Articles Posted in Shareholder Freeze Out

In Illinois, the situation regarding LLC minority members bringing a derivative lawsuit for member oppression is quite specific. The Illinois Limited Liability Company Act allows LLC members to file a derivative action to protect the interests of the LLC. This is particularly relevant when the LLC itself has a cause of action, but the managers or members have failed to pursue it. Such a derivative action enables members to enforce the rights of the LLC and recover damages on its behalf.

However, it’s important to understand that a derivative action is distinct from a member oppression claim. While derivative actions are filed on behalf of the LLC for wrongs against the LLC, certain types of member oppression claims are brought by individual members against the controlling members for actions that unfairly prejudice the minority members’ rights or interests and case-specific injury to the minority member but not the LLC as a whole.

For a derivative action to be initiated, certain conditions must be met. The member initiating the action should not be a manager of the LLC, and they must have made a written demand on the managers or members of the LLC to take action to enforce the right. If the managers or members fail to take action within 90 days, the member can then file a lawsuit on behalf of the LLC. It is crucial to note that derivative actions are complex and can be costly, so seeking advice from an experienced business attorney is recommended.

For member oppression, minority LLC members in Illinois have legal options to protect their interests and seek remedies, such as judicial dissolution, breach of fiduciary duty claims, specific performance or injunctive relief, and buyout or monetary damages. Again, legal counsel is crucial in navigating these options and understanding the rights and legal remedies available under the Illinois Limited Liability Company Act.

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When a shareholder or LLC (Limited Liability Company) member faces a “freeze-out” or “squeeze-out,” they are typically being pushed out of the company’s decision-making process or their economic interests are being diminished. This can be a challenging and complex situation, requiring a careful and strategic approach. Here are some general steps that might be considered:
  1. Understand Your Legal Rights and Documents: Review the company’s governing documents, such as the bylaws, shareholder agreement, or operating agreement. These documents often outline the rights and obligations of shareholders or members and may contain provisions relevant to your situation.
  2. Gather Evidence: Document any actions that contribute to the freeze-out or squeeze-out. This could include meeting minutes, emails, financial statements, or any other relevant communications.
  3. Seek Legal Advice: Consult with an attorney who specializes in corporate law, particularly someone experienced in shareholder/member rights in LLCs or corporations. They can provide advice specific to your situation, including the interpretation of any legal documents and the identification of any breaches of fiduciary duties or violations of state laws.
  4. Explore Negotiation and Mediation: Before taking any legal action, consider whether the situation can be resolved through negotiation or mediation. These alternative dispute resolution methods can often be less costly and time-consuming than litigation.
  5. Consider Your Goals: Identify what you want to achieve. Do you want to regain your position in the company, receive compensation for your lost interests, or simply exit the company in a fair manner? Your goals will guide your strategy moving forward.
  6. Possible Litigation: If negotiations fail and your legal rights are being significantly infringed upon, litigation may be necessary. Your attorney can advise on the likelihood of success and the costs involved.
  7. Financial Implications: Consider the financial impact of your chosen course of action, including legal fees, potential loss of income, and any tax implications.
  8. Communication with Other Shareholders/Members: If other shareholders or members are also being affected, it might be beneficial to communicate with them. There could be strength in numbers, either in negotiations or in legal action.
  9. Understand the Impact on Relationships: Consider the long-term business relationships and how they will be affected by your actions. Sometimes the best legal strategy might not align with your long-term business or personal relationships.
  10. Plan for the Future: Regardless of the outcome, think about your future with or without the company. This might involve considering other business opportunities or roles.

Every situation is unique, and the best course of action will depend on the specific circumstances, the governing laws of the state where the LLC or corporation is registered, and the details of the company’s governing documents. It’s crucial to balance legal considerations with practical business and personal considerations.

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Excessive management fees charged by a majority owner can potentially be the basis for a derivative lawsuit in certain circumstances. In corporate law, a derivative lawsuit is a legal action brought by shareholders on behalf of a corporation against third parties, often including insiders such as officers, directors, or controlling shareholders. The key issues in such a lawsuit typically involve allegations of breach of fiduciary duty, abuse of control, fraud, or mismanagement.

When a majority owner charges excessive management fees, it may be construed as a breach of fiduciary duty or misuse of their position to the detriment of the corporation and its minority shareholders. In such cases, the following elements are often considered:

  1. Breach of Fiduciary Duty: Majority owners owe a fiduciary duty to the corporation and its shareholders. Charging excessive fees could be seen as a breach of this duty, especially if it harms the corporation’s financial health or is not in the best interest of all shareholders.
  2. Fairness and Reasonableness: The fees must be fair and reasonable. If the fees are exorbitant compared to industry standards or the services rendered, it could be a ground for legal action.
  3. Impact on Minority Shareholders: If the excessive fees adversely affect the minority shareholders or the value of their shares, it can be a strong basis for a derivative suit.
  4. Corporate Governance and Approval Processes: The procedures followed in approving the fees are also important. If the majority owner bypassed normal governance processes or used their influence to approve the fees without proper oversight, it could strengthen the case for a lawsuit.
  5. Jurisdiction and Specific Laws: Laws regarding fiduciary duties and shareholders’ rights vary by jurisdiction. The specific legal standards and precedents in the jurisdiction where the corporation is incorporated will play a critical role.

