Recent Developments in Business Divorce Litigation 2021


Byeongsook Seo

Snell & Wilmer L.L.P., 1200 17th Street, Suite 1900, Denver, CO 80202, 303.635.2085, [email protected]

Byeongsook Seo is a member of the Snell & Wilmer L.L.P.’s commercial litigation practice.  He represents clients in handling complex and, often, heated disputes related to failed business ventures and disputes among business partners, executives, owners, and directors.  Byeongsook is a member and Vice-Chair of the Business Divorce Subcommittee of the ABA Business Law Section Committee on Business and Corporate Litigation.  His honors include Colorado Super Lawyers and The Best Lawyers in America.  Byeongsook graduated from the United States Air Force Academy and obtained his law degree from the University of Denver, Sturm College of Law.


Melissa Donimirski

Heyman Enerio Gattuso & Hirzel LLP, 300 Delaware Avenue, Suite 200, Wilmington, DE 19801, 302.472.7314, [email protected]

Melissa N. Donimirski is an attorney with Heyman Enerio Gattuso & Hirzel LLP in Wilmington, Delaware.  She concentrates her practice in the area of corporate and commercial litigation in the Delaware Court of Chancery and has been involved with many of the leading business divorce cases in that Court.  Melissa is Co-Chair of the Business Divorce Subcommittee of the ABA Business Law Section, Business and Corporate Litigation Committee.  She received her undergraduate degree from Bryn Mawr College and her law degree from the Delaware Law School of Widener University.  Melissa has also co-edited and co-authored a treatise on business divorce, which is published by Bloomberg BNA.

Janel M. Dressen

Anthony Ostlund Baer & Louwagie P.A., 90 South 7th Street, 3600 Wells Fargo Center, Minneapolis, MN 55402, 612.492.8245, [email protected]

Janel Dressen is a lawyer and shareholder with the litigation boutique firm Anthony Ostlund Baer & Louwagie P.A., located in Minneapolis, Minnesota.  Janel has 19 years of experience as a trial lawyer and problem solver.  She assists her clients to avoid and prepare for business and employment-related disputes in and outside of the courtroom.  Janel spends a significant amount of her time resolving family-owned and privately held business disputes for owners that are in need of a business divorce.  In 2019, Janel was selected by her peers to the Top 50 Women Minnesota Super Lawyers list by Super Lawyers.  In 2017, Janel was honored as one of Minnesota’s Attorneys of the Year.

Thomas Kanyock

Schwartz & Kanyock, LLC, 33 North Dearborn Street, Ste. 2330, Chicago, IL 60602, 312.441.1040, [email protected]

Thomas Kanyock is a principal with Schwartz & Kanyock, LLC, in Chicago, where he regularly litigates and resolves commercial disputes involving injunctions, trials and appeals in state and federal courts.  Tom concentrates in representing oppressed equity interest holders frozen into and out of closely held business entities.

John Levitske

Ankura, One North Wacker Dr., Suite 1950, Chicago, IL 60606, 312.252.9533, [email protected]

John Levitske, CPA/ABV/CFF/CGMA, ASA, CFA, CFLC, CIRA, MBA, JD, is a Senior Managing Director in the disputes and economics practice of Ankura, a global business advisory and expert services firm.  He serves as a business valuation, forensic accounting and damages expert witness, arbitrator, and advisor.  John is frequently consulted regarding business disputes, shareholder disputes and post-acquisition transaction disputes.  In addition, he is the current Chair of the Dispute Resolution Committee of the Business Law Section and a Member at Large of the Standing Committee on Audit of the American Bar Association.

John C. Sciaccotta

Aronberg Goldgehn, 330 N. Wabash Ave., Suite 1700, Chicago, IL 60611, 312.755.3180, [email protected]

John C. Sciaccotta is a Member at Aronberg Goldgehn.  He focuses his practice on litigation, arbitration and business counseling matters with a special emphasis on complex civil trial and appellate cases brought in federal and state courts throughout the United States.  John has also been appointed by the American Arbitration Association as an Arbitrator and Lawyer Neutral to adjudicate various claims and disputes in arbitration.  For many years he has advised public and privately held businesses, lenders, employers and individuals in business transactions and disputes.  He is experienced in dealing with numerous industries and business activities and has a specialty focus on representing entities in business divorce and complex ownership dispute resolution.  John is highly active in professional associations and within his community.  Among his activities, he is Co-Founder and current Chair of the Chicago Bar Association’s Business Divorce and Complex Ownership Disputes Committee.  He served on the CBA’s Board of Managers from 2017 to 2019.

Ben T. Welch

Snell & Wilmer L.L.P., 15 West South Temple, Suite 1200, Salt Lake City, UT 84101, 801.257.1814, [email protected]

Ben T. Welch is a commercial litigator and trial attorney at Snell & Wilmer LLP. Ben litigates all types of complex business disputes, including shareholder disputes, contract disputes, and disputes regarding corporate dissolution, non-compete agreements, and trade secrets.

§ 1.1 Introduction

This chapter provides summaries of developments related to business divorce matters that arose from October 1, 2019 to September 30, 2020 from mostly eight states.  Each contributor used his or her best judgment in selecting cases to summarize.  We then organized the summaries, first, by subject matter, then, by jurisdiction.  This chapter, however, is not meant to be comprehensive.  The reader should be mindful of how any case in this chapter is cited.  Some jurisdictions have rules that prohibit courts and parties from citing or relying on opinions not certified for publication or ordered published.  To the extent unpublished cases are summarized, the reader should always consult local rules and authority to ensure relevant and permissible precedent is found for any particular matter.  We hope this chapter assists the reader in understanding recent developments in business divorces.

§ 1.2 Access to Books and Records

§ 1.2.1 Massachusetts

Bernstein v. MyJoVE Corp., 97 Mass. App. 1127, 150 N.E.3d 1144 (2020), review denied, 486 Mass. 1101 (unpublished).  Plaintiff held dual status as a corporation’s chief technology officer and 30% shareholder.  Plaintiff left the company and his position as CTO, while maintaining his 30% shareholder status.  More than a year later, plaintiff used his knowledge of the company’s computer systems to gain control of its website and to cut off the CEO’s email access for several days.  Plaintiff filed suit claiming statutory rights, per G.L.C. 156D, §16.02, to inspect books and records.  The trial court dismissed the claim.  However, the issue arose again in the defendant company’s counterclaim brought under three federal statutes, each of which provide protections against unauthorized impairments or invasions of computer systems.  The company obtained a preliminary injunction requiring plaintiff to return systems controls.  However, despite the preliminary injunction, plaintiff downloaded and kept select company records and communications.  Plaintiff claimed that his continuing status as a 30% shareholder authorized him to access records and communications.  The trial court entered judgment for counterclaimant and plaintiff appealed.

Plaintiff argued on appeal that he was authorized to take the actions at issue, acting in good faith out of a desire to help the corporation.  Plaintiff asserted his 30%ownership of the close corporation, citing Donahue v. Rodd Electrotype Co., 367 Mass. 578 (1975), claiming a right to participate in management.  As such, reasoned plaintiff, he had an unfettered right to access the computer system to force the controlling member to negotiate.

The Appellate Court, in an unpublished order, rejected plaintiff’s core argument for three main reasons, including:

[T]he trial judge made several factual findings that establish that Bernstein was not “authorized” to take the actions at issue.  The judge found that Bernstein left the company’s employ in September of 2011, that the company termed that a “resignation,” and that Bernstein did not contest that designation at that time.  Thereafter Bernstein may have been involved in some oversight functions, but he was no longer “at the company.”  Bernstein’s successor as CTO changed the company passwords, and did not share them with Bernstein.  The judge found that “within a few months of leaving, [Bernstein] was no longer allowed access to company emails.”  To the extent Bernstein contests these findings, they are not clearly erroneous.  Accordingly, even if we were to accept Bernstein’s contention that his employment with MyJoVE continued past September 30, 2011, the judge was still more than justified in concluding that when Bernstein accessed the company’s computer system over one year later, he knew he was not employed by MyJoVE, and knew he did not have the requisite authorization.

§ 1.2.2 New York

Atlantis Management Group II LLC v. Nabe, 177 A.D.3d 542, 113 N.Y.S.3d 79 (N.Y. App. Div. 2019).  A non-managing member of a limited liability company sought an equitable accounting from the managing members of the LLC.  The trial court granted summary judgment in favor of the equitable accounting and the appellate court affirmed, finding that the managing members owed the non-managing member a fiduciary duty.  The appellate court noted that while an equitable accounting is distinct from a right of accounting, the latter was appropriate here because the managing members had repeatedly refused to respond to demands for access to books and records.

§ 1.3 Business Judgment Rule

§ 1.3.1 California

Coley v. Eskaton, 51 Cal.App.5th 943 (2020).  In an action involving homeowner claims against directors of an HOA, the court addressed whether the business judgment rule was properly ignored to impose liability against the board members for breach of fiduciary duty among other claims for relief.  In doing so, the court analyzed both statutory and common law versions of the business judgment rule.

