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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)

“Piercing the corporate veil” is one of those legal terms that makes a legal action seem more romantic than it really is. When a party to a legal dispute attempts to pierce the corporate veil of a corporate adversary, they are asking a court to move aside the metaphorical veil created by the adversary’s corporate structure and hold the owners of the corporate entity personally liable for the entity’s actions or debts.

Corporate veil piercing—or at least attempts to pierce a corporate veil—arise more frequently in closely held businesses than in other settings. That’s because the owners of closely held businesses tend to be intimately involved in their businesses’ operations and are more likely to attempt to use the limited liability created by their businesses’ corporate structures to shield them from legal liability for the wrongdoing they or their businesses engage in.Continue Reading THE PENNSYLVANIA SUPREME COURT MAKES IT HARDER FOR BUSINESS OWNERS TO ESCAPE LEGAL LIABILITY BY HIDING BEHIND CORPORATE STRUCTURES

When legal disputes between owners of closely held companies turn the corner past “Let’s resolve this issue without litigation” and head toward “See you in court,” the owners and their lawyers typically begin jockeying for the upper hand in a potential lawsuit. The most effective way to grab the upper hand is to be the…

Last month, we tackled Pennsylvania’s “universal” demand requirement. As a refresher, unlike many states, Pennsylvania will not excuse the shareholder of a company who wants the company to sue its executives or directors from making a written demand on the company’s board of directors prior to filing a lawsuit even when doing so would…

Attorneys that represent shareholders of publicly traded companies in securities litigation are intimately familiar with the pre-suit demand required by the corporate law of many states. The purpose of the demand is to give the board of a company an opportunity to investigate and remedy alleged wrongdoing on the company’s behalf before a shareholder is…