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Articles Posted by David R. Pierce

It’s Never Too Early to Plan for Management Transition

Published on: October 16, 2017 | by David R. Pierce

Lindabury Partner and President, David Pierce, shares his insight on developing, adopting and implementing strategic management transition plans in the Leadership Issue of Law Practice Today by the American Bar Association (ABA) Law Practice Division.

“Navigating a transition in the management of a law firm can be daunting and troublesome, but it is an absolutely necessary endeavor for the long-term survival of the firm. While many firms have been in operation for 50-plus years, it is easy to rattle off a list of firms that have imploded or disintegrated after experiencing decades of success. Nothing lasts forever. As the Second Law of Thermodynamics says, entropy (disorder) is always increasing in an isolated system. That does not mean that one shouldn’t try to preserve a law firm that has strong name recognition and a good internal culture. It does mean, however, that doing so requires an investment of considerable effort and energy to keep it from following the natural tendency to splinter and dissolve.”

To read the full text of the article click here.

Corporate Deadlock – When Shareholders Seek the Courts’ Assistance in Forcing Buy-outs

Published on: June 28, 2017 | by David R. Pierce

Corporate deadlock is often cited as a reason why the court should invoke its powers and order the sale of one shareholder’s stock in minority shareholder litigation. While deadlock is a legitimate reason to bring a lawsuit seeking the court’s intervention, it is not a magic bullet that will automatically lead to the court ordering a buyout of one or more shareholders.

Deadlock is defined under the New Jersey Business Corporations Act and can be found under one of two circumstances. Deadlock can be found to exist when “the shareholders are so divided that they have not been able, for two consecutive meetings, to elect successors to directors whose terms have expired or would have expired if successors had been elected and qualified.” N.J.S.A. 14(a):12-7(1). The second manner in which deadlock may exist is if “the directors or other persons having management authority are unable to effect action on one or more substantial matters respecting the management of the company’s business.” N.J.S.A. 14(A):12-7(1).

The first deadlock provision may seem like an easy one to satisfy in closely held companies since many small companies do not hold formal shareholder meetings as required under the statute. The owners of small closely held companies are so focused on running the business that they forget about the formal requirements. Instead, since the shareholders in such companies generally work together closely and see each other practically every day, they make management decisions informally as necessary to operate the business and without formal meetings or corporate resolutions.

Fiduciary Duties Owed by Business Owners to Their Company: A Primer on Common Causes of Shareholder Oppression Claims

Published on: May 22, 2017 | by David R. Pierce

Because of the fiduciary duties owed by business owners to each other, whether they are shareholders in a closely held corporation, members in a limited company, or partners in a general or limited partnership, a business owner generally is prohibited from competing with the company. This general prohibition can be modified by an agreement among the owners, but in the absence of such an agreement the prohibition stands.

Failure to do so is referred to as the diversion of corporate opportunities. An owner of a closely held business has a duty to bring to the company any business opportunity that the company would normally expect to seek to pursue. The opportunity must be presented to the company and cannot be pursued individually unless the company decides not to pursue that opportunity.

As with the prohibition on competition, the requirement to present all opportunities to the company can be altered by contract. Pursuant to N.J.S.A. 14A:3-1, a corporation can renounce its interest in, or expectancy of the opportunity to pursue, specific opportunities. One manner in which corporate opportunities can be relinquished is to insert the pertinent language in the Certificate of Incorporation. When starting a new business, if there is any thought that one or more owners might want the right to pursue competing opportunities, you want to include language in the Certificate of Incorporation, or a separate shareholder agreement, that specifies what competing businesses the shareholder may appropriate.

What Happens to a Business Partner’s Interests in a Company After Death?

Published on: April 19, 2017 | by David R. Pierce

Have you ever heard a story among your friends about a company where two partners got along great, but then one suffered an untimely death and then his widow or children caused the company to breakup? That is a common scenario, although one might not be able to place the blame on the surviving spouse or the children. This is one of the ultimate worst case scenarios that proper planning can help avoid.