California recognizes two types of business judgment rules: one based on statute and another on the common law.  Corporations Code section 7231 supplies the relevant statutory rule for nonprofit mutual benefit corporations like the Association.  Under that statute, a director is not liable for “failure to discharge the person’s obligations as a director” if the director acted “in good faith, in a manner such director believes to be in the best interests of the corporation and with such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances.”  The common law business judgment rule is similar but broader in scope.  It is similar in that it immunizes directors for their corporate decisions that are made in good faith to further the purposes of the corporation, are consistent with the corporation’s governing documents, and comply with public policy.  And it is broader in that it also insulates from court intervention those management decisions that meet the rule’s requirements.  A director, however, cannot obtain the benefit of the business judgment rule when acting under a material conflict of interest.

Corporations Code section 7233 provides, among other things, that an interested director who casts a deciding vote on a transaction must show the “transaction was just and reasonable as to the corporation at the time it was authorized, approved or ratified.”  Section 7233, however, only applies to transactions “between a corporation and one or more of its directors, or between a corporation and any domestic or foreign corporation, firm or association in which one or more of its directors has a material financial interest.”  The common law rule, as before, is similar but broader in scope.  It is similar in that it requires interested directors to prove that the arrangement was fair and reasonable—a rigorous standard that requires them not only to prove the good faith of the transaction but also to show its inherent fairness from the viewpoint of the corporation and those interested therein.  And it is broader in that it is not concerned only with transactions between a corporation and either its directors or a business in which its directors have a material financial interest.  Courts have found directors must also satisfy the common law requirements when they approve other transactions in which they have a material financial interest distinct from the corporation’s own interest.

Here the directors were employees of the development company that developed the residential community.  The directors were compensated in a way that encouraged them to pass assessments that benefit the development company and not the owners.  Plaintiff initiated the action in his individual capacity and derivatively on behalf of the HOA.  During litigation, the defendant directors participated in privileged communications between the HOA and its counsel, then shared privileged information with their employer, who was also a defendant in the action.  Given these facts, the court determined the directors had a material conflict of interest, which precluded the application of the business judgment rule.

§ 1.3.2 Massachusetts

Dolan as Tr. of Charles B. Dolan Revocable Tr. v. DiMare, 2020 WL 4347607, at *12-13 (Mass. Super. 2020).  In a case mixing Massachusetts and Delaware oppression issues, plaintiff brought a claim against the company’s controlling shareholder for failure to issue distributions.  Plaintiff alleged that defendant siphoned assets by, among other things, overcompensating himself and family members, thus leaving no funds available for distribution.  Defendant moved to dismiss asserting that the company charter granted him “sole discretion” whether to pay dividends.  The Court denied the motion reasoning that defendant may have frustrated plaintiff’s reasonable expectations:

A minority owner of a closely-held corporation may sue under a freeze-out theory by alleging that a corporate fiduciary kept corporate benefits for themself while denying them to the minority plaintiff.  See Clemmer v. Cullinane, 62 Mass. App. Ct. 904, 905-06 (2004) (rescript) (applying Delaware law).  “Freeze-outs can occur … ‘[w]hen the reasonable expectations of a [minority] shareholder are frustrated.’”  Selmark Assocs., Inc. v. Ehrlich, 467 Mass. 525, 536 (2014).

Where those in control of a closely-held corporation with lots of free cash do not pay any dividends, but use other mechanisms to pay or distribute substantial sums to themselves, they may be liable to the minority shareholders for engaging in shareholder oppression; this is “a classic squeeze out situation.”  Litle, 1992 WL 25758, at *8; accord Crowley v. Communications for Hosp., Inc., 30 Mass. App. Ct. 751, 762-63 (1991) (majority froze out minority stockholder by, among other things, paying themselves excessive compensation while refusing to declare dividends).

§ 1.3.3 New York

Beckerman v. Lattingtown Harbor Property Owners Association, Inc., 183 A.D.3d 821, 124 N.Y.S.3d 651 (N.Y. App. Div. 2020).  A homeowner brought an action against the homeowners’association seeking to annul a license agreement between the board and another member of the association regarding use of the community dock.  In reviewing the action under the business judgment rule, which inquired whether the action was taken in good faith and in furtherance of the legitimate interest of the association, the Court concluded that it should defer to the homeowners’association as long as the board “acts for the purposes of the [homeowners’ association], within the scope of its authority and in good faith.”  Id. at 654.  Here, however, the trial court found that the homeowners’association was acting outside its authority and therefore annulled the license.  The appellate court affirmed.

Witty v. Wallace, 176 A.D.3d 906, 107 N.Y.S.3d 871 (N.Y. App. Div. 2019).  This case involved a dispute between 50% co-owners of a limited liability company that owns a commercial building that leases to a bank under a triple-net lease.  When the lease was renewed in 2010, the tenant was granted a rent reduction, whereupon one of the co-owners brought an action for corporate waste.  In reviewing the application, the Court concluded that pursuant to the business judgment rule, absent evidence of bad faith, fraud, self-dealing, or other misconduct, courts would respect business judgments.  Here, the evidence for overcoming the business judgment rule was not present; rather, the evidence suggested that the lease extension was made in good faith and in furtherance of the corporation’s legitimate business interest.  Thus the trial court’s decision to dismiss the plaintiff’s complaint was proper.

§ 1.4 Dissolution

§ 1.4.1 Delaware

SolarReserve CSP Holdings, LLC v. Tonopah Solar Energy, LLC, 2020 WL 1291638 (Del. Ch. Mar. 18, 2020).  The Court held that equitable dissolution was not available where the petitioning party failed to demonstrate that the Court should “invoke equitable principles to override the plain language” of the Delaware LLC Act and the relevant LLC agreement.  Originally, plaintiff SolarReserve held a direct ownership interest in the subject company, Tonopah Solar Energy, LLC, which would have permitted plaintiff to seek judicial dissolution of that entity.  However, that interest was reduced to an “indirect equity interest” through several intermediary entities, which the Court held were “calculated choices to reshape Tonopah’s complicated ownership structure in order to secure additional funding.”  Because the intended relationship of plaintiff to the subject Company was intended to be remote, the Court held that plaintiff did not meet the standard set forth in In re Carlisle Etcetera LLC, 114 A.3d 592 (Del. Ch. 2015) to warrant finding that plaintiff had equitable standing to seek dissolution.

§ 1.4.2 New York

PFT Technology, LLC, v. Wieser, 181 A.D.3d 836, 122 N.Y.S.3d 313 (N.Y. App. Div. 2020).  A limited liability company and its majority members filed suit against a minority member seeking to dissolve the company and reconstitute without the minority member.  The minority member, in turn, counterclaimed for breach of the operating agreement.  The minority member eventually agreed that the majority could buy out his membership interest, and the court held a valuation proceeding in which the minority member’s interest was valued at $1.250M.  The minority member was also awarded attorney fees and prejudgment interest but not any damages based on his counterclaim.  Both sides appealed.

On appeal the appellate court noted that although limited liability law did not expressly authorize a buyout in a dissolution proceeding, that remedy was appropriate as an equitable remedy.  The appellate court found that the trial court’s decision to allow the buyout was a “provident” exercise of its discretion.  However, the trial court erred in applying certain adjustments to the company’s value, which should have been $1.489M.  The trial court also erred in the amount of attorney fees it awarded.  The trial court did not err in deciding not to award damages on the counterclaim or in the amount of prejudgment interest.

§ 1.4.3 Utah

HITORG, LLC v. TC Veterinary Serv. Inc., 2020 UT App 123, 472 P.3d 1177.  A veterinarian brought suit against other veterinarians for breach of contract, breach of good faith and fair dealing, and dissolution of a limited liability company based on her expulsion.  The other veterinarians moved to compel arbitration pursuant to the operating agreement.  The plaintiff-veterinarian opposed the motion and filed a motion to stay arbitration claiming that she sought dissolution and other causes of action arising from duties and obligations outside the operating agreement (such as statutory dissolution on the basis of oppressive conduct or fraud).  The trial court granted the motion to compel and denied the motion to stay, concluding that the operating agreement contained a provision for judicial dissolution and therefore the issue of dissolution was within the power of the arbitrator to decide along with other claims.  The court of appeals affirmed.

§ 1.5 Jurisdiction, Venue, and Standing

§ 1.5.1 California

Clark v. S&J Advertising, Inc., 611 B.R. 669 (E.D. Cal. 2019).  This case involves the interplay between a bankruptcy court’s jurisdiction and California’s involuntary dissolution/valuation/share buyback statute (Cal. Corp. § 2000) and related proceedings.  A married couple filed a Chapter 13 bankruptcy petition.  The wife later filed a certificate of election to wind up and dissolve a company with the California Secretary of State pursuant to Cal. Corp. Code § 1900.  She owned 50% interest in the company.  The company filed a petition to stay dissolution proceedings and ascertain value of the wife’s shares under § 2000 in state court.  The state court stayed dissolution until appraisers could arrive at a fair valuation.  The bankruptcy court granted the company relief from stay so the valuation could proceed in state court.  The court approved the § 2000 valuation and the transfer of the wife’s shares to the corporation for the valuation price.

The couple appealed the bankruptcy court’s decision to adopt the § 2000 valuation under the Rooker-Feldman doctrine, which precludes a federal court from overturning a state court’s judgment.  Since the bankruptcy court did not overturn the state court’s decision, but effectively affirmed the state court’s decision to proceed with § 2000 proceedings, Rooker-Feldman did not apply.

