Articles Posted in Shareholder Freeze Out

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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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In a recent 11th Circuit Court of Appeals decision, Warrington v. Rocky Patel Premium Cigars, Inc., No. 22-12575, 2023 WL 1818920 (11th Cir. Feb. 8, 2023), the court provided valuable lessons for partners, shareholders, and small business owners who may find themselves in disputes. This case serves as a cautionary tale, highlighting the importance of careful strategy and legal counsel when pursuing litigation or arbitration.

The dispute centered on Brad Warrington, a minority shareholder in Rocky Patel Premium Cigars, who wanted to divest from his holdings in the company. The buy-sell agreement between Warrington and Rakesh Patel, the majority shareholder, included an arbitration provision for any disputes arising out of the agreement. However, the case demonstrates how mistakes made during litigation can result in a waiver of the right to arbitration.

After years of disagreement over the value of Warrington’s shares and alleged improprieties by Patel, Warrington found a private buyer and notified Patel of his intention to sell. Patel refused to acknowledge the notice and subsequently sued Warrington in Florida state court, seeking a declaratory judgment and alleging breach of contract, among other claims.

While the state action was pending, Warrington sued Patel in federal court, bringing several counts, including breach of contract and breach of fiduciary duty. Patel moved to dismiss, remand, or stay the federal action, but the district court denied his motion. It wasn’t until June 2022 that Patel moved to stay and compel arbitration under the agreement. However, the district court denied this motion, finding that Patel had waived his right to arbitrate by initially filing in state court and moving to dismiss or remand Warrington’s federal action. Continue reading ›

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When starting a business, co-owners envision the best—working together productively and profitably. But it is all too common for business partners to encounter a serious impasse over how to operate the business. When partners are unable to work through a dispute, it may be time for one partner to exit the company via a buyout of their interest. It is not uncommon for this scenario to arise in conjunction with claims that the majority shareholder or shareholders are oppressing the minority shareholder or shareholders.

For Illinois corporations, the Illinois Business Corporation Act of 1983 (BCA) permits shareholders to pursue legal action against each other based on allegations of fraud, illegal activity, corporate waste or other disruptive conduct. The BCA provides for 12 categories of relief that a court may order as an alternative to dissolving the business. Minority shareholders frequently opt to pursue the remedy of a buyout, in which the exiting shareholder’s interest is purchased by the remaining shareholders for “fair value.” Similarly for Illinois LLCs, the Illinois Limited Liability Company Act provides that a court may order the entity or the remaining members to purchase the interest of the outgoing member.

The BCA defines “fair value” as the value of the shares “taking into account any impact on the value of the shares resulting from the actions giving rise to a petition under this Section.” The statute goes on the explain that “‘fair value,’ with respect to a petitioning shareholder’s shares, means the proportionate interest of the shareholder in the corporation, without any discount for minority status or, absent extraordinary circumstances, lack of marketability.” For many companies, this provides a much more favorable valuation to a minority shareholder than selling shares for fair market value or any other metric of value normally employed when selling an interest in a small business. This is particularly true for closed (or closely held) corporations where a market for the minority’s shares might not otherwise exist since the statutory valuation does not generally speaking allow for a discount for the lack of marketability of the minority’s shares. Continue reading ›

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Earlier this year, the governor of Delaware signed Senate bill 273 which amended various provisions of the Delaware General Corporation Law (GCL). The changes became effective August 1, 2022. Most notable among the changes was the amendment of Section 102(b)(7) of the GCL to allow corporations to exclude or limit certain officers from personal liability for breaches of their fiduciary duty of care. In order for corporations to take advantage of this change in the law, companies must include a provision in their certificate of incorporation eliminating or limiting its officers from personal liability for breaches of the duty of care.

Under Delaware corporate law, directors and officers of Delaware corporations owe the corporation and its shareholders certain fiduciary duties. One of the two chief fiduciary duties that directors and officers owe to the corporation and shareholders is called the duty of care. The duty of care requires directors and officers to exercise care and act in an informed manner when acting for the corporation and making decisions on its behalf.

Since 1986, with the addition of Section 102(b)(7) to the GCL, corporations have been authorized to eliminate or limit the personal liability of directors for monetary damages for  breaches of the duty of care. However, until passage of the amended Section 102(b)(7) this year, corporations could not do the same for its officers, even though the Delaware Supreme Court repeatedly affirmed that officers owe the same fiduciary duties as directors. Now corporations can insulate its officers as well as directors from personal liability for breaches of the duty of care.

