Ownership Disputes

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We represent closely held businesses and business owners in high-stakes litigation who often lack general counsel to align litigation with broader business goals. To fill the gap, we advise clients on the risks, rewards, and costs of each approach. We have watched hundreds of clients ingest this information, process it and make decisions related to the ligation in reliance on it. Some do a better job than others. Here’s three things that work well:

  1. Figure Out What a “Win” Looks Like, Do It Early and Do It with Both Feet on Planet Earth

Before diving into the legal strategy, take time to articulate what success looks like. One of our first questions to a new client is “what do you want to happen here?” Do you want money? Do you want a problem gone? Do you want to send a message to discourage similar future claims? Think about that goal in the context of your entire business. Get specific. And then get realistic. Talk without counsel about what is ascertainable and the odds of achieving a given result. In a perfect world, we would always be in a position to tell our clients we have great claims or strong defenses that can be litigated at minimal costs. In the real world, we are more regularly talking about good claims but with concerns about collecting a judgment from a defendant. There are many situations where we have strong defenses that will cost a significant amount to litigate. Sometimes where clients are in difficult positions and the only promise we could make was time—to pay, for market shifts, or to refinance. In the reality is that in large majority of business related litigation, you likely won’t be ‘made whole,’ especially since you’ll usually cover your own legal fees, you can’t get compensation for your and you staff’s time in dealing with us and there is usually some point in the litigation where you will accept or you are willing to pay money to eliminate the ongoing risk of litigation.

  1. Think In Terms of Probabilities – Make “Investment” Decisions

Nothing is certain in life, and nothing is certain in litigation. There is no way around it – litigation is risky. For that reason, the clients who display the best litigation decision making are those who think in terms of probabilities. They understand that no attorney that is being honest with them can tell them what is going to happen with certainly – there is no such thing in business litigation. The best decisionmakers find ways to get uncomfortable with uncertainty. They think in terms of the odds of success on a particular motion or a particular strategy. Two clients in recent memory were particularly adept and managing litigation risk. One had a background in data analytics and the other was a bond trader. Every time we came to them with a decision to be made, they employed some version of the same approach. They would define the possible outcomes, determine the probably of each outcome and push us on the cost of implementing a particular strategy. They viewed each decision like an investment decision – how much does it cost, what’s the potential upside and downside, and what are the odd of each?  If the odds of success and the magnitude of the outcome met their criteria, they went ahead; if it did not, we would try a different approach. We never saw them, but I am sure they had elaborate spreadsheets. You do not need spreadsheet or an actuary, but you do need to think in terms of odds, not certainties.

  1. Listen to Your Lawyer and Then Challenge Their Approach

The best client decision makers we have seen all have one thing in common – they listen to our advice and then push us on it. It may seem counterintuitive, but we welcome clients challenging our advice. When a client is questioning me on a strategy decision it is usually a good thing. I do not even mind clients using the wisdom of ChatGPT to test my analysis. On one of the first big cases I handled on my own, I was explaining to a client how the statute of limitations might apply to a portion of their claim and that laches might bar another. The issue was germane to settlement discussions and what our opening demand would be. He was upset about the likely bar and the lower opening demand I was suggesting. We talked about the issue at length and, before long, we were talking about the difference between law and equity courts and their merger. We arrived at the decision to make a higher opening demand, somewhere between what I was suggesting and what he initially proposed. (If you are reading this unnamed client and now good friend, I am curious if you remember this discussion). This was a more involved discussion than I expected but I left the discussion knowing that the client had a good handle on what was going on, had fully considered the issues and made a fully informed decision. Ultimately, the client makes the final call on major decisions. The client is entitled to our best advice and zealous advocacy but client makes the calls and lives with the consequences.  A client that is pushing us on strategy is one who is taking their vote and the consequences that can stem from it seriously. This is the client you want to be.…

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.
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

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

There is arguably no more prevalent legal claim in business divorces than a claim of breach of a fiduciary duty. Simply put (and I do mean simply), when one person owes a fiduciary duty to another, the person with the duty must act in the best interests of the person to whom they owe the duty.

When the co-owner of a closely held business owes a fiduciary duty to another shareholder of the business, the co-owner must act in the best interests of that shareholder. That means, among other things, treating the other shareholder in a way that allows them to realize the value of their interest in the business.Continue Reading WITHOUT EQUAL? PENNSYLVANIA FEDERAL COURT CHARTS NEW PATH, RULES FIDUCIARY DUTY EXISTS BETWEEN 50/50 CO-OWNERS OF A BUSINESS

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…

When reading a recent New Jersey court’s opinion regarding an employee of an LLC claiming to have been given a share of ownership of the company by its sole owner, I couldn’t help but think of method acting – the technique in which “an actor aspires to encourage sincere and emotionally expressive performances by fully…