The couple also argued that the bankruptcy court could not exercise subject matter jurisdiction over the § 2000 proceeding absent removal from state court pursuant to 28 U.S.C. § 1452(a), which sets forth a formal removal process that was not followed in this case.  But the bankruptcy court had not exercised jurisdiction over the § 2000 state proceedings.  It just adopted and applied the § 2000 valuation to the bankruptcy proceedings, so removal was neither necessary nor relevant to the bankruptcy court’s jurisdiction analysis.  The bankruptcy court had proper jurisdiction over the couple and the wife’s shares in the company.

§ 1.5.2 Illinois

Tabirta v. Cummings, 2020 IL 124798.  The Illinois Supreme Court held that an employee’s home office within a county did not qualify as an office of the employer for the purposes of venue.  The court found that there was no evidence that the employer hired the employee because of the location of his residence and home office or that his employment would be affected if he moved to another county and therefore the employer did not purposely select a fixed location as necessary to avail itself to venue in that county.

§ 1.5.3 Massachusetts

In re Bos. Grand Prix, LLC, 2020 WL 6140391, at *16 (Bankr. D. Mass. 2020).  The Court rejected a Chapter 7 trustee’s argument that he had standing to ask the Court to hold an LLC member personally liable for all debtor LLC’s debts as the LLC’s alter ego.  The trustee brought a series of fiduciary breach claims against the sole member, manager, and operating officer of an insolvent LLC purporting to promote auto races in Boston.  The Court had little difficulty entering judgment against the LLC member based on an apparently indefensible series of egregious self-dealings acting as a fraud on creditors, resulting in the Court awarding significant damages and unwinding fraudulent transfers.  However, the Court held that the trustee went too far asking to hold the LLC member personally liable for all LLC debts as its alter ego.  The Court held that, under the Bankruptcy Code, only actual creditors, and not the trustee, have standing to pierce the debtor’s veil.

Dolan as Tr. of Charles B. Dolan Revocable Tr. v. DiMare, 2020 WL 4347607, at *12-13 (Mass. Super. 2020).  In a case mixing Massachusetts and Delaware oppression issues, plaintiff brought direct and derivative claims against the company’s controlling shareholder for failure to issue distributions.  Plaintiff alleged that defendant siphoned assets by, among other things, overcompensating himself and family members, thus leaving no funds available for distribution.  The company had layers of subsidiaries.  The company was a Delaware corporation, but one of its subsidiaries was a Massachusetts corporation.  Plaintiff sued derivatively on behalf of the Massachusetts entity.

Defendant moved to dismiss arguing that plaintiff lacked standing because he never made a pre-suit derivative demand.  Delaware and Massachusetts statutory law differ in that Delaware law still applies the futility exception, while Massachusetts changed its BCA, G.LC. 156D, § 7.42, to always require a prerequisite derivative demand on behalf of a corporation.  The Court denied the motion, noting that plaintiff brought a pass-through “double-derivative” claim and therefore was suing primarily in the interests of the Delaware corporation, thus applying Delaware’s futility exception.

JT IP Holding, LLC v. Florence, 2020 WL 5217118, at *3–4 (D. Mass. 2020).  Unlike corporations, Massachusetts’s LLC Act has no universal pre-suit derivative demand requirement.  Defendant moved to dismiss a derivative claim for failure to make a pre-suit demand, regardless of futility, per § 156 C, § 56, arguing that the LLC operating agreement did not authorize suit without a demand.  The Court denied the motion, holding that a provision in the operating agreement prohibiting action on behalf of the entity without approval of all members was too generic, without more specific language, to require a pre-suit derivative demand.

§ 1.6 Claims and Issues in Business Divorce Cases

§ 1.6.1 Accounting
§ New York

Atlantis Management Group II LLC v. Nabe, 177 A.D.3d 542, 113 N.Y.S.3d 79 (N.Y. App. Div. 2019).  A non-managing member of a limited liability company sought an equitable accounting from the managing members of the LLC.  The trial court granted summary judgment in favor of the equitable accounting and the appellate court affirmed, finding that the managing members owed the non-managing member a fiduciary duty.  The appellate court noted that while an equitable accounting is distinct from a right of accounting, the latter was appropriate here because the managing members had repeatedly refused to respond to demands for access to books and records.

§ 1.6.2 Alternative Entities
§ Delaware

Franco v. Avalon Freight Services, LLC, 2020 WL 7230804 (Del. Ch. Dec. 8, 2020).  Where an LLC Agreement provides that the co-equal members must agree on the identity of a tie-breaking director, but is silent on the topic of how to remove a director, removal is governed by the Delaware LLC Act.  Such provision does not mean that, if one faction becomes dissatisfied with the service of the tie-breaking director, such director must be removed.  Avalon Freight Services, LLC, is a co-equally owned LLC, owned between two members.  The Company is governed by a board of directors, on which sits the two members, two additional directors, one appointed by each member, plus a tie-breaking director, whose appointment must be agreed upon by the two members.  When one member became dissatisfied with the tie-breaking director, that member brought this action seeking a declaration that his dissatisfaction with the tie-breaking director means that “position must be vacated and [the members] must mutually agree on a new person to fill the position.”  The Court held that the provision in question related only to the appointment of the tie-breaking director, and not to such director’s removal.  Because the LLC Agreement did not specify how to remove a director, the terms of the Delaware LLC Act were considered incorporated to fill the gap.

§ 1.6.3 Breach of Fiduciary Duty
§ Delaware

Wright v. Phillips, 2020 WL 2770617 (Del. Ch. May 28, 2020).  In a business divorce between co-equal owners who were formerly husband and wife, the Court found that Phillips failed to demonstrate that Wright’s actions rose to the level of a breach of her duty of care or loyalty.  Phillips claimed that Wright breached her fiduciary duties by (1) using company funds to pay personal credit card bills; (2) “raiding” the offices to take files and equipment; (3) engaging in accounting practices that caused cash crunches; (4) failing to follow the Receiver’s instructions; and (5) removing money to bank accounts that she independently controlled.  The Court held that Wright credibly explained why personal credit card charges appeared on the company accounts and found that there was insufficient evidence to find that this activity was wrongful or that it breached Wright’s fiduciary duties.  The Court additionally held that the allegations of “raiding” the company offices to take files and equipment were without scienter, and were actually “careless actions … directed at the disintegrated personal relationship between the parties.”  With respect to the “cash crunches,” the Court found that both parties were equally at fault in this regard, and, again, that Wright’s actions lacked scienter.  With respect to failing to follow the Receiver’s instructions, which included designating office hours for Wright, the Court held that “a failure to obey guidelines set by a Receiver is not a per se violation of fiduciary duties.”  The Court additionally credited Wright’s trial testimony that she had logical reasons for her choices regarding work hours and location that included her safety and her long history of working from home.  Finally, the Court held that Wright’s actions in removing company money to her personal bank accounts were not actionable because she had “cognizable reasons to move the funds,” and because the Receiver’s instruction to transfer them back was contingent on Phillips reinstating her salary, which he did not do.

§ Illinois

Flynn v. Maschmeyer, 2020 IL App (1st) 190784.  The appellate court held that a member of an Illinois limited liability company who was held to have breached his fiduciary duties to his co-members and the LLC was nonetheless entitled to a judgment on his counterclaim for the fair value of his interest in the LLC.  The court held that the member did not forfeit his right to recover his interest in the LLC by failing to respond to a purported capital call that was sent only to him to recover the amount of funds he had misappropriated from the LLC.

§ Massachusetts

Bernstein v. MyJoVE Corp., 97 Mass. App. 1127, 150 N.E.3d 1144 (2020), review denied, 486 Mass. 1101 (unpublished).  (See description in § 7.1).  The Court rejected plaintiff/counter-defendant’s argument that, after he resigned his position as Chief Technology Officer, he remained a 30% shareholder entitled to access records and communications because defendant/counter-plaintiff breached fiduciary obligations owed to him:

Bernstein did not at any time have an unfettered right to participate in management, and he surely did not once he resigned as CTO.  More importantly, Bernstein’s status as a shareholder of a close corporation did not give him a right to engage in unauthorized acts.  “Allowing a party who has [allegedly] suffered harm within a close corporation to seek retribution by disregarding its own duties has no basis in our laws and would undermine fundamental and long-standing fiduciary principles that are essential to corporate governance ….  ‘Rather, if unable to resolve matters amicably, aggrieved parties should take their claims to court and seek judicial resolution.’”  Selmark Assocs., Inc. v. Ehrlich, 467 Mass. 525, 552-553 (2014), quoting Rexford Rand Corp. v. Ancel, 58 F.3d 1215, 1221 (7th Cir. 1995).  See Donahue, 367 Mass. at 593 n.17 (recognizing that, “[i]n the close corporation, the minority may do equal damage through unscrupulous and improper ‘sharp dealings’”).  To the extent Bernstein felt aggrieved by any mistreatment he may have received by MyJoVE or Pritsker (including Pritsker’s refusal to meet with him), his recourse was not through unauthorized access to the company’s computer system.

Dolan as Tr. of Charles B. Dolan Revocable Tr. v. DiMare, 2020 WL 4347607, at *13 (Mass. Super. 2020).  Plaintiff shareholder brought, among other things, aiding and abetting breach of fiduciary duty claims against the company’s lawyer for failure to inform plaintiff that the company’s controlling shareholder improperly siphoned assets by overcompensating family members, thus leaving no funds available for distribution.  The Court dismissed the claim, holding that allegations that the lawyer had familiarity with the company’s financial condition did not rise to the level of actual knowledge of wrongdoing.