It is important to understand the limits of this newly amended Section 102(b)(7). First, it doesn’t apply to all officers but only to those officers “deemed to have consented to service by the delivery of process to the registered agent of the corporation pursuant to § 3114(b) of Title 10” which includes the president, chief executive officer, chief operating officer, chief financial officer, chief legal officer, controller, treasurer, or chief accounting officer along with anyone identified in the corporation’s SEC filing as one of the most highly compensated executive officers, or anyone who has, by agreement with the corporation, consented to be identified as an officer for the purposes of Section 3114(b) of the GCL. Continue reading ›

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While most securities fraud lawsuits accuse the defendant of manipulating their stock prices to keep them artificially high, the current lawsuit against Goldman Sachs alleges the company lied to maintain its high stock prices, rather than lying to cause the prices to rise. It’s a unique allegation, and one the U.S. Supreme Court has not yet recognized, but two lower courts have already upheld it as a valid claim.

Goldman appealed the decision made by the district court and the Second U.S. Circuit Court of Appeals to the Supreme Court. The company alleges that, if the Supreme Court were to allow the securities lawsuit against it to proceed, the result would be devastating for public companies all over the country.

Goldman is arguing that the allegations against it are too weak to be valid. The allegations made by the shareholders rely on Goldman’s advertising claims that included words like “honesty” and “integrity” and claimed the company always prioritized the interests of its clients, when the opposite turned out to be true.

According to Goldman, the statements cited by the lawsuit are too vague to make the basis of a securities-fraud case. The company has also denied the statements had any effect on its stock price. If the lawsuit is allowed to proceed through the courts, the bank alleges it will allow shareholders to file securities-fraud lawsuits in the future simply by pointing to any kind of aspirational statement that nearly all companies make in their marketing materials. Continue reading ›

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After discussions about going public, Promega Corp., a privately-held biotech company based in Wisconsin, decided instead to remain a privately held company back in 2014 and tried to buy back the stock owned by its minority shareholders and regain a controlling interest in the company. Those minority shareholders claimed the price at which Promega wanted to buy back their shares was deeply discounted, and when they tried to negotiate for a higher price point, Promega allegedly refused, which ultimately led to the massive lawsuit between the company and its minority shareholders that dragged on for about five years.

The team of attorneys arguing the case for the minority shareholders was headed by James Southwick and Alex Kaplan, two partners of the Susman Godfrey law firm in Houston, Texas. They recently announced that the lawsuit settled for $300 million, a victory to which they attribute their months of research and preparation leading up to the trial, as well as their decision to stick to one main allegation: shareholder oppression.

Other attorneys might have argued that the defendants had breached their fiduciary duty to their shareholders, or they would have alternated between making the case for shareholder oppression, arguing breach of fiduciary duty, and making the case for other allegations throughout the course of the trial. Instead, Southwick and Kaplan decided their best bet was to argue that Promega had tried to oppress its shareholders and to continue to make that case throughout the month-long bench trial. It was an unusual strategy, but one that ultimately paid off. Continue reading ›

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Leprino Foods Co. is the largest manufacturer of mozzarella cheese in the world and is solely responsible for making all the mozzarella that goes on top of Domino’s, Papa John’s, and Pizza Hut’s pizzas. It’s worth billions of dollars, but it’s also a family business.

It was founded in Denver, Colorado in the 1950s by Michael and Susie Leprino. The couple had five children, including Michael Jr. and James. James went into the family business as soon as he had graduated from high school, and while Michael Jr. was involved in the business, he also had his own career in banking and real estate.

James and his daughters, Terry Leprino and Gina Vecchiarelli, together own 75% of the company’s stock.

Michael Jr. died in August of 2018 and his daughters, Nancy, Mary, and Laura Leprino, together own the remaining 25% of the stock in the company. In July, Nancy and Mary sued their uncle and cousins in Denver District Court for allegedly managing the company in a way that provided the greatest financial reward for them, while ignoring the financial interests of the minority shareholders.

