shareholder dispute
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Thursday, January 20th, 2011
I was recently asked to litigate a breach of contract claim on behalf of a party who was wronged by the breach of another party to a contract. The kind of contract is immaterial for the purpose of this article. It could have been an independent contractor agreement, or employment agreement, or an asset purchase, stock purchase, non-compete, or non-solicitation agreement, or any one of a dozen other types of contracts. Regardless, as I have said previously in these posts, there are certain contractual provisions that should be found in just about every contract. What may be possibly be the single most important provision, from my perspective, happened to have been omitted from this particular contract, that is, a provision addressing the potential recovery of attorney’s fees resulting from litigation.
I say that this may be the single most important provision in a contract not in a substantive sense, as the material terms of the contract must of course be included with specificity. The services to be performed or the products to be sold are obviously vital, since without which there may be no meeting of the minds and thus no contract in the first place. And there are other material provisions related to the deal itself that must be included as well, ie the duration of the agreement, compensation, termination, etc.
But aside from the substantive points of the deal, there is not a more important procedural, boilerplate, provision than a provision addressing attorney’s fees. Why? Because in many cases, the lack of such a provision makes litigating over a contract a financially untenable idea. A party to a contract may have the facts and the law on its side. The case may essentially be a slam dunk, if such things exist. However, if at the end of the day, the damages available to the winning party only barely exceed the amount the party paid to its attorney’s to prosecute the case, then regardless of how great a case it is, the filing of a lawsuit or arbitration makes little sense from a bottom line perspective. None of us, clients or attorneys, litigate in order to achieve moral victories. If maintaining a lawsuit does not make sense from a financial point of view, then regardless of right and wrong and getting even, I always advise my clients to consider the case strictly from a business perspective, leaving aside emotion.
That is why it is such a huge benefit when a contract at issue contains a prevailing party clause with regard to attorney’s fees. This magic language allows a wronged party to sue with the understanding that if the facts and the law support her case, then she will be made whole in regard to not only the actual damages she sustained as a result of the breach of contract, but in addition, all costs, expenses and attorney’s fees she expended in litigating the matter. Please then, I ask you to review EVERY agreement your business has signed, as well as every agreement you sign from here on out, and prior to execution, include a provision similar to the following:
“In the event of litigation [or arbitration] for any matter arising out of or related to this Agreement, the party prevailing in any such action shall be entitled to recover from the losing party its reasonable attorney’s fees and all other legal costs and expenses, including filing fees, expended in the matter.”
The importance of this provision cannot be overstated, since attorney’s fees on even a fairly “routine” matter can easily run into the tens of thousands of dollars, and for more complex cases against defendants with deep pockets, it would not be a surprise to see attorneys’ fees in the hundreds of thousands of dollars.
Posted in business law, franchise law | No Responses »
Tags: arbitration, arbitration clause, asset purchase agreement, attorneys fees, attorneys fees clause, breach of contract arbitration, breach of contract case, breach of contract lawsuit, business breach of contract, business contract, business contract review, business law, business lawsuit, business litigation, confidentiality agreement, contract terms, corporate agreement, corporate litigation, covenant not to compete, franchise agreement, franchise arbitration, Franchise Disclosure Document, franchise law, franchise litigation, maryland breach of contract, maryland business, maryland business law, non solicitation agreement, operating agreement, partnership agreement, prevailing party, prevailing party clause, shareholder agreement, shareholder dispute, small business attorney, small business lawyer, stock purchase agreement
Wednesday, January 5th, 2011
In Flynn v. Everything Yogurt, et al., 1993 U.S. Dist. Lexis 15722 (D. Md. 1993), the Maryland Federal District Court granted a motion to dismiss a fraud claim for failure to state a claim under Rule 12(b)(6). The Court held that ““Projections of future earnings are statements of opinion rather than statements of material fact. Projections cannot constitute fraud because they are not susceptible to exact knowledge at the time they are made. Layton v. Aamco Transmissions, Inc., 717 F. Supp. at 371 (D. Md. 1989); See also, Johnson v. Maryland Trust Co., 176 Md 557, 565, 6 A.2d 383 (1939) (statement referring to value of securities representing collateral for the payment of trust notes was a matter of expectation or opinion). Thus, the Defendants’ projections can not constitute statements of material fact under § 14-227(a)(1)(ii).”
