Use of Corporate Authority in Internal Business Disputes

Friday, 07 September 2018 15:32 Written by  Thomas P. Donnelly

In my many years of practice as a commercial litigator dealing with conflicts between shareholders, it has become clear time and again that one of the best things business owners can do when in business with multiple shareholders or partners is to have a well-defined agreement which governs the operations of the business.  Not only can that agreement memorialize the respective rights and obligations of the parties, it can also provide dispute resolution mechanisms which may serve the parties well in the event of material disagreement. Utilizing the powers granted by the Business Corporations Law and granted by the terms of an agreement governing business owners can be complex and risky but can often force an acceptable resolution when the status quo is no longer tenable.

In the case of a corporation, a shareholders agreement or by-laws will often identify the corporate office which holds supreme executive authority subject only to removal of that corporate officer by a vote of the directors. If the officer controls sufficient votes from the board, removal by a disgruntled shareholder may be impossible. The acts of the executive are subject to the business judgment rule and granted a certain amount of deference at law.  

A majority shareholder who holds the top executive office is free to wield that power, consistent with the business judgment rule, in many ways -  including business dealings with outside parties and, generally, with respect to employment decisions.  If the disgruntled shareholder is an employee of the company, which is often the case in small business, that shareholder’s continued employment may be at the discretion of the majority.  Termination of employment, if justified, is a use of corporate power which often impacts on the relative negotiating positions.      

Of course, a majority shareholder who exercises corporate authority can be faced with claims that the minority has been “frozen” or “squeezed” out of the business.  In such cases, it is important that the majority have “clean hands” and has avoided self-dealing, corporate waste or fraud as such allegations, if proven, could result in the appointment of a custodian or receiver and a loss of control.  Certainly the majority cannot transfer the assets of the business to a new entity controlled solely by the majority.   However, the existing entity can be managed in a way that maximizes benefit to the majority consistent with the exercise of business judgment.  The existence of a dispute between shareholders does not in and of itself negate the discretion afforded by the business judgment rule.        

AMM counsels clients through the minefield of corporate authority and with regard to available strategies to address disputes which arise between business owners. 

Last modified on Friday, 07 September 2018 15:52
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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