Mahoney v. Bernat, 2019 WL 6497601, at *3 (Mass. Super. 2019).  Plaintiff minority shareholder, Mahoney, brought an aiding and abetting claim against the company’s lawyers, the Sabella Defendants, alleging that they breached a duty owed to him by assisting with preparing a buy-out of another shareholder that plaintiff claimed harmed him.  The Court granted the lawyers’ motion to dismiss:

Massachusetts law imposes a fiduciary obligation on corporate counsel to protect the interests of individual members or shareholders only in rare circumstances.  See Baker v. Wilmer Cutler Pickering Hale & Dorr, LLP, 91 Mass. App. Ct. 835, 837 (2017) (recognizing fiduciary duty on part of corporate counsel to individual members of limited liability company where the LLC was “governed by an operating agreement providing significant minority protections,” and it was alleged that counsel “secretly worked to eliminate those protections …”).  Those rare circumstances are not present here.  The Shareholders’ Agreement does not afford Mr. Mahoney “significant minority protections,” and there is no allegation that the Sabella Defendants engaged in any clandestine effort to undermine Mr. Mahoney’s position vis-a-vis the Company.

§ Minnesota

Blum v. Thompson, No. A19-0938, 2020 WL 1983218 (Minn. Ct. App. Apr. 27, 2020), review denied (July 23, 2020).  Richard Ward and Rosemary Ward raised seven children.  Three of their children, Kathryn, Charles and Thomas (plaintiffs), sued three of their siblings and their father relating to the operations of their family-owned business, Ward Family, Inc. (“WFI”).  The dispute involved a long-term lease that WFI executed that gave one of the defendants’ corporation, El Rancho Manana, Inc., greater authority over a large plot of land known by the parties as “the Ranch.”  Following a jury trial on plaintiffs’ common-law breach-of-fiduciary duty claim against defendants and a court trial on plaintiffs’ statutory shareholder-oppression claim, both the jury and district court found in favor of defendants.  The Minnesota Court of Appeals affirmed, reasoning that the shareholders knew about the plan to formalize the lease arrangement, and that WFI allowed shareholders to propose terms of the lease.  The Court of Appeals, like the district court, rejected a claim that consensus was needed among the shareholders as to the terms of the lease.  While the parties had reached a consensus on some issues in the past, “it was not reasonable for [plaintiffs] to expect that WFI would be governed in a manner inconsistent with its bylaws.”  WFI’s bylaws stated that actions were approved by simple majority. “It is not clear error to conclude that it is unreasonable for minority shareholders to expect that they have veto power over an action permitted by the company’s bylaws just because the majority shareholders had tried to achieve consensus with them in previous disputes.”

40 Ventures LLC v. Minnesquam, L.L.C., No. A19-2082, 2020 WL 5507887 (Minn. Ct. App. Sept. 14, 2020).  Members of Aspire Beverage Company LLC (“Aspire”) entered into a Membership Control Agreement (MCA) that established a six-person board of governors for Aspire.  Plaintiff, a member of Aspire, alleged breach of contract, breach of fiduciary duty, and tortious interference with contract, and sought an order compelling Aspire to disclose company records.  When the Aspire board voted to dissolve Aspire, plaintiff alleged that the board did not have the authority to do so (breaching supermajority requirements set forth in the MCA).  The district court dismissed all of the claims on a Rule 12 motion for failure to state a claim.  The Court of Appeals affirmed, reasoning that the MCA supermajority requirements in the MCA provision applied to the board, not the members.  The Court held that plaintiff could sustain a breach-of-fiduciary-duties claim against the members just because the members appointed governors to the board.  The plaintiff alleged that its allegations in the Complaint related to “actions taken by the members, not the governors, in violation of the member-control agreement”; the only alleged violations of the member-control agreement are the alleged violations of the supermajority requirements in section 3.3 of the member-control agreement, which is an alleged violation by the Aspire board, not by the members themselves.

§ New York

Atlantis Management Group II LLC v. Nabe, 177 A.D.3d 542, 113 N.Y.S.3d 79 (N.Y. App. Div. 2019).  A non-managing member of a limited liability company sought an equitable accounting from the managing members of the LLC.  The trial court granted summary judgment in favor of the equitable accounting and the appellate court affirmed, finding that the managing members owed the non-managing member a fiduciary duty.  The appellate court noted that while an equitable accounting is distinct from a right of accounting, the latter was appropriate here because the managing members had repeatedly refused to respond to demands for access to books and records.

§ 1.6.4 Breach of Contract and Breach of Covenant of Good Faith and Fair Dealing
§ Massachusetts

Bernstein v. MyJoVE Corp., 97 Mass. App. 1127, 150 N.E.3d 1144 (2020), review denied, 486 Mass. 1101 (unpublished).  The Appellate Court rejected plaintiff/counter-defendant’s argument that, after he resigned his position as CTO, he remained a 30% shareholder and therefore entitled to access records and communications because defendant/counter-plaintiff breached the obligation to treat him fairly and in good faith:

[W]e are aware of no authority that would allow Bernstein, as a minority shareholder of a close corporation, to surreptitiously access the company’s computers in retaliation for the alleged breach of such a duty.  Put differently, whether Bernstein was treated with the “utmost good faith and loyalty,” in connection with his resignation or termination in 2011 is simply not before us.  Rather, the issue before us is whether Bernstein was authorized, in November of 2012, to access MyJoVE’s computer system and to interfere with the company’s operations.

Crashfund, LLC v. FaZe Clan, Inc., 2020 WL 4347254 (Mass. Super. 2020).  Plaintiffs invested in Wanderset LLC, which then merged into defendant Wanderset, Inc.  In exchange for plaintiffs’ cash investments, Wanderset granted plaintiffs the conditional right to obtain specified shares of capital stock if Wanderset changed ownership.  Plaintiffs contended that occurred when Wanderset functionally, but not formally, merged Wanderset into FaZe Clan, Inc. Plaintiffs sued both Wanderset and FaZe, asserting two alternative breach of contract theories, tortious interference, and unjust enrichment.

The Court granted defendant FaZe’s motion to dismiss the first alternative breach of contract claim seeking shares of its stock.  Plaintiff’s express contractual right to convert stock was limited to legal mergers, did not extend to de facto successor liability, and thus plaintiff had no right to stock of the succeeding entity.  However, the Court denied the motion as to plaintiff’s second alternative contract claim alleging successor liability for consequential damages equal to the value of the stock if plaintiffs had been permitted to participate if defendants had acted in good faith.  The Court held that plaintiffs may be entitled to recover against all defendants for breach of contract, at least insofar as plaintiff seeks consequential damages, unjust enrichment, and tortious interference.

Ramey v. Beta Bionics, Inc., 2020 WL 4931636, at *5–6 (Mass. Super. 2020).  Plaintiff alleged that a defendant promoter orally promised him a salary and 5% equity stake in a new company to be established developing medical devices.  Plaintiff began working for nothing, and then for his salary, as the defendant established the company.  However, defendant then refused to assign plaintiff his 5% equity, instead engaging in a series of negotiations trying to convince plaintiff to accept a fraction of that stake.  The Court rejected defendant’s argument that the alleged agreement’s terms were too vague to enforce:

While “[i]t is not required that all terms of the agreement be precisely specified, and the presence of undefined or unspecified terms will not necessarily preclude” a contract’s formation, “[t]he parties must, however, have progressed beyond the stage of ‘imperfect negotiation.’”  Id., (citations omitted).…  It may be that, after discovery, Ramey will not be able to prove that his negotiations with Damiano in 2013 progressed beyond the stage of “imperfect negotiations” to an oral agreement on material terms that is sufficiently definite to be enforceable .…  However, given the specificity of Ramey’s allegations that in the fall of 2014, Damiano offered, and he accepted, a 5% interest in the corporation to be formed in exchange for his continued work on the Project, I cannot conclude at this stage that Count I fails to state any claim for breach of contract.

§ 1.6.5 Fraud
§ Massachusetts

In re Blast Fitness Grp., LLC, at *9 (Bk. D. Mass. 2020).  Creditors alleged that a general partner fraudulently induced them to participate in a real estate transaction.  The Bankruptcy Court noted extensive allegations of aiding and abetting the fraud on the part of other entities.  However, the Court stopped short of allowing an aiding and abetting claim against the partnership itself, noting that the complaint contained no such allegations against the partnership – thus drawing a distinction between a general partner acting on behalf of the partnership, which the Court allowed, and whether the partnership itself aided and abetted the fraud, which the Court disallowed.

Sapir v. Dispatch Techs., Inc., 2019 WL 7707794, at *3 (Mass. Super. 2019).  Plaintiff alleged that two director shareholders fraudulently induced him to sell his shares in a closely held corporation by withholding information about the status of software development and fundraising efforts.  Plaintiff also claimed negligent misrepresentation and breach of fiduciary duty.  Defendants moved to dismiss proffering the sale agreement containing the usual integration and waiver clauses.

The Court denied the motion as to the fraudulent inducement claim, holding that, generally, Massachusetts law recognizes that neither integration clauses nor releases bar fraudulent inducement claims, citing Shawmut-Canton, LLC v. Great Spring Waters of America, Inc., 62 Mass. App. 330, 335 (2004).  An exception exists where the alleged inducement contradicts clear statements in the writing – a situation not usually present unless the waiver contains contextual references.