The Maryland Federal District Court also held in Payne v. McDonald’s Corporation, 957 F.Supp. 749 (D. Md. 1997) that claims of fraud against McDonald’s must be dismissed: “McDonald’s projections concerning the future building costs of the Broadway restaurant and concerning the impact of new restaurants on future sales of the Broadway facility are just as much predictions of ‘future events’ as are projections of future profits. Accordingly, this Court concludes that it was unreasonable for plaintiff Payne to rely on any of McDonald’s predictive statements as a basis for the assertion of fraud-based claims in this case.”
In addition to the McDonald’s case cited above, see Miller v. Fairchild Industries, Inc., Finch v. Hughes Aircraft Co., and Hardee’s v. Hardee’s Food System, Inc., all of which stand for the proposition that predictions or statements which are merely promissory in nature and expressions as to what will happen in the future are not actionable as fraud.
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Tags: arbitration, arbitration clause, breach of contract lawsuit, business breach of contract, business law, business litigation, Buy a Franchise, corporate litigation, federal franchise law, franchise agreement, franchise arbitration, Franchise Disclosure Document, franchise fraud, franchise law, franchise litigation, franchisee, fraud, fraud in the inducement, fraudulent, fraudulent representation, FTC Franchise Rule, maryland breach of contract, maryland business, maryland business law, maryland fraud law, shareholder dispute, shareholders' agreement, small business attorney, small business lawyer
Wednesday, October 6th, 2010
If you have registered your business trademark or service mark with the U.S. Patent and Trademark Office (“USPTO”), then you have the right to sue a party that is infringing your trademark rights. The criteria used to determine whether the use of your mark or a similar mark qualifies as infringement is whether such use causes a “likelihood of confusion” to the public. Likelihood of confusion exists when a court believes that the public would be confused as to the source of the goods, or as to the sponsorship or approval of such goods.
Courts deciding a trademark infringement action will mainly look at two issues in deciding an infringement action: 1) the similarity of the two marks, for example, are the marks identical or merely similar; and, 2) what goods or services are the marks associated with. The more similar the marks, and the more related the products or services of the two marks are, the more likely a court will find a likelihood of confusion and enjoin the offending party’s use of the mark.
Should your prevail in a trademark infringement action, you are entitled to some or all of the following remedies: 1) injunctive relief to enjoin the other party from using the mark; 2) profits the opposing party made as a result of its use of the infringing mark; 3) monetary damages you sustained as a result of the infringing party’s use of the mark; and, 4) the costs you incurred in bringing the infringement action. In addition, a court may award treble (triple) damages if there is a finding of bad faith on the part of the offending party.
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Tags: breach of contract case, breach of contract lawsuit, business breach of contract, business contract review, business formation, business law, business lawsuit, business litigation, business name registration, business trademarks, corporate formation, corporate litigation, franchise agreement, how do you trademark a name, infringement, limited liablity company, maryland business, maryland business law, protect your trademark, shareholder dispute, small business attorney, small business lawyer, trademark actions, trademark damages, trademark dilution, trademark infringement, trademark law, trademark protection, trademarking a name, what is a trademark
Wednesday, October 6th, 2010
Maryland law does not require that a sole member limited liability company (“LLC”) have an existing, enforceable operating agreement on file. Nevertheless, there is an excellent reason to draft and execute one: by executing an LLC operating agreement, the single member of the LLC has drawn a line of protection guarding that person against personal liability for the business debts and obligations of the LLC.
Specifically, Maryland courts have held that the protection from liability that exists by virtue of the LLC’s formation can disintegrate if the LLC fails to observe certain corporate formalities. One of these formalities is the existence of a valid operating agreement. Having an operating agreement in place can protect the single member from liability when a third party attempts to sue the individual member in order to satisfy an obligation resulting from a debt of the LLC.
Without an operating agreement, it may prove more difficult for the sole member to avoid liability. Courts sometimes blur the line between a sole member LLC with its protection from liability for its individual owners, and a sole proprietorship where such protection does not exist. However, this line becomes more clear cut, and courts will as a result hesitate to “pierce the corporate veil” and hold an individual liable for the LLC’s debts, when corporate formalities like having an operating agreement are complied with.