As shareholders in a small company each shareholder may have a reasonable expectation of continuing employment and participation in management of the company. When one shareholder dies, unless an agreement among the shareholders is in place providing a right for the company or remaining shareholder to purchase the deceased shareholder’s stock, that stock will be transferred to that deceased shareholder’s heirs, whether by will or by intestacy. As a result, most often the deceased shareholder’s stock ends up in the hands of a surviving spouse or children. In some cases the heir of the deceased shareholder will be able to step into his or her shoes and be able to participate meaningfully in the operation of the business. There may be personality conflicts and other difficulties in operating the business with a new partner, but hopefully, those can be worked out.

More often, however, the deceased shareholder’s stock is inherited by someone who does not have any clue about the business and cannot be expected to participate in or contribute to the operation of the business in any realistic sense. Sometimes this leads the remaining original shareholder to think that he will not pay them a salary since they are not working in the business and he can retain the earnings to reinvest in the business since he is not required to pay dividends. This is a recipe for disaster and some really unfortunate consequences.

New Jersey Courts Are Limited Only By Imagination When Resolving Business Disputes Between Partners

Published on: April 13, 2017 | by David R. Pierce

When dealing with shareholder oppression claims the court has a broad arsenal of remedies at its disposal. In fact, the remedies available to the court are limited only by its own imagination and the court’s sense of fairness.

The statute applicable to oppressed minority shareholders does provide some remedies along with its rights. N.J.S.A. 14A:12-7 (1)(c)(8) states that “Upon the motion of the corporation or any shareholder who is a party to the proceeding, the court may order the sale of . . . the corporation’s stock held by any other shareholder who is a party to the proceeding to either the corporation or the moving shareholder . . . if the court determines in its discretion that such an order would be fair and equitable to all parties under all of the circumstances of the case.”

The statute also gives the court the power, under the appropriate circumstances, to order the dissolution of the company. Although this is a favored threat of a party claiming oppression, it is quite unlikely to be ordered by the court. The court is extremely reluctant to dissolve an operating business and will go the great lengths to preserve a business, including to the extent of ordering a sale of the business to a third party. At least one court has ruled that the statute contemplates the ongoing existence of the corporation or the existence of a successor operating the business as a requirement of any remedy that might be imposed. Thus, dissolution is likely to be the remedy only if the parties agree that it should be the ultimate remedy in the case.

Minority Shareholder Oppression: The Court’s View of “Unfair” Action

Published on: April 6, 2017 | by David R. Pierce

Statutory remedies are made available to shareholders in a small, closely held corporation should harmful actions be undertaken by other shareholder or directors of the corporation. Importantly, these statutory remedies are available only to owners of a corporation with 25 or fewer shareholders.

Pursuant to N.J.S.A. 14A:12-7(1)(c), a shareholder in a closely held corporation may seek judicial remedies if the directors or other persons in control of a corporation have:

Acted fraudulently;

Regardless of Amount of Corporate Stock Owned, You May Still Be A “Minority Shareholder”

Published on: March 30, 2017 | by David R. Pierce

New Jersey statutes provide important rights and protections to “minority” shareholders of small, closely held companies. The applicable statute provides a right to file a lawsuit for relief under the following circumstances:

In the case of a corporation having 25 or less shareholders, the directors or those in control have acted fraudulently or illegally, mismanaged the corporation, or abused their authority as officers or directors or have acted oppressively or unfairly toward one or more minority shareholders in their capacities as shareholders, directors, officers, or employees. N.J.S.A. 14A:12-7(1)(c) (emphasis added).

This is not the only justification for filing a lawsuit against fellow shareholders, but it is one that the legislature has seen fit to create.

Fiduciary Duties Between Business Partners

Published on: March 21, 2017 | by David R. Pierce

Does your business partner owe you anything? We’re not talking about money, although that may be an ultimate outcome, we’re talking about how they treat you. Do they owe you any duty to be fair or to bring business opportunities to your company? Whether you are a shareholder in a small, closely held corporation or a member in a limited liability company, the answer to this question is yes, with some exceptions.

Every small business owner, again, whether be it a corporation or limited liability company, has a fiduciary relationship with the other business owners. What is a fiduciary relationship? A person who is a fiduciary is someone charged with a legal and/or ethical relationship of trust with one or more other persons. A fiduciary duty, in turn, is the highest standard of care that can be imposed on someone. A fiduciary is required to be loyal to the beneficiaries of that duty and there must be no conflict of interest between the fiduciary and beneficiaries. The fiduciary cannot profit personally from his position as a fiduciary.