The Court granted the motion as to the negligent misrepresentation claim.  Unlike a claim for fraudulent inducement, a claim for negligent misrepresentation ordinarily can be released or waived; thus, the seller release barred plaintiff’s claim for simple negligence.

The Court also granted the motion as to the fiduciary breach claim.  The Court held that, as a Delaware corporation, Delaware law controlled that issue and that, unlike other jurisdictions, Delaware does not impose a heightened duty of good faith and loyalty on shareholders or directors in a close corporation and does not impose a fiduciary duty on the part of a close corporation for the benefit of individual shareholders.

§ 1.6.6 Interference
§ California

Siry Investment, L.P. v. Farkhondehpour, 45 Cal.App.5th 1098 (2020).  Penal Code section 496 is entitled “Receiving or concealing stolen property.”  Subdivision (a) makes it a crime to (1) “buy[ ] or receive[ ] any property that has been stolen or that has been obtained in any manner constituting theft or extortion, knowing the property to be so stolen or obtained,” or (2) “conceal[ ], sell[ ], [or] withhold[ ] any property from the owner, knowing the property to be so stolen or obtained.”  Subdivision (c) empowers “[a]ny person who has been injured by a violation of subdivision (a)” to “bring an action for three times the amount of actual damages [he has] … sustain[ed]” as well as for “costs of suit[ ] and reasonable attorney’s fees.”  This case presents the question: Does Penal Code section 496, subdivision (c) authorize treble damages and attorney fees where the underlying criminal conduct did not involve trafficking in stolen property, but rather the improper diversion of a limited partnership’s cash distributions through fraud, misrepresentation, and breach of fiduciary duty?  The court ruled that treble damages and attorney fees are not available under Penal Code section 496, subdivision (c) in cases where the plaintiff merely alleges and proves conduct involving fraud, misrepresentation, conversion, or some other type of theft that does not involve “stolen” property for two reasons.  First, treble damages under Penal Code section 496, if held applicable to torts of fraud, misrepresentation, conversion or breach of fiduciary duty, would all but eclipse traditional tort damages remedies.  Second, reading Penal Code section 496 to apply in theft-related tort cases would effectively repeal the punitive damages statutes.  The legislature never declared that it wanted to effect significant changes to tort remedies but only wanted to “dry up the market for stolen goods.”

§ Massachusetts

Viken Detection Corp. v. Videray Techs. Inc., 2020 WL 68244, at *6–7 (D. Mass. 2020).  Defendant allegedly stole confidential information and trade secrets and formed a new entity.  Plaintiff’s claims included one against defendant’s new entity for tortious interference with plaintiff’s customer relationships.  The individual and entity defendants moved to dismiss contending that plaintiff failed to state a claim because the individual defendant, as owner and principal of the entity, was synonymous with his company.  In other words, the individual was so “closely identified” with the entity that he should not be considered a third party for purposes of a claim of tortious contractual interference.  The Court denied the motion, at least at the pleading stage, holding that whether an individual is synonymous with a corporation of which he is owner and principal is a fact-intensive question “ill-suited” for resolution at the motion-to-dismiss stage.

§ 1.6.7 Equitable/Statutory Relief
§ Massachusetts

Automile Holdings, LLC v. McGovern, 483 Mass. 797, 813–14, 136 N.E.3d 1207, 1221–22 (2020).  Defendant was a minority equity owner and executive of plaintiff but left to work for a competitor.  He violated a restrictive covenant in his repurchase agreement by poaching three employees.  Among other claims, plaintiff sued the individual’s new employer for tortious interference and sought a preliminary injunction barring defendant from employing the former officer.

Defendants argued that absent “more expansive interests,” Wells v. Wells, 9 Mass. App. Ct. 321, 326, 400 N.E.2d 1317, 1321 (1980), no legitimate interest exists in stifling competition.  The Court, however, found that more expansive interests indeed existed.  The Court noted the individual’s status as both an owner and officer of plaintiff, reasoning that the contract was more akin to a business interest than an employment restriction.

The Court emphasized that the individual sold his minority interest at a premium because he agreed to the restrictive covenant.  His repurchase agreement, aimed at shoring up the protections in the original operating agreement, thus served plaintiff’s legitimate business interest in ensuring that defendant did not “derogate from the value of the business interest he sold to the other owners” when he left, quoting Boulanger v. Dunkin’ Donuts Inc., 442 Mass. 635, 639, 815 N.E.2d 572 (2004), and Alexander & Alexander, Inc., 21 Mass. App. Ct. at 496, 488 N.E.2d 22 (“Where the sale of the business includes good will, as this sale did, a broad noncompetition agreement may be necessary to assure that the buyer receives that which he purchased”).

§ 1.6.8 Privilege
§ Delaware

Pearl City Elevator, Inc. v. Gieseke, 2020 WL 5640268, at *1 (Del. Ch. Sept. 21, 2020).  The Court ordered the production of documents withheld as privileged on behalf of the subject company regarding matters as to which the subject company and the plaintiff were not adverse.  Plaintiff, Pearl City Elevator, Inc., sought a declaration under 6 Del. C. § 18-110 that it may appoint a seventh and controlling member to the board of directors of nominal defendant, Adkins Energy, LLC.  The Board currently consists of six directors, three designated by Pearl City, as an Adkins member, and three designated by Adkins’ General Members (the “General Directors”).  After plaintiff’s dispute with the General Members emerged, counsel to Adkins Energy began to give legal advice to the General Members and General Directors, to the exclusion of Pearl City and its directors on the question of whether Pearl City’s unit acquisitions were bona fide, and whether Pearl City’s effort to place a seventh member on the Board were effective.  Citing Moore Business Forms, Inc. v. Cordant Holdings Corp., 1996 WL 307444, at *1 (Del. Ch. June 4, 1996), the Court held that Pearl City was just as much the “client” of counsel to Adkins as the General Directors were, and accordingly counsel to Adkins was required to produce to plaintiff privileged documents respecting its analysis of the bona fides of Pearl City’s unit acquisitions and, relatedly, the effectiveness of Pearl City’s effort to place a seventh member on the Board.

§ 1.6.9 Trade Secret
§ Delaware

iBio, Inc. v. Fraunhofer USA, Inc., 2020 WL 5745541, at *14 (Del. Ch. Sept. 25, 2020).  The Court held that the Delaware Uniform Trade Secrets Act (“DUTSA”) preempts common law claims based upon alleged misappropriation of confidential information that does not otherwise qualify as a trade secret under the statute.  iBio, Inc. and Fraunhofer USA, Inc., enjoyed a commercial relationship for several years pursuant to which Fraunhofer developed plant-based biopharmaceutical technology for iBio.  iBio later discovered that Fraunhofer had entered into an agreement to perform the same services for an iBio competitor.  iBio brought suit alleging that, among other things, Fraunhofer misappropriated iBio’s technology in the performance of its duties for the competitor.  iBio brought claims under both DUTSA, as well as for conversion and misappropriation of confidential information that does not qualify as a trade secret under DUTSA.  The Court held that DUTSA preempted the common law claims for conversion and misappropriation, even though the confidential information alleged to have been converted did not qualify as a trade secret under DUTSA.

§ 1.7 Valuation and Damages

§ 1.7.1 Alabama

Porter v. Williamson, 2020 Ala. Lexis 98; 2020 WL 3478540 (Ala. Supr. Ct., Jun. 26, 2020).  In this appeal regarding an action for specific performance of a shareholders agreement, the Court addressed the valuation of the interests in five companies owned by a pair of brothers.  Ultimately, the Court determined that the valuation process at trial was error because it was inconsistent with the evaluation process set forth in the shareholders agreement and beyond the action in the claim and remanded the case to the trial court.

The two brothers owned interests in four corporations and one limited liability company.  The Court stated that the claim before the trial court was only for specific performance of part of the agreement and an injunction, and that the shareholders agreement provided a clear, specific, two-step process to determine values including the parties’ expression that the companies’ accountant would provide the evaluation methods.

Regarding the claim presented, the Court noted that the defendants “argue only that the trial court awarded relief beyond the scope of a request for specific performance of the agreement.”  In addition, the Court stated regarding its review of a trial court’s decision, “The trial court’s findings of fact, insofar as they are based on evidence presented during the hearing, are presumed correct and will not be overturned unless they are shown to be plainly or palpably wrong … However, a presumption of correctness does not attach to the trial court’s legal conclusions, which are reviewed de novo.”  In addition, “Regardless of whether [the] paragraph … of the agreement may allow for legal and equitable remedies beyond specific performance of the agreement and an injunction, [plaintiff] is bound by the claims he actually brought against the … defendants.”

Regarding the process in the agreement, the Court stated, “We cannot agree that the method of determining share value in the agreement was so unclear or indefinite that it could not be specifically enforced … there is no indication that any of the parties believed that the part of the agreement requiring an evaluator to be selected by [the companies’ accountant] … that was acceptable to the shareholders was indefinite or otherwise unenforceable.  Yet, the trial court ignored that clear and specific part of the agreement when it accepted the valuation provided by an evaluator independently selected by [one employee-owner].  As to the second step, we must conclude, as a matter of law, that the agreement clearly expressed the parties’ agreement that [the companies’ accountant] … would provide the evaluation methods that would be used by the independent evaluator acceptable to the shareholders to determine share value… given his knowledge and familiarity with the … companies, we see no reason why the parties could not have agreed to allow [the companies’ accountant] to provide the evaluation methods to be used by an independent evaluator for purposes of determining share value.”