The lawsuit alleges James and his daughters tend to align their votes so the outcome always provides them with the greatest financial benefits, but allegedly leaves Nancy and Mary out in the cold. Nancy and Mary also allege they have been unable to obtain financial records to which they are legally entitled as shareholders of the company. Continue reading ›

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LVMH Moët Hennessy-Louis Vuitton SE was scheduled to acquire Tiffany & Co. no later than August 24th, 2020, but the merger came to a halt when LVMH failed to even apply for antitrust clearance.

Antitrust laws exist to avoid monopolies. If two major companies merge to form one company, there’s a fear that the existence of a huge corporation, which now owns the market shares of both companies involved, might dominate the industry, thereby making it difficult, or even impossible for any other company to compete with them. Since healthy competition promotes innovation and helps drive down prices, it’s necessary for a healthy economy.

As a result, when two major corporations merge to form one company, they have to file for antitrust clearance with the authorities in the markets in which they operate, meaning the authorities look at the market share of the two companies and agree that the merger would not create a monopoly. But according to a recent lawsuit filed by Tiffany, LVMH has not only failed to acquire the antitrust clearance by the agreed-upon date but has failed to even file for antitrust clearance.

The terms of the merger allowed for an extension to November 24th, 2020 if antitrust clearance had not been obtained by August 24th, but the fact that LVMH still has yet to even file for antitrust clearance in two of the three relevant markets raises doubts about whether they’re taking this merger seriously. Tiffany has responded by filing a lawsuit in the Court of Chancery of the State of Delaware.

The lawsuit is asking the court to provide an order that LVMH must abide by the terms of the acquisition, which had been agreed upon by both companies.

Even before the lawsuit was filed the acquisition had been having problems. LVMH had claimed that Tiffany had suffered a Material Adverse Effect (MAE) as a result of the COVID-19 pandemic, and had tried to buy shares of Tiffany at a lower price per share than the price they had agreed upon in the terms of the contract. Continue reading ›

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After partners in a closely held corporation entered into years of adversarial litigation, a settlement agreement was reached. One of the partners later sued the other two, alleging that he was fraudulently induced into agreeing to the settlement when the defendant’s counsel misrepresented the financial position of the corporation at the time of the settlement. The circuit court dismissed the plaintiff’s complaint, finding that the defendants did not owe him a fiduciary duty during the litigation settlement discussions. The appellate court reversed, determining that because there was no document specifying that the parties’ relationship had been dissolved at the time of the settlement talks, the defendants still owed the plaintiff a fiduciary duty, and there was a question of material fact as to whether the resulting settlement agreement was valid. The appellate panel then reversed the decision of the circuit court.

Samuel Arndt, III, Nicholas Nardulli, and Diana Johnson were shareholders in Redhawk Financial Services, Inc. Arndt owned 49 percent of Redhawk’s shares; Nardulli was the controlling shareholder, a director, and the president of Redhawk; Johnson was a shareholder, a director, and the secretary of Redhawk. In December 2012, Redhawk filed a complaint against Arndt for breach of fiduciary duty. The complaint alleged that Arndt withdrew over $100,000 from Redhawk without an apparent business justification and also diverted Redhawk’s commissions into Arndt’s personal bank account. Arndt filed a counterclaim against Redhawk as well as a third-party complaint against Nardulli and Johnson, alleging breach of fiduciary duty and oppression of him as a minority shareholder. Continue reading ›

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Investing is supposed to be a long-term strategy to build wealth, but expecting shareholders to wait more than 60 years before they can get a fair return on their investment is far beyond what any investor would consider reasonable.

That was allegedly the case for the minority shareholders of Promega Corp., the biotechnology company based in Fitchburg, Wisconsin. According to a lawsuit filed by shareholders back in 2016, Bill Linton, Promega’s founder and CEO, allegedly used manipulative and bullying tactics to become a majority shareholder of the company. His actions allegedly left the minority shareholders with no hope of getting a decent return on their investments before 2078 at the earliest.

Circuit Judge Valerie Bailey-Rihn, who has been hearing the case, has said that she was leaning towards the plaintiffs and agreeing that they had been oppressed by Linton’s actions. Now the only two things left to determine are 1) how to punish Promega and provide restitution for the minority shareholders who were allegedly oppressed by Linton’s actions; and 2) how to determine the price of the stocks for which the minority shareholders are allegedly owed compensation. Continue reading ›

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