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The elements of a wrongful removal or freezing out of a partner in a business context include the following:

1. Exclusion of a partner from participation in the business: This implies that a partner is denied the right to participate in the operations and decisions of the business [1]. For instance, actions such as serving a partner with a notice of default, stating that they are no longer a partner, removing their name from partnership tax returns, and refusing to provide them with access to partnership books, records, and information can be seen as a wrongful exclusion.

2. Violation of implicit duty of good faith between partners: Partners owe each other the duty to exercise the highest degree of honesty and good faith in their dealings and in the handling of partnership assets. A genuine issue of material fact that precludes summary judgment on whether expulsion of a partner violated this duty also constitutes an element of a wrongful removal or freeze out.

3. Breach of the right of a partner to a formal accounting: Any partner has the right to a formal accounting in relation to partnership affairs. If this right is breached through a wrongful exclusion, it forms one of the elements.

4. Disregard of the partner’s advice and wishes, irreconcilable differences and personal ill-will between the partners, refusal to keep accounts open to the co-partners, refusal to account at reasonable times, and refusal to pay over profits as agreed: These are also listed as acts and circumstances that can justify a decree of dissolution and therefore can be seen as elements of wrongful removal or freeze-out.

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The duty of oversight, often referred to within the context of corporate governance, is a critical aspect of the responsibilities of a corporation’s board of directors. This duty is essentially the requirement that board members are attentive to and oversee the business and affairs of the corporation, including its compliance with the law and its risk management processes. The duty of oversight is a component of the fiduciary duties that directors owe to the corporation and its shareholders.

The case In re McDonald’s Corp. S’holder Deriv. Litig., 2023 WL 387292, C.A. No. 2021-0324-JTL, at *1, *9 (Del. Ch. Jan. 26, 2023) is centered around allegations that the McDonald’s directors overlooked signs of a corporate culture permitting sexual harassment and misconduct from 2015 to 2020. The plaintiffs, who are shareholders, contend that this resulted in harm to the company due to subsequent employee lawsuits, loss of employee trust, and a damaged reputation. Nine directors who served during this period were named as defendants.

David Fairhurst, who served as Executive Vice President and Global Chief People Officer of McDonald’s from 2015 until his termination in 2019, was among the defendants. The plaintiffs argued that Fairhurst, as a fiduciary, was aware of potential issues with sexual harassment and misconduct in the company. They claimed that under his leadership, a culture of sexual misconduct and harassment was allowed to develop, leading to coordinated Equal Employment Opportunity Commission (EEOC) complaints, a 30-city walkout, and a second round of coordinated EEOC complaints, followed by a second one-day strike in 10 cities.

To fully grasp how this case has impacted Delaware Law concerning the duty of oversight, it is essential to understand the concept of a Caremark claim. This type of “failure of oversight” theory is observed to be one of the most challenging theories in corporation law upon which a plaintiff might hope to win a judgment. Under Delaware law, plaintiffs must plead with particularity that there were so-called ‘red flags’ that put the directors on notice of problems with their systems, but which were consciously disregarded. Continue reading ›

Limited Liability Companies (LLCs) are a popular business structure known for providing liability protection to its members. However, conflicts and wrongdoing within an LLC can occur, leading to disputes among members. When an LLC suffers harm due to actions taken by its management or majority members, a derivative suit can be an effective legal recourse for members seeking to address these issues in Illinois.

Understanding LLC Derivative Suits: An LLC derivative suit is a legal action brought by one or more members on behalf of the LLC against a third party, typically the management or majority members, alleging wrongdoing or harm done to the company. In essence, it allows individual members to sue on behalf of the LLC when the company itself fails to take action against internal misconduct.

In Illinois, the procedures and rules governing derivative suits for LLCs are outlined under the Illinois Limited Liability Company Act (805 ILCS 180) and relevant case law.

Requirements for LLC Derivative Suits in Illinois: For a member to file a derivative suit on behalf of an LLC in Illinois, several key requirements must be met:

  1. Ownership Status: The member initiating the derivative suit must be a current member at the time of filing the lawsuit and must have been a member at the time the alleged wrongdoing occurred.
  2. Exhaustion of Remedies: Generally, the member bringing the suit must show that they made a demand on the LLC’s management to take action against the alleged wrongdoing but that the demand was either rejected or ignored, or waiting for a response would be futile.
  3. Injury to the LLC: The alleged misconduct must have caused harm or damage to the LLC, affecting its financial interests or causing other significant negative effects.
  4. Representation of LLC’s Interests: The member bringing the derivative suit must adequately represent the interests of the LLC and not have conflicting interests.