Posted in business law, Uncategorized | 1 Response »
Tags: benefits of LLC, business contract review, business formation, business law, business name registration, business start up, corporate bylaws, corporate formation, corporate start up, limited liability company operating agreement, limited liablity company, LLC, llc agreement, llc operating agreement, maryland business, maryland business law, operating agreement, partnership agreement, shareholder agreement, shareholder dispute, shareholders' agreement, single member limited liability company, single member llc, small business, small business attorney, small business lawyer, small business needs
Saturday, February 20th, 2010
I frequently tell my franchise and business clients to be wary of automatically including an arbitration clause in a franchise agreement or other contract they execute. Several years ago it was savvy for a business owner or franchisor to include mandatory arbitration in their agreements. Now, many of the reasons that supported the inclusion of arbitration clauses have been diminished, making the inclusion of mandatory arbitration in many contracts a questionable strategy at best. I now advise my business and franchise clients against arbitrating disputes for the following reasons:
1. Arbitrations are not “cost-savers” like they used to be thanks to the multiple fees associated with the process. Unlike judges, arbitrators are paid by the parties on an hourly basis. It is therefore in an arbitrator’s financial interest for the case to reach a hearing, regardless of the claim’s merits. In addition, many hearings go on much longer than necessary, allowing witnesses and testimony with questionable relevance to be heard. As a result, arbitrator’s fees can be quite significant for even routine business disputes. The arbitrator’s fees are of course in addition to the fees that business clients pay to their own attorneys for handling the matter, plus the hefty filing fees that many arbitration forums charge as well. For example, the American Arbitration Association, the preeminent arbitration forum in the U.S., charges filing fees ranging from $300 to $2,500.00 for commercial arbitration disputes. Contrast these expenses with trials and other court hearings, where judges have no financial interest in prolonging a case, and filing fees are minimal.
2. The distribution of who pays the arbitrator’s and other fees can disfavor the party bringing the action. The filing party, known as the Claimant, will be responsible for paying not only the arbitration filing fees, but also its portion AND the other party’s portion of the arbitrator’s fees mentioned above should the defending party, called the Respondent, refuse to pay its share of such fees. In such a case, the Claimant must pay all fees in order for the matter to go on, yet the Respondent remains entitled to participate in the arbitration process. If the Claimant fails to pay all of the fees owed to the arbitrator, the arbitrator will likely suspend or dismiss the action entirely. Because there is no incentive for a Respondent to pay its share of an arbitrator’s compensation or other fees, the absurd ersult of the Claimant paying all fees happens more than one would think. Combined with the fees a Claimant must pay to its own attorney, it is easy to see why a business owner would question the use of arbitration in the first place.
3. Arbitrators have far more discretion to rule than judges, sometimes in spite of the evidence presented. The arbitration process is much less formal than a trial. While some informality saves the parties time and expense and speeds up the process, the biggest informality can alter the entire outcome, namely, the fact that the rules of evidence do not apply to arbitration. As a result, arbitrators are free to allow documents and testimony that is questionable as to veracity and authenticity into evidence, even though such evidence would not be permitted in a court of law. In plain terms, an arbitration hearing can literally turn into a free for all, with the arbitrator allowing all kinds of testimony and documents to be factored into an award. This sort of setting can severely hurt a business client who is relying strictly on the language of documents and the actions of the parties, while in turn favoring a party hoping for chaos, basing its case on hearsay and unsupported and unreliable accusations. [Tune in to PART 2 next week]
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Tags: arbitrate business disputes, arbitration, arbitration clause, breach of contract case, breach of contract lawsuit, business breach of contract, business contract review, business law, business lawsuit, business litigation, commercial arbitration, corporate litigation, franchise agreement, franchise arbitration, franchise law, litigate or arbitrate?, maryland breach of contract, maryland business, maryland business law, operating agreement, shareholder agreement, shareholder dispute
Monday, January 11th, 2010
I often am asked by business clients how to address the circumstances surrounding the transfer of ownership if one of the owners dies, becomes disabled, or whose employment in the business is terminated for-cause? The answer is through the use of language addressing buy-sell situations that are included in an Operating or Shareholder Agreement.
