIONS IN CLOSELY HELD COMPANY DISPUTES

Image a home buyer finally finds their dream house. There’s just one problem.

During their home inspection, they discover the foundation is cracked. But they buy the house anyway, fully aware of the issues with the foundation.

In the sale agreement, there’s a clause stating the house’s foundation is flawless.

Should the seller be liable to the buyer for breaching the sale agreement, even though the buyer knew the foundation was not flawless at the time they signed the agreement?

In other words, and to have some fun with legal terminology, should the buyer be able to “sandbag” the seller?

The unsatisfying answer is that it probably depends on if the sale agreement addresses sandbagging.

Continue Reading SELLERS BEWARE: SANDBAGGERS WELCOMED IN PENNSYLVANIA & DELAWARE

Over the past few years, the term “receipts” has entered the pop culture lexicon to mean something broader than its traditional definition of a document that acknowledges either the receiving of a product or service, or money in exchange for a product or service.

These days, if you hear “receipts” mentioned in a song, television show, or movie, or see it on social media, there’s a good chance it is being used to mean proof that something is how a speaker claims it to be. For example, someone might claim to have the “receipts” that another person cheated on their spouse—perhaps in the form of screenshots of now-deleted social media posts or direct messages.

Well, when it comes to proving ownership of a closely held business, receipts—in the trendiest sense of the word—are a good thing. In fact, receipts are required.

Continue Reading CLAIMING OWNERSHIP OF A COMPANY? YOU BETTER HAVE THE RECEIPTS.

Business partnerships are built on the trust and loyalty of their participants. Without mutual coordination and honesty among all involved, tensions will inevitably arise that could derail a partnership’s success. The resulting fallout could be costly in several ways, as lost profits, ruined business opportunities, protracted litigation, and busted personal relationships would surely follow.

Given the dark clouds that quickly form overhead as tensions increase among partners in a partnership, one would assume it would make good business sense, if not common sense, for those partners to look out for each other.

It certainly would make legal sense to do so because partners in a partnership, and, generally speaking, co-owners of all businesses, will typically be deemed to owe a fiduciary duty to each other. At its core, a fiduciary duty is the legal duty of a fiduciary (i.e., one business owner) to act at all times in the best interests of the beneficiary (i.e., the other owner(s) of a business). This requires partners in a partnership to act loyally toward each other, with care, with good faith and fair dealing, and to disclose material information to each other.

Continue Reading PA. SUPERIOR COURT CHANNELS SPIDER-MAN: RULES THAT IN BUSINESS PARTNERSHIPS, GREAT POWER COMES WITH GREAT RESPONSIBILITY (INCLUDING FIDUCIARY DUTIES TO OTHER PARTNERS)

For some owners of closely held companies, installing a board of directors may seem more painful than cutting off one of their pinkie fingers.

They’d have to give up control of their business.

They’d have to share confidential information.

They’d have to waste time on the formalities of having a board.

They’d have to waste money on compensating directors.

Putting aside for a moment whether these concerns are valid (they’re not), for many owners of closely held companies, installing a board could be one of the best things they do for their companies—and their sanity.

Continue Reading PREPARE TO BE BOARDED! YET ANOTHER REASON CLOSELY HELD COMPANIES SHOULD CONSIDER INSTALLING BOARDS OF DIRECTORS