Considering the terms of the agreement in combination with the nature of the claim, the Court concluded that the trial court was not at liberty to depart from and ignore the process in the agreement nor to provide relief in “any other legal or equitable remedy” under the agreement.  Therefore, the Court determined it was an error for the trial court to ignore a clear and specific part of the agreement when it accepted the valuation provided by an evaluator selected by the plaintiff.

§ 1.7.2 Connecticut

R.D. Clark & Sons, Inc. v. Clark, 222 A. 3d 515, 194 Conn. App. 690 (Dec. 10, 2019).  In a buyout dispute involving the value of the departing shareholder’s interest in a family business organized as an “S” Corporation, the Appeals Court considered the trial court’s decision to not tax affect the company’s earnings in determining value even though both sides’ experts had applied tax affects.  The Court affirmed the trial court’s decision to not tax affect.

On appeal, the company asserted that not tax affecting “artificially inflated” the value.  The Court reviewed relevant court decisions in various jurisdictions.  The Court noted that some courts “have chosen to reject an S corporation cash flows based on taxes” such as the US Tax Court in Gross v. Comm’r v. IRS, 272 F.3d 333, 335 (6th Cir. 2001) and called it “the only reported decision on tax affecting by a United States Court of Appeals.”  It also noted that some cases such as one Delaware and one Massachusetts state trial court cases had approved tax affecting.  Furthermore, the Court stated that “the issue of tax affecting continues to be an open debate among experts in the field.”

The Court found it important and influential in this case that before it was a “fair value” proceeding rather than a “fair market value” proceeding.  In this current context of fair value, the Court considered the fact of the company’s policy of covering the shareholders’ tax liabilities.  Ultimately, the Court found that considering that policy, “The present case seems particularly ill-suited to tax affecting earnings … based on the facts of this case … and …  We discern no bright line rule in this area.”

§ 1.7.3 Delaware

Kruse v. Synapse Wireless, Inc., 2020 Del. Ch. Lexis 238 (July 14, 2020).  In a statutory appraisal fair value buyout action, the Court addressed issues of whether there was meaningful market-based evidence of fair value in prior purchases of the company’s stock, and whether there were flaws in the experts’ comparable transactions and discounted cash flow valuation analyses.  Based upon the evidence, the Court found that there was no “wholly reliable indicator of value” in the case and decided to adopt the discounted cash flow valuation analysis by the company’s expert but adjust it.

The Court noted that both experts used the same three valuation methods and “the experts reached monumentally different valuations.”  In its analysis of the evidence regarding prior purchases of the company’s stock, the Court found that the two prior transactions did not take place in a competitive market, and that the earlier of the two transactions was “stale” and at a time when the company faced different prospects.  Regarding the experts’ comparable transactions analyses, the Court found that approach “a dicey valuation method in the best of circumstances,” one in which both experts made “well-considered, convincing objections to the other side’s model,” and, therefore, not reliable in this case.

Regarding the experts’ discounted cash flow analyses, the Court noted that the discounted cash flow method of valuation is “widely considered the best tool for valuing companies when there is no credible market information and no market check.”  Furthermore, the Court considered that both experts looked largely to the company’s management projections for the forecast for the first five years, but the experts differed widely regarding the forecast for years six through ten, long-term growth rate and weighted-average cost of capital discount rate.

The Court determined that none of the valuations by the experts was “wholly reliable,” and that a fact-finder might find that neither party has met their burden of proof, but that the Court “in the unique world of statutory appraisal litigation” was forced to make a fair value decision.  In this regard, the Court viewed the forecasts, long-term growth rate and discount rate used by the company’s expert as more reliable, and the figure for debt of the company as of the transaction date used by the plaintiff’s expert as more reliable.  The Court commented that the company’s expert “credibly made the best of less than perfect data to reach a proportionately reliable conclusion.”  As a result, the Court adopted the company’s expert’s discounted cash analysis but adjusted it by adopting the figure for debt of the company as of the transaction date used by the plaintiff’s expert.

Riker v. Teucrium Trading, LLC, 2020 Del. Ch. Lexis 178; 2020 WL 2393340 (C.A. No. 2019-0314-AGB, May 12, 2020).  In this Demand action to inspect books and records of a limited liability company (“LLC”) for appraisal purposes, the Court concluded that some books and records sought were not necessary, while it deemed others, such as plans and projections, important to valuation.  In its analysis, the Court considered the purpose for seeking the specific books and records, whether the requested information was necessary and essential to valuation, whether the request was reasonably targeted, and whether there was wrongdoing in errors in filed documents.  Consequently, the Court granted in part and denied in part the member’s demand for books and records under the Delaware LLC Act, Section 18-305.

Regarding document requests, the Court considered that “the company [had] produced some documents to [plaintiff] … within weeks of receiving his inspection demand, produced a substantial number of additional documents to him after engaging in a mediation, and produced certain other documents after trial.”  As a result, six document requests from the Demand were still in dispute.

The Court stated that, under the Delaware LLC Act, valuing one’s own interest is a proper purpose to seek books and records.  Furthermore, the Court considered that plaintiff “testified credibly that he was looking to value his interest … to determine whether to sell or hold his shares in light of the Company’s ‘deteriorating financial performance’ and what he perceives to be ‘erratic decision-making at the Company’”; and plaintiff “more specifically identified at trial … types of information … he needs to prepare a DCF analysis.”

In its review of the scope of the requests in dispute, the Court deemed the request for: (1) the Excel workbook detailing the company’s expense allocation model not necessary for the plaintiff’s stated purpose, far exceeds the types of information in the Demand, and that necessary expense information could be found in the company’s audited financial statements which were produced or in the process of being produced; (2) memoranda regarding contingent assets and liabilities not necessary, because they are not significant and information is in the financial statements produced; and (3) documents to investigate potential mismanagement, appointment or removal of officers, not necessary, because no credible evidence of wrongdoing was presented and the errors in the document filings were honest mistakes and corrected.  Nevertheless, the Court deemed the request for cash projections, including the full current year’s budget and business plan, not just portions, important to valuation under the facts in this case and granted this request, because “an investor cannot hope to do is [to] replicate management’s inside view of the company’s prospects.”  In this regard, the Court directed that “to the extent that other parts of the Company’s 2020 budget address expanding the outstanding shares of the Funds, increasing the Company’s assets under management, or restoring the Company to profitability, the Company must produce those parts of the 2020 budget.”

Consequently, the Court concluded that the plaintiff “has failed to establish an entitlement to receive any further documents in response to his broadly worded demand except for a few specific items enumerated herein relevant to valuing his interest in [the company]….”

Zachman v. Real Time Cloud Servs., LLC, 2020 Del. Ch. Lexis 115 (C.A. No. 9729-VCG, Mar. 31, 2020).  At trial regarding a valuation dispute involving a member’s interest in an LLC related to an alleged breach of fiduciary duty, each side offered a valuation expert to opine on the fair value of plaintiff’s fifty-percent economic interest in the company.  In its determination, the Court selected the most representative analysis and then made what it deemed appropriate adjustments to arrive at a valuation.

In evaluating the two sides’ valuation reports, the Court deemed the expert’s report more reliable, which valued the plaintiff’s interest at the date of the subject merger transaction and relied upon financial information from the company’s accounting system, in comparison to the other report which valued the interest as of five months preceding the transaction with financial information from an accounting firm engaged to re-create the company’s financial statements based upon source documents provided by plaintiff.

According to the Court, the plaintiff “had no credible basis for the financial figures supplied to” his valuation expert, “simply guessed” at some of the expenses, and “inflated [the company’s]… income figures.”  Instead, the Court used the figures in the defendants’ expert report as the basis for determining the value of plaintiff’s interest at the time of the merger.

Nevertheless, the Court made adjustments because it found that the defendant’s expert report valuation was based on unduly conservative future growth estimates for the business.  Consequently, the court adjusted the growth estimates upwards “to account for the Company’s early-years hyper-growth” in determining the value of plaintiff’s interest.

§ 1.7.4 Kentucky
§ Henley Mining v. Parton, U.S. Dist. Ct., ED Ky., S. Div., No. 6:17-cv-00092-GFVT-HAI (Aug. 3, 2020)

In a dissenting shareholder action, both sides offered expert testimony and their estimates of fair value varied widely.  The Court found that summary judgment was not the appropriate means to resolve the valuation dispute; because both sides presented thorough expert valuations, the Court’s role is not simply to pick one valuation over the other, and that the Court “may combine or choose among [estimates] as it believes appropriate given the evidence” and “make whatever use of the experts’ appraisals it deems reasonable.”  Consequently, the Court concluded that the fair value standard does not automatically preclude all use of a net asset approach to meet the legal definition of fair value “of the company as a whole and as a going concern.”

The Court noted established precedent that the “value of dissenting shareholders is to be calculated ‘In accord with generally accepted valuation concepts and techniques and without shareholder level discounts for lack of control or lack of marketability.’”  Furthermore, the Court deemed that “one such valuation concept is the net asset value …. [in which] ‘one of the things the appraiser seeks to do is to establish the market value, as opposed to the book value of the company’s assets.’”  It also noted precedent that “the company’s going concern value … is almost certain to be, estimated by reference to market values of one sort or another” but “what is being sought is the company’s going concern value, not the mere liquidation value of its tangible assets,” (p. 5) therefore, “to the extent that the asset approach cannot yield a going concern value … it should be given no weight.”