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Shareholder derivative lawsuits can be particularly impactful for closely held companies in Illinois. These lawsuits provide an avenue for shareholders to address wrongdoing by officers, directors, or majority shareholders, and to protect the company’s best interests. In this blog post, we’ll explore the best way to prosecute a shareholder derivative lawsuit for a closely held Illinois company, considering the unique dynamics of such entities.
  1. Understand the Closely Held Company Dynamics:Closely held companies typically have a limited number of shareholders, and often, those shareholders are actively involved in the company’s management. Understanding the close-knit nature of these businesses is essential when prosecuting a derivative lawsuit. Recognize that personal relationships and conflicts of interest may play a significant role.
  2. Engage Experienced Local Counsel:Given the specific nuances of Illinois corporate law and the potential complexities of closely held companies, it is crucial to engage experienced local counsel. Seek attorneys with a track record in closely held corporate litigation, who understand the intricacies of Illinois business statutes and court procedures.
  3. Preserve Evidence and Documents:As with any derivative lawsuit, preserving evidence and relevant documents is paramount. Ensure that you have access to all necessary corporate records and financial documents that may support your claims.
  4. Evaluate Your Standing:Verify that you have standing to bring a derivative lawsuit as a shareholder of the closely held company. This may involve confirming that you were a shareholder at the time of the alleged wrongdoing and that you have maintained your shares throughout the legal process.
  5. Thoroughly Investigate the Allegations:Conduct a thorough investigation into the allegations of wrongdoing within the company. It’s essential to gather evidence and build a strong case that demonstrates how the misconduct has harmed the company and its shareholders.
  6. Attempt Resolution Through Negotiation or Mediation:Given the close relationships in closely held companies, it may be worthwhile to explore options for resolution through negotiation or mediation before proceeding with litigation. Engaging in discussions with the parties involved may lead to an amicable solution that benefits all stakeholders.
  7. Draft a Well-Pleaded Complaint:Create a well-pleaded complaint that clearly outlines the allegations, the harm suffered by the company, and the legal basis for your claims. A well-drafted complaint is crucial to moving the case forward.
  8. Consider the Impact on Company Operations:Recognize that a shareholder derivative lawsuit can disrupt business operations and relationships within a closely held company. Weigh the potential benefits of the lawsuit against its impact on the company’s ability to function effectively.
  9. Stay Committed and Persistent:Legal proceedings for closely held companies may be emotionally charged and protracted. Stay committed to the process, work closely with your legal counsel, and be prepared for potential challenges.
  10. Protect the Interests of Minority Shareholders:If you are a minority shareholder, emphasize the importance of protecting the interests of minority shareholders during the litigation process. Ensure that any potential settlements or resolutions are equitable to all shareholders.

Prosecuting a shareholder derivative lawsuit for a closely held Illinois company requires a thorough understanding of the unique dynamics and challenges that these businesses present. By following the steps outlined above and working closely with experienced local counsel, you can navigate the complexities of closely held corporate litigation and strive to protect the best interests of the company and its shareholders.

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Limited Liability Companies (LLCs) have become a popular choice for business owners due to their flexibility and liability protection. However, in the realm of LLCs, disputes among members can arise, leading to conflicts and, in some cases, member oppression. In the state of Illinois, LLC member oppression is a serious issue that demands attention and understanding to navigate legal complexities and seek appropriate remedies.

Understanding LLC Member Oppression: LLC member oppression refers to situations where the majority members of an LLC engage in conduct that unfairly prejudices the rights or interests of minority members. These oppressive actions can take various forms, such as excluding minority members from decision-making, withholding crucial information, mismanagement of company affairs, or diverting opportunities that could benefit the LLC.

In Illinois, LLCs are governed by the Illinois Limited Liability Company Act (805 ILCS 180). This act provides a legal framework outlining the rights and responsibilities of LLC members and offers avenues for minority members who face oppression within the company.

Rights of LLC Members in Illinois: Under Illinois law, LLC members possess certain rights, including the right to access company records, participate in management decisions (unless otherwise specified in the operating agreement), and the right to fair treatment without discrimination or oppression. However, these rights can sometimes be compromised when majority members wield their power to the detriment of minority stakeholders. Continue reading ›

Shareholder and LLC member disputes can be complex and contentious, especially when one party attempts a “freeze-out.” A freeze-out refers to excluding a shareholder or member from the decision-making process or the benefits of ownership. In Illinois, recent court decisions have shed light on the legal principles surrounding these disputes. In this blog post, we will explore some of these notable cases and the lessons they offer for those facing or involved in freeze-out situations.v

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It’s commonly said that you have to spend money to make money, but taken too far, that philosophy can easily bankrupt a company. When that company has investors and shareholders whose money you’re spending so you can try to make money, you have to justify your expenses to those shareholders. You have a responsibility to spend their money wisely so they can expect a good return on their investment.

According to a series of lawsuits filed against Madison Square Garden Entertainment Corp., the company allegedly made a series of moves the shareholders considered to be in violation of the company’s fiduciary duty.

One such move was the decision made by MSG Network’s board of directors and controlling stockholders to merge with MSG Entertainment. The reason given for the move was to save costs, but the minority shareholders allege the move was not made with their best interests in mind. Continue reading ›

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