Eric Milby was a co-organizer and panelist at the 2015 American Bar Association Business Law Section Spring Meeting in San Francisco where the topic was “50 Ways to Leave Your Lover, . . . err, Business Partner.”
In August 3rd and 6th 2015, Eric was a panelist on the Pennsylvania Bar Institute’s continuing legal education Seminar “Tales from the Shareholder Wars” in Philadelphia and Harrisburg, Pa.
In October, 2017, Eric was the organizer, and a panelist with the Honorable Patricia McInerney, his partner Jessica Gulash, Esq., and Neal Jacobs, Esq. on a seminar for the Philadelphia Bar Association’s annual Bench-Bar conference titled: “Business Divorce: Get the Clients not the Goldfish” – an homage to the business divorce that left Tom Cruise’s character Jerry Maquire with little more than a few goldfish and a contract with Rod Tidwell after his sudden dispute with his business partners.
In November 2017, Eric was a panelist on the Pennsylvania Bar Institute’s continuing legal education Seminar “Business Divorce, Startup to Litigation to Resolution.”
Eric “wrote the book” on business divorce as one of 15 co-authors, the only from Pennsylvania and New Jersey, of the BNA/Bloomberg treatise “Litigating the Business Divorce” available here: National Business Divorce Treatise
“Business Divorce” is the emerging title for the practice area dealing with shareholder, partnership, membership and other internal disputes in closely-held or family-owned companies.
“The acute vulnerability of minority shareholders in the closely-held corporation is well recognized. It stems principally from two factors. Because of its controlling interest, the majority is able to dictate to the minority the manner in which the corporation shall be run. In addition, shares in closed corporations are not publicly traded and a fair market for these shares is seldom available.” Orchard v. Covelli, 590 F. Supp. 1548, 1557 (W. D. Pa. 1984)
The majority owner(s) or the owner(s) running the daily operations is(are):
Breach of Contract
Breach of Fiduciary Duties
Statutory Books and Records Inspection Accounting
The duty of the board of directors, committees of the board and individual directors under section 1712 (relating to standard of care and justifiable reliance) is solely to the business corporation and may be enforced directly by the corporation or may be enforced by a shareholder, as such, by an action in the right of the corporation, and may not be enforced directly by a shareholder or by any other person or group.
15 Pa.C.S.A. § 1717, Limitation on standing
To have standing to sue individually, the shareholder must allege a direct, personal injury—that is independent of any injury to the corporation—and the shareholder must be entitled to receive the benefit of any recovery.
Hill v. Ofalt, 85 A.3d 540, 548 (Pa.Super.,2014)
Every business venture between two or more owners is the product of an agreement. Somewhere a decision was made to go into business together so there IS some agreement even if the parties neglected to reduce it to writing.
The first task is to determine “what was the agreement:”
If there is a writing, what does the agreement say about the issues in dispute?
What if there is no writing or the writing ambiguous on a point of contention?
Joint adventurers, like copartners, owe to one another, while the enterprise continues, the duty of the finest loyalty. Many forms of conduct permissible in a workaday world for those acting at arm’s length, are forbidden to those bound by fiduciary ties. A trustee is held to something stricter than the morals of the market place. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior. As to this there has developed a tradition that is unbending and inveterate. Uncompromising rigidity has been the attitude of courts of equity when petitioned to undermine the rule of undivided loyalty by the ‘disintegrating erosion’ of particular exceptions. * * * Only thus has the level of conduct for fiduciaries been kept at a level higher than that trodden by the crowd. It will not consciously be lowered by any judgment of this court.’
Where a majority shareholder stands to benefit from his decisions as a controlling stockholder, the law requires that the majority’s action be “intrinsically fair” to the minority interest.
A policy of corporate governance which has as its objective the denial of benefits to the minority interest runs afoul of this fairness standard and calls to question the majority’s fulfillment of its fiduciary duty to the other shareholders.
Orchard v. Covelli, 590 F. Supp. 1548, 1556 (W.D. Pa. 1984)(Internal cite omitted)
The Corporate Opportunity Doctrine precludes an officer or director “from appropriating to himself a business opportunity which in fairness should belong to the corporation, and subjects any property or profit he so acquires to a constructive trust in favor of the corporation.”
74 Harv. L. Rev. 765
In Pennsylvania, “if there is presented to [an officer or director] a business opportunity which is within the scope of its own activities and of present or potential advantage to it, the law will not permit him to seize the opportunity for himself; if he does so, the corporation may elect to claim all of the benefits of the transaction. Nor is it material that his dealings may not have caused a loss or been harmful to the corporation; the test of his liability is whether he has unjustly gained enrichment.”
Ciampa v. Conversion Sciences, Inc., 2015 WL 8196712, at *10 (Pa.Super.,2015) (quoting Lutherland, Inc. v. Dahlen, 53 A.2d 143, 147 (Pa.1947)).
New rule: 15 Pa.C.S.A. §8871, Events Causing Dissolution
Old Rule: § 8354. Dissolution by decree of court, PA ST 15 Pa.C.S.A. § 8354
New Rule: § 8481. Events causing dissolution, PA ST 15 Pa.C.S.A. § 8481
Old Rule: 15 Pa.C.S.A. § 8572, Judicial dissolution
New Rule: 15 Pa.C.S.A. 8681, Events Causing Dissolution
“the equity court should remember that involuntary dissolution is a drastic remedy to be employed cautiously and only in clear cases.”
O’Farrell v. Steel City Piping Co., 403 A.2d 1319, 1325, 266 Pa. Super. 219, 232 (1978)
In a recent Pa case, one of two 50/50 LLC members complained that the other was operating the company to his exclusion. The Court found that the failure to operate in accordance with the operating agreement justified an involuntary dissolution notwithstanding that the company was operating profitably. Staiger v. Hollohan, 100 A.3d 622 (Pa. Super. 2014). There, the party seeking the dissolution was deemed the oppressed rather than oppressor.
What if the party seeking dissolution is the oppressor – does the Doctrine of Unclean Hands protect the victim of the oppressive majority/controlling shareholder?
(b) Right of inspection by a shareholder.–Every shareholder shall, upon written verified demand stating the purpose thereof, have a right to examine, in person or by agent or attorney, during the usual hours for business for any proper purpose, the share register, books and records of account, and records of the proceedings of the incorporators, shareholders and directors and to make copies or extracts therefrom. A proper purpose shall mean a purpose reasonably related to the interest of the person as a shareholder. In every instance where an attorney or other agent is the person who seeks the right of inspection, the demand shall be accompanied by a verified power of attorney or other writing that authorizes the attorney or other agent to so act on behalf of the shareholder. 15 Pa.C.S.A. § 1508. Corporate records; inspection by shareholders