A carefully drafted buy-sell provision will address the buyout of a deceased or disabled owner’s share of the business, usually through the use of the proceeds of life and disability insurance policies taken out by the business on the lives of the owners. A buy-sell provision will also address termination of an owner’s employment with the business for-cause. A sample buy-sell paragraph will read something like the following:
Sale of Shares on Death, Disability or Termination of Employment. If, during the term of this Agreement: a) a Shareholder dies or becomes permanently disabled (meaning the Shareholder becomes unable to carry out his duties as a Director or Officer of the Company for a period of 90 consecutive days or more); or b) a Shareholder who is also an employee of the Company has his or her employment terminated by Company for-cause, then the Company shall buy, and the Shareholder, his estate or the named representative of the Shareholder shall sell, the Shares of said Shareholder to the Company.
A buy-sell provision will go on to address how to arrive at the price at which an owner’s shares may be sold for, as well as whether such price will vary depending on the circumstances surrounding the owner’s departure from the business.
A buy-sell provision will also address an owner’s potential divorce, so as to prevent remaining owners from having to own and operate the business with the spouse or other family member of a former owner.
Every LLC Operating Agreement and Corporate Shareholder Agreement should address the buy-sell provisions referenced above. This will go a long way towards solving many potential disputes involving circumstances associated with the transfer of ownership of a business before they arise.
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Tags: business formation, business incorporation, business law, business start up, buy sell, buy-sell agreement, corporate formation, corporate start up, death of business owner, disability of business owner, limited liablity company, LLC, maryland business, maryland business law, operating agreement, partnership agreement, shareholder agreement, shareholder dispute, shareholders' agreement, stockholder dispute
Monday, August 3rd, 2009
Need an Attorney to help your Maryland or DC business? Contact Raymond McKenzie at 301-330-6790 or ray@mckenzie-legal.com
Shareholders
A Maryland corporation need only file Articles of Incorporation with the Maryland Department of Assessment and Taxation in order be lawfully incorporated. Once formed, though, it is advisable that every Maryland corporation consult with a Maryland business attorney to discuss the drafting of a set of Bylaws, as well as a shareholders’ agreement.
Maryland law mandates that each Maryland corporation must have a set of Bylaws that lay out the procedures concerning the governance of the corporation. A Maryland corporation’s Bylaws may contain any provision not inconsistent with law or the charter of the corporation for the regulation and management of the affairs of the corporation.
A Maryland corporation’s Bylaws usually set out the powers, duties, rights and obligations of its directors and officers, including how many directors the corporation may have, the procedure for calling shareholder and Board of Director meetings, how and where corporate records are to be maintained, stockholder reports, voting and proxy procedures, how stock may be transferred, how directors are elected and removed, how officers are appointed and removed, as well as numerous other matters related to the corporation as a whole.
A Maryland corporation may, but is not required to, have a shareholders’ agreement. A shareholders’ agreement is an agreement between the stockholders of a corporation that governs the rights and obligations of the shareholders. First and foremost, a shareholders’ agreement will state the individual equity in the corporation as held by the shareholders. A shareholders’ agreement typically states how new shares of stock are issued, and addresses issues surrounding restrictions on stock repurchase and transfer, including how stockholders of a company may sell their shares, what happens to the shares upon the death or disability of a shareholder, whether other shareholders have the right to purchase another shareholder’s stock upon death or disability, what procedures are used in order to assign value to stock shares, and what happens to stock upon the breach of a shareholder agreement by a stockholder.
A shareholders’ agreement will also govern how the day-to-day operations of the company are managed, how a Board of Directors will be elected and terminated, what decisions require majority, super-majority or unanimous consent of the shareholders, how the Board will appoint Officers of the corporation.
The resolution of shareholder disputes through mediation, arbitration or litigation, or a combination thereof, may also be included in a shareholders agreement, as well as what law governs any dispute.
When you are in the start up and formation stages of your new business, consult with your business attorney regarding the drafting of Bylaws and a shareholders’ agreement.
Need an Attorney to help your Maryland or DC business? Contact Raymond McKenzie at 301-330-6790 or ray@mckenzie-legal.com
Posted in business law | No Responses »
Tags: business contract review, business formation, business incorporation, business law, business start up, corporate bylaws, corporate formation, corporate litigation, corporate start up, maryland business, maryland business law, shareholder agreement, shareholder dispute, shareholders' agreement, stockholder dispute
Raymond McKenzie is a corporate and franchise attorney in the Washington, D.C. metropolitan area.
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