1 / 73

BUSINESS DIVORCE 50 Ways to Leave Your Lover . . . err, Business Partner

BUSINESS DIVORCE 50 Ways to Leave Your Lover . . . err, Business Partner. Moderator Kurt M. Heyman; Partner; Proctor Heyman Enerio LLP; Wilmington, DE Speakers Hon. Donald F. Parsons, Jr.; Vice Chancellor; Delaware Court of Chancery

peyton
Télécharger la présentation

BUSINESS DIVORCE 50 Ways to Leave Your Lover . . . err, Business Partner

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. BUSINESS DIVORCE50 Ways to Leave Your Lover . . . err, Business Partner Moderator Kurt M. Heyman; Partner; Proctor Heyman Enerio LLP; Wilmington, DE Speakers Hon. Donald F. Parsons, Jr.; Vice Chancellor; Delaware Court of Chancery Melissa N. Donimirski; Associate; Proctor Heyman Enerio LLP; Wilmington, DE Peter B. Ladig; Partner; Morris James LLP; Wilmington, DE Eric C. Milby; Partner; Lundy Beldecos & Milby P.C.; Narberth, PA Michaela L. Sozio; Partner; Tressler LLP; Los Angeles, CA

  2. Signs You Have a Business Divorce on Your Hands Definition: The legal separation of business partners in a privately held business • Closely held • Few owners • At least one owner no longer wants to work with the other owner(s) • Tends to be acrimonious and/or emotional • “[T]hese two parties ... don't trust each other at all … which … in a business divorce is often the case.” Schwartz v. Chase, 2010 WL 2601608, *9 n.77 (Del. Ch.) • May be protracted and expensive given the business’ bottom line

  3. Slip Out the Back, JackRight and Wrong Ways to Leave and Related Claims • Multidisciplinary • Corporate Law/LLC Law/Fiduciary Duties • Employment Law/Non-Competes • Trade Secrets & Related Claims

  4. Make a New Plan, StanDissolution • Corporations & Alternative Entities • Statutory v. Common Law v. Contractual • Corporations & Alternative Entities • Types of Dissolution

  5. No Need to Be Coy, RoyForced Buyouts • Corporate Transactions • Majority v. Minority Remedies

  6. Drop Off the Key, LeeProtective Measures Shareholder Agreements Operating Agreements Exit Mechanisms/Buyout Agreements

  7. Slip Out the Back, JackCommon Claims Eric C. Milby Lundy Beldecos & Milby

  8. Background “The acute vulnerability of minority shareholders in the closely-held corporation is well recognized. It stems principally from two factors. Because of its controlling interest, the majority is able to dictate to the minority the manner in which the corporation shall be run. In addition, shares in closed corporations are not publicly traded and a fair market for these shares is seldom available.”Orchard v. Covelli, 590 F. Supp. 1548, 1557 (W.D. Pa. 1984) Lundy Beldecos & Milby

  9. Common Factual Complaints • Withholding of distributions • Restricting or precluding employment in the company • Paying excessive salaries to majority or controlling stockholders • Withholding information relating to the operation of the company • Appropriation of company assets • Failure to hold meetings • Exclusion from a meaningful role in the corporate decision-making Lundy Beldecos & Milby

  10. Common Legal Claims • Breach of Contract • Breach of Fiduciary Duties • Usurpation of Corporate Opportunities • Oppression • Access to Books and Records and Accounting • Violation of Restrictive Covenants • Trade Secrets and Confidentiality Lundy Beldecos & Milby

  11. Levels of Judicial Scrutiny 1. Business Judgment Rule The Business Judgment Rule expresses a judicial policy of deferring to the reasonable judgment of an independent and disinterested Board of Directors rather than attempting to substitute their own judgment. The Rule places the burden of proof on a Plaintiff challenging the Board’s action. 2. Enhanced Scrutiny The Court will apply an “enhanced scrutiny” standard of review in limited circumstances such as when a Board is confronted with takeover decisions or changes in control – i.e., decisions that inherently confront the directors with a conflict of interest. 3. Entire Fairness Doctrine The Entire Fairness Doctrine applies where the directors approving a transaction are not independent or disinterested. The Entire Fairness Doctrine places the burden on the Board to prove that the decisions of the Board were both procedurally and substantively fair. Lundy Beldecos & Milby

  12. Common Remedies • Monetary Damages • Disgorgement • Accounting • Constructive Trust • Fair Value Determination • Injunctions • Dissolution Lundy Beldecos & Milby