After reviewing the experts’ reports, the Court determined that the challenged expert valuation is not “inherently, legally flawed because [it] … appraised [the company’s]… equipment as he would equipment for sale.”  Furthermore, the Court considered that the expert “conducted additional analysis” which “also considered the health of the economy, the … industry and a financial analysis of [the company].”  In this context, the Court noted that “business appraisal, of course, is ‘as much an art as it is a science,’” and “should the Court later reject [the challenged] valuation, the Court is not then bound to accept Plaintiff’s valuation whole-cloth.”  Therefore, the Court rejected the motion of summary judgment.

§ 1.7.5 Missouri

Robinson v. Langenbach, 599 S.W.3d 167; 2020 Mo. Lexis 192; 2020 WL 2392488 (Supr. Ct. Mo., No. SC97940, May 12, 2020).  This family business valuation dispute regarding a determination of fair value arises from claims of breach of fiduciary duty and shareholder oppression.  On appeal, the Court evaluated whether the trial court’s use of a valuation which applied discounts for lack of marketability and lack of control was appropriate.  The Court considered the context and particular facts, determined that a separate prior trial on the breach of fiduciary claim had already awarded damages to plaintiff for the increase in the company’s value before plaintiff’s removal, that in this case the shareholder oppression claim does overlap and that the trial court had determined that valuation discounts are needed to avoid double recovery.  As a result, the Court concluded that the trial court’s decision was within the trial court’s broad equitable discretion, and, therefore, upheld the trial court’s decision.

In its analysis, the Court noted that the “parties here agree that fair value is a broader, equitable concept” than fair market value, and that both sides’ experts relied on valuation treatises which indicated that “there is no hard and fast rule regarding the use of discounts to determine fair value… the case law is literally all over the place.”  Although the Court agreed that “the rationale for applying a minority and marketability discount usually would have limited application in the case of a court-ordered sale to a majority stockholder,” it stated that there is “no fixed set of factors a court must review to determine ‘fair value,’” “context is crucial in a ‘fair value’ analysis,” and a trial court has broad discretion “to shape and fashion relief to fit the particular facts and circumstances and equities of the case before it.”  Therefore, considering the particular facts, the Court determined it was not an error for the trial court to agree with the defendant’s expert that a discount was proper in this one case and noted that the trial court “did not purport to determine any broad principle of law as to application of these discounts.”

§ 1.7.6 Nebraska

Anderson v. A&R Spraying & Trucking, Inc., 306 Neb. 484; 946 N.W. 2d 435, 2020 Neb. Lexis 116 (Supr. Ct. Neb., July 17, 2020).  On appeal, in a shareholder buyout dispute regarding fair value, the Court upheld the trial court’s valuation of the shares in which it adjusted the earnings-based valuations of both parties’ experts and averaged the results.  The Court deemed that trial court’s approach not to be an error, because it was reasonable and had an acceptable basis in fact and principle for use of the experts’ income approach valuation analyses but adjusts for inconsistencies.

The Court noted that neither party asserted on appeal that the trial court used an incorrect valuation method, and instead, “the sole issue presented is whether the… court’s valuation ‘is unreasonably high,’ considering expert’s reports and supporting testimony regarding the income approach.”  In addition, the Court commented that “the determination of the weight that should be given expert testimony is uniquely the province of the fact finder.  The trial court is not required to accept any one method of stock valuation as more accurate than another accounting procedure.  A trial court’s valuation of a closely held corporation is reasonable if it has an acceptable basis in fact and principle.”

On appeal, in a shareholder buyout dispute regarding fair value, the Court upheld the trial court’s valuation of the shares in which it adjusted the earnings-based valuations of both parties’ experts and averaged the results.  The Court deemed that trial court’s approach not to be an error, because it was reasonable and had an acceptable basis in fact and principle for use of the experts’ income approach valuation analyses but adjusts for inconsistencies.

In its analysis, the Court found that the trial court carefully reviewed the expert opinions, identified certain variables that were inconsistent with the income approach, adjusted each opinion accordingly, and used the resulting average of the two adjusted valuation conclusions.  Furthermore, a fair value determination assumes that the business is valued as a going concern, which can be achieved through an income approach.  Therefore, it found that the trial court was not speculative when it made an adjustment because it viewed one expert’s “subtracting 100% of the debt from the valuation estimate of the business [because it] does not comport with the overall theory of the Income Approach because a business, as a going concern, is not required to pay back all of its debt on a lump sum basis.”  In this regard, the Court also considered that the business continued to operate, “there have been no effort to liquidate,” both experts agreed that the company generated significant cash flows, and its banker testified that the company paid its loans on time.

§ 1.7.7 New York

Magarik v. Kraus USA, Inc., No. 606128-15, Nassau County, Supreme Court of New York (April 10, 2020).  In a claim alleging shareholder oppression and a petition for judicial dissolution, the Court considered each of the parties’ experts’ valuations, which came to conclusions that “were vastly disparate from each other.”  The Court selected the valuation which item deemed to “reflect a more accurate value,” and rejected the valuation by plaintiff’s expert that it deemed was “based on income projections that were unrealistic and optimistic and not based on comparable businesses.”

In this case, the company prepared projections for purposes of applying for a bank loan, but not in the ordinary course of running the business.  The plaintiff’s expert relied on those projections.  But, based upon the facts in this case, the Court deemed those projections to be “ambitious and, in fact, overstated.”

In evaluating the projections, although the Court noted the early rapid sales growth of the company, it viewed that “not as great as petitioner contended (especially considering … negative cash flow) nor was it accurately predictive of future success.”  Rather, it deemed the projections used “did not sufficiently account for the competitive nature of the … business … lack of cash flow,” and lack of ownership of the brand name.  Furthermore, regarding the statements and forecasts that the company’s owners made to the bank in obtaining the loan, the Court noted “the representations were not accurate.”  Consequently, according to the Court, the plaintiff’s expert’s income approach “was based on unrealistic projections, proven to be unrealized and wrong.”

In addition, the Court considered that both parties’ experts also applied a market valuation approach.  It deemed that the market approach used by the plaintiff’s expert to be “based on incorrect comparables … public companies, not reasonably related to [the subject company] in terms of size, ownership or marketability.”  Nevertheless, the Court viewed the market approach using the “merged and acquired company method” when weighted with the income approach to be “sound” in this case.

In this situation, the plaintiff owned 24 percent of the company’s shares, the other two owners held 25 percent and 51 percent, respectively.  Finally, the Court also accepted “application of a discount for lack of marketability [of 5 percent], recognizing that the shares of [the subject company] cannot be readily sold on a public market.”

PFT Technology, LLC, v. Wieser, 181 A.D.3d 836, 122 N.Y.S.3d 313 (N.Y. App. Div. 2020).  A limited liability company and its majority members filed suit against a minority member seeking to dissolve the company and reconstitute without the minority member.  The minority member, in turn, counterclaimed for breach of the operating agreement.  The minority member eventually agreed that the majority could buy out his membership interest, and the court held a valuation proceeding in which the minority member’s interest was valued at $1.250M.  The minority member was also awarded attorney fees and prejudgment interest but not any damages based on his counterclaim.  Both sides appealed.

On appeal, the appellate court noted that although limited liability law did not expressly authorize a buyout in a dissolution proceeding, that remedy was appropriate as an equitable remedy.  The appellate court found that the trial court’s decision to allow the buyout was a “provident” exercise of its discretion.  However, the trial court erred in applying certain adjustments to the company’s value, which should have been $1.489M.  The trial court also erred in the amount of attorney fees it awarded.  The trial court did not err in deciding not to award damages on the counterclaim or in the amount of prejudgment interest.

§ 1.7.8 Tennessee

Boesch v. Holeman, 2020 Tenn. App. Lexis 410; 2020 U.S.P.Q.2D (BNA) 11062; 2020 WL 5537005 (Ct. App. Tenn., Knox., No. E2019-02288-COA-R3-CV, Sep. 14, 2020).  This case concerns valuation of a disassociated partner’s interest in a business, and the issue of whether a discount should have been applied to the value of the disassociated partner’s one-third minority interest.  On appeal, the Court determined that a discount for lack of marketability as to the entire partnership business and not as to the minority partnership interest may be appropriate, but a discount for lack of control by the minority partnership interest is inappropriate because [Tennessee Code Annotated, Section 61-1-701 (b)] calls for determining value based on the sale of the entire partnership as a going concern.  Consequently, the Court deemed the trial court’s application of a minority discount improper and remanded the case back to the trial court.

In this situation, the plaintiff is one of three partners.  The Court considered that the expert’s report, which the trial court accepted, applied both a discount for lack of control (aka discount for minority position) and a discount for lack of control.  The Court referenced the Uniform Law comment to Tennessee Code Annotated, which states, “The notion of a minority discount in determining the buyout price is negated by valuing the business as a going concern.  Other discounts, such as for a lack of marketability or the loss of a key partner, may be appropriate, however.”  Furthermore, the Court stated that “the statute calls for determining value based on a sale of the entire partnership business as a going concern.”  As a result, the Court concluded that since that expert’s report did not comply with the Tennessee Code, remand to the trial court was necessary.