Since each shareholder or limited liability company member owes each other a fiduciary duty the responsibility is reciprocal. Therefore, as a small business owner, you owe a fiduciary duty to your other partners whether you own 60% of the company or 5% of the company and they also owe you a reciprocal fiduciary duty.

Clarification of New Jersey’s Time of Application Rule

Published on: March 15, 2017 | by David R. Pierce

The Appellate Division has recently issued a decision clarifying the applicability of the time of application rule. Effective May 5, 2011 the New Jersey Legislature enacted a change to the Municipal Land Use Law (“MLUL”) that provided the ordinances that would be applied to a development application are those that were in existence at the time a development application is filed. This was a significant change from the prior law under which the development application was subject to any changes in the applicable ordinances that was enacted up until the time when the local board made a decision with respect to the application. Known as the “time of decision” rule, this principle had great potential to work hardship and injustice upon an applicant. Essentially, an applicant could expend significant time and money pursuing a development application, including engineering, planning and legal expenses and numerous appearances before the reviewing board, only to have the rules of the game changed at the last instant.

In order to provide some predictability to applicants and ensure that the application review process was fair, the Legislature provided that the ordinances in effect “on the date of submission of an application for development” govern its review. N.J.S.A. 40:55D-10.5. Naturally, debate emerged about what the constitutes the “submission of an application.” This issue was resolved by the Appellate Division on Dunbar Homes, Inc. v. The Zoning Board of Adjustment of the Twp. of Franklin, 2017 N.J. Super. LEXIS 18.

In Dunbar the applicant had submitted an application to develop a 6.93 acre property with 55 garden apartment units. The applicant submitted its application one day before the existing ordinance was amended to delete garden apartments as a conditionally permitted use in the applicable zoning district. The zoning officer determined that the application submitted was deficient in that it did not contain several documents required to be submitted as a part of the application, including a copy of a submittal letter to the Department of Transportation. As a result it was determined that the application could not proceed as a d(3) variance application for a conditional use variance, but had to instead proceed as an application for a d(1) variance for a non-permitted use. The Board’s decision was founded on the premise that to obtain the protection of the time of application rule the application submitted must be a “complete” application under the MLUL.

Breaking Up Your Company: Why Shareholder Disputes Take Place

Published on: November 28, 2016 | by David R. Pierce

What is a shareholder dispute or, in other words, shareholder oppression? The terms “shareholder dispute” and “shareholder oppression” are short hand references to business disputes between two or more owners of closely held businesses. Although the phrases both refer to “shareholders” they are used interchangeably by most people to refer to disputes between owners of not only corporations, but between owners of partnerships and limited liability companies. There are important distinctions between the various business entities that can be used, but those are beyond the scope of this introduction.

In a closely held business there are often several shareholders/partners who decided to go into business together. They can be relatives, close friends or even just business acquaintances who realized that they could combine their efforts and make a go of a new business. In many cases there is an inside partner and an outside partner. The inside partner typically is responsible for the production and fulfillment operations of the business while the outside partner is responsible for promoting the business and securing orders for the businesses goods and/or services. Sometimes a business is started by one person with a vision, but they want to share their success with others who have helped them out, when the business founder decides that he or she wants to give those individuals a chance to share in the growth and prosperity of the company, they do so by giving them stock in the company. Other times the founder opens up the ownership of the business to others in an effort to raise capital to help take the business to the next level. Whichever scenario, or even any other scenario that hasn’t been mentioned, there is the very real potential for disputes to develop over, among other things, the management of the business, the direction of the business, the level of effort being expended by owners, the compensation being paid or lack of profits to distribute.

Any of these disputes can blossom into full-fledged, to the death litigation contests, pitting partners, and their respective wills, against each other. Often times the dispute erupts over perceived slights or resentment that has festered beneath the surface for months or even years. These disputes can, and do, usually lead to the breakup of the business relationship. One owner may be compelled to sell his or her interest to the other owner at a price determined through a valuation process. In rare cases the sale of the business to a third party may be forced.