From a Litigator's Desk: Sometimes You Have To Just Blow It Up

Wednesday, 14 November 2018 18:14 Written by  Thomas P. Donnelly

Many of our previous posts delve into the benefits of resolution of a commercial or shareholder dispute without litigation.  Cost, uncertainty and business distraction are factors which often weigh in favor of settlement even at a price which seems unfair.  But making a deal necessitates a desire to do so from both sides.  As they say, it takes two to tango.  If one party is simply not so inclined or the final best offer is simply unacceptable, litigation may be inevitable, and the only mechanism available to bring about resolution.   

In a corporate setting, that litigation may take several forms.  Choosing the right path is fact intensive and dependent on the relative positions of the parties.  Of course, the terms of agreement between business owners may either provide mechanisms for resolution or limit potential alternatives.  Regardless, every course of action comes with significant consequences which must be carefully considered prior to embarking on what can be both emotionally taxing and expensive.

Minority Shareholder Strategies

A minority shareholder who is not actively involved in the business has limited options.  Unless a shareholders’ agreement provide a mechanism for redemption or transfer, it may be difficult for a minority shareholder to compel a purchase.  That minority shareholder would be left to argue that he or she has been “frozen out” from the business, i.e. excluded from information relating to management, oppressed or treated inequitably in terms of distributions of profits so as to trigger an obligation that the company redeem their shares at “fair value”.  An action for the appointment of a custodian or receiver is the minority shareholders weapon of choice in that instance.  Majority and controlling shareholders are loathe to lose control of what is often their economic life blood. 

Majority Shareholder Strategies

A majority shareholder desirous of consolidation of ownership faced with a minority owner not interested in selling also has limited options to compel a sale.  In the absence of an agreement which provides for same, there is no provision at law relating to corporations to simply expel a shareholder.  With regard to llc’s, the Pennsylvania Limited Liability Company Act provides a limited number of circumstances where the right of expulsion may apply.  In either case, involuntary expulsion of a minority interest is no easy task. 

The Nuclear Option

The above being said, the nuclear option available to a controlling interest is dissolution.  Blow it up, resign all positions which impose fiduciary obligations at law, liquidate the assets and start something new.  While the process may be incredibly disruptive to the continuity of business and the personal finances of all the parties, if the separation of the minority interest holder is imperative dissolution may be the only option.  The minority may scream breach of fiduciary duty, but in the absence of an agreement among shareholders that the shareholders would not move to dissolve, the success of such a claim at law is speculative at best. 

In the end, the decision of whether to engage in such explosive tactics involves a financial analysis but also other factors such as whether the long term interests of the parties require same.  In some cases, such as in professional settings, potential irreparable damage to reputation may demand action regardless of the short term pain such action may cause.            

Thomas P. Donnelly

Thomas P. Donnelly

Tom’s practice focuses on commercial litigation and transactions. In litigation, Tom represents both Plaintiffs and Defendants. Throughout his career, he has undertaken the representation of both individual and corporate clients in subject matters concerning fraud, contracts, employment agreements, breach of fiduciary duty, securities violations, real estate and insurer bad faith. Tom’s clients include individuals and businesses local to the Philadelphia area, as well as national corporations.

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