Raley v. Brinkman, et al., 2020 Tenn. App. Lexis 342 (M2018-02022-COA-R3-CV, Jul. 30, 2020).  In a buyout dispute involving one of the two 50% owners of a limited liability company (“LLC”) organized as an “S” corporation for income tax purposes, the issue on appeal was whether tax affecting is “relevant” to the determination of fair value buyout.  The trial court declined to tax affect.  On appeal, the Court determined that tax affecting assisted “in determining the going concern value of the S corporation to the shareholder or member.”

The Court noted that the defendant’s expert explained “in considerable detail” why tax affecting and applying an income tax rate “was entirely appropriate and comports with generally accepted valuation standards and methods.”  The expert’s rationale included that “all of the components of the Capitalization Rate are based on after-tax values or after-tax income data, the income stream to which the Capitalization Rate is applied in the Income Approach must also be an after-tax amount in order to be comparing apples to apples.”

The Court considered that its role on appeal is not to determine value but only to determine “whether tax-affecting constitutes relevant evidence of fair value.”  Furthermore, the Court stated that relevant evidence under Tennessee law includes “evidence having any tendency to make the existence of any fact that is of consequence to the determination of the action more probable or less probable than it would be without the evidence.”

The Court stated that the trial court erred in rejecting tax affecting because the trial court incorrectly “applied the fair market value standard, as the Gross court[1] [in a tax case, not a buyout case] did” and incorrectly relied on an Internal Revenue Service (“IRS”) job aid.[2]  The Court noted that although there is no Tennessee case law on the precise issue of how to define fair value under the LLC Act, there is a Tennessee decision, Athlon Sports, under the dissenter’s rights statute that is instructive.  In Athlon, the Tennessee Supreme Court said that fair value is the required standard, fair value is not fair market value, and that the selling fair value owner is “not in the same position as a willing seller on the open market – he is an unwilling seller with little or no bargaining power.”

Instead of Gross and the IRS job aid which the trial court referenced, the Court deemed that the better guidance was Delaware Open MRI,[3] in which the Delaware Court of Chancery determined the going concern fair value of interests in an S corporation and deemed tax affecting relevant to determine “what the investor ultimately can keep in his pocket.”  Therefore, the Court concluded that tax affecting is relevant evidence.

§ 1.7.9 Virginia

Biton v. Kreinis and New Tomorrow, Inc., 2020 Va. Cir. Lexis 94 (Cir. Ct. Norf. Va., No. CL19-7991, Jul. 10, 2020).  In this buyout litigation dispute, the fair value of the departing owner’s shares in a corporation was at issue.  Both parties’ experts used an income approach-capitalization of earnings valuation method, but they reached very different conclusions.  Based upon the evidence, the Court resolved disputed issues regarding valuation date and key valuation inputs of: estimating representative annual revenue to calculate annual cash flow to use in the income approach to value, whether a revenue discount is appropriate due to the implied loss of the sales expertise of the departing owner, estimating representative net income margin percentage to calculate annual cash flow, and estimating capitalization rate.

Regarding valuation date, the Court determined that since this is an action for dissolution of corporate stock in lieu of dissolution, “The statutory valuation date is the day before the date on which the dissolution petition was filed unless the court deems another valuation date appropriate under the circumstances. [Plaintiff] … filed her dissolution action on August 2, 2019, so the presumptive valuation date is August 1, 2019.”

In estimating representative annual revenue to calculate annual cash flow to use in the income approach to value, the Court addressed the lack of projections, little revenue history, and problems with the quality of some historical financial information.  In this regard, the Court commented that “although using the twelve months of revenue immediately prior to the valuation date arguably would have yielded a more accurate representative annual revenue for valuation purposes, that would have required using the monthly [internal accounting] figures, which … are not reliable,” and noted several problems, including “the [internal accounting] data are suspect, as evidenced by the fact that the 2018 revenue is more than twelve percent higher than the 2018 tax-reported revenue, a fact that neither expert could explain.  Further, … two [internal accounting] profit-and-loss statements produced in discovery … for the same time period … are markedly different.”

In addition, the Court rejected the defendant’s expert’s use of full calendar year 2019 internal accounting information, because it includes five months of information subsequent to the valuation date of August 1, 2019.  The Court stated, “Using data after the valuation date is discouraged by the Statement on Standards for Valuation Services,[4] which states that ‘[g]enerally, the valuation analyst should consider only circumstances existing at the valuation date and events occurring up to the valuation date,’ and [defendant’s] expert acknowledged as much in his expert report, and he admitted during his testimony that using post-valuation date revenue was highly irregular.”

Based upon the evidence, “For valuation purposes, the Court finds it appropriate to use the 2018 revenue as calculated by [the plaintiff’s] expert … as … representative annual revenue, … subject to discounting to account for [plaintiff’s] unique contributions.”  The Court considered that “[plaintiff’s]… expert chose to use the 2018 tax reported annual revenue because it was the last available year an accountant had filed a corporate tax return, the last full year before the valuation date, and the last year before the events that led to [plaintiff] filing for dissolution.  He also claimed that there was no reason to believe … operations would not continue as in 2018.  He filled in the missing months of … [the additional location’s] operations revenue — January through April 2018 — by calculating an average 2018 monthly income per location and applying a seasonal adjustment.”  The Court also noted that “the … 2018 revenue information that [plaintiff’s] expert used, on the other hand, appears reliable.  The 2018 corporate tax return is available.”

Regarding whether the revenue discount is appropriate, “The Court finds, based on evidence presented at trial, that [plaintiff’s] sales expertise is not easily replaceable and that the corporate revenue for purposes of valuation therefore should be discounted based on her loss,” and “finds it appropriate to discount the representative annual revenue by ten percent to represent [the company’s] future cash flows without the benefit of [plaintiff’s] sales expertise.”

In estimating the representative net income margin percentage to calculate annual cash flow, the Court made adjustments for non-recurring items such as one-time store opening expenses, discretionary charitable contributions, and manager and officer salary costs.

In analyzing the capitalization rate, the Court considered the totality of the evidence and the company’s current circumstances.  According to the court, “The experts agree to a large extent on the discount rate to be used to calculate the capitalization rate applicable to the ongoing cash flows … [however] the experts disagree regarding … longterm sustainable growth rate.”  Regarding growth rate, the Court considered testimony regarding historical and forecast increases in economic gross domestic product, projected inflation rates, and inflation and future prospects for retail sales.

§ 1.7.10 Washington

McClelland v. Patton, 2019 Wash. App. Lexis 2960, 11 Wn. App. 2d 181 (No. 35401-6-III, Nov. 21, 2019).  In this dissolution case regarding interests in a professional limited liability company (PLLC), the Appellate Court addressed a dispute over whether a PLLC can have entity goodwill value separate from the goodwill of the professionals.  The Court considered the evidence, reviewed goodwill principles, and affirmed the trial court’s finding of entity goodwill.

As a basic premise, the Court noted that “goodwill blossoms from a business’ brand name, trade name, customer relationships, locations, memes, logos, patents, and proprietary technology.”  In addition, it noted that previously regarding goodwill, the Washington Court of Appeals said that goodwill is the “expectation of continued public patronage,” and that helpful insight from the Texas Court of Appeals said, “Goodwill is generally understood to mean the advantages that accrue to a business on account of its name, location, reputation, and success.”

The Court considered the proffered testimony by both parties’ valuation experts on the issue, and that the courts in numerous states recognize that a professional business may possess goodwill separate from that of the individual practitioners, but a few states recognize that professional goodwill attaches to the individual professional rather than the entity.  Among various facts, the Court considered that at the time of trial, referrals were still occurring to the PLLC, not to the professionals, professionals continued to practice at all three of the offices, patients received a bill from the PLLC, not the individual professional, and that when the plaintiff bought into the practice several years earlier, he paid a specified amount then for goodwill value.

The Court rejected the assertion by defendant’s expert as a “false alternative” that either the individual practitioner or the entity but not both could have goodwill.  Rather, the Court concluded that “no reason exists to preclude the practitioner and the entity that employs the practitioner from both enjoying goodwill,” and it adopts “the rule that a professional business entity may enjoy goodwill as the rule that best follows the phenomenon that some customers or clients chose to conduct business with the professional organization not only because of the individual skill of one professional inside the entity.”  Furthermore, the Court concluded that dissolution of the PLLC does not mean it is a going concern, and based upon the fact, the value of the entity as a going concern was preserved.  Finally, the Court listed the five goodwill valuation methods, which the Washington Supreme Court has recognized, and stated that the trial court “could have accepted [plaintiff’s expert’s] valuation of goodwill based on a market value on a going concern basis.”

[1] Gross v. Comm’r v. IRS, 272 F.3d 333, 335 (6th Cir. 2001).

[2] “Valuation of Non-Controlling Interests in Business Entities Electing to be Treated as S Corporations for Federal Tax Purposes,” prepared by representatives of the Large Business and International Division NRC Industry, Engineering Program and the Small Business/Self-Employed Division Estate and Gift Tax Program, dated October 29, 2014.

[3] Delaware Open MRI Radiology Associates, P.A. v. Kessler, 898 A.2d 290 (Del. Ch. 2006).

[4] “Statement on Standards for Valuation Services,” American Institute of Certified Public Accountants.


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