  13. Direct vs. Derivative Claims • A litigant must consider whether his or her claims are Direct or Derivative. The Delaware Supreme Court explained that you should ask two questions to determine whether claims are direct or derivative: (1) Who suffered the alleged harm, and • Who would receive the benefit of any recovery or other remedy? Tooleyv. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031, 1035 (Del. 2004) • “If the corporation alone, rather than the individual stockholder, suffered the alleged harm, the corporation alone is entitled to recover, and the claim in question is derivative. Conversely, if the stockholder suffered harm independent of any injury to the corporation that would entitle him to an individualized recovery, the cause of action is direct.” Feldman v. Cutaia, 951 A.2d 727, 732 (Del. 2008) Lundy Beldecos & Milby

  14. Requirements for Derivative Claims In order to sustain a derivative claim, a plaintiff must: • Demonstrate that he or she was a shareholder or member at the time of the alleged wrong, • Remain a shareholder or member throughout the litigation, • Demand that the Board or equivalent governing body take the action they desire before filing suit or describe the reason for not making the effort (futility of demand), • Describe the Plaintiff’s failure to obtain the desired action, and • Attest that he or she has not received, been promised and will not accept any compensation for maintaining the action except that which the court might award. Further, any dismissal or compromise of the matter (except without prejudice or only with prejudice to the Plaintiff) must be approved by the court with notice given to all shareholders or members. Lundy Beldecos & Milby

  15. Derivative claims in Closely Held Companies In closely held corporations, some states permit derivative claims to be asserted as direct claims rather than dismissed if certain conditions are met: In the case of a closely held corporation [§ 1.06], the court in its discretion may treat an action raising derivative claims as a direct action, exempt it from those restrictions and defenses applicable only to derivative actions, and order an individual recovery, if it finds that to do so will not (i) unfairly expose the corporation or the defendants to a multiplicity of actions, (ii) materially prejudice the interests of creditors of the corporation, or (iii) interfere with a fair distribution of the recovery among all interested persons. • Hill v. Ofalt, 2014 PA Super 17, 85 A.3d 540, 553 (citing ALI Principles of Corporate Governance § 7.01(d) (1994)). Lundy Beldecos & Milby

  16. Breach of Contract • Co-ownership of a business is inherently the product of an agreement. • Agreement is usually written in the form of a Shareholder Agreement, Operating Agreement, or Partnership Agreement, but occasionally verbal. • Agreement is the first place the courts look and the most important evidence in any business divorce. • In a recent Pa case, one of two 50/50 shareholders complained that the other was operating the company to his exclusion. The Court held that the failure of the company to operate in accordance with the Operating Agreement was grounds for judicial dissolution notwithstanding that the business was operating profitably. Staiger v. Holohan, 100 A.3d 622 (Pa. Super. 2014) • Common breaches claimed are (i) failure to contribute required time to the partnership, (ii) failure to make distributions, (iii) exclusion from management, (iv) paying excess salaries to the controlling parties, and (v) failing to abide by restrictive covenants or confidentiality agreements. Lundy Beldecos & Milby

  17. Restrictive Covenants Restrictive covenants such as Non-Competition and Non-Solicitation Agreements are powerful tools in Business Divorce Litigation. The typical covenants are: • Non-Competition: a covenant that restricts a shareholder, member, partner, or employee from competing with the company within a designated geographical region and for a specified time frame, and • Non-Solicitation: a non-solicitation covenant might preclude a party from soliciting customers, employees, vendors, or any combination thereof. The covenants may be found in the shareholder, operating or partnership agreement, or they may be found in ancillary employment contracts. It is important to define the nature of the business from which the party to the covenant is precluded from engaging. Disgruntled business owners who believe themselves to be responsible for the success of the business, or believe that the clients or employees are loyal to them, often leave and set up a competing business. The existence of Restrictive Covenants can force an owner to obtain an involuntary or judicial dissolution in order to terminate the covenants before setting off on their own. In most states, restrictive covenants are enforceable but are strictly construed and must be carefully drafted to be enforced as written. California is perhaps the most restrictive state, prohibiting restrictive covenants as a restraint of trade except in certain narrowly defined circumstances. SeeCal. Bus. & Prof. Code § 16600 et seq. Lundy Beldecos & Milby

  18. Fiduciary Duties Justice (then Judge) Benjamin Cardozo is widely cited for his description of fiduciary duties in Meinhardv. Salmon. There, Salmon failed to inform his partner Meinhard about a profitable opportunity offered by a 3d party and took the opportunity for himself. Justice Cardozo found that Salmon breached the duty to inform and the duty of loyalty. Justice Cardozo explained: “A trustee is held to something stricter than the morals of the market place. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior… the level of conduct for fiduciaries [has] been kept at a level higher than that trodden by the crowd.” Meinhard v. Salmon, 164 N.E. 545 (N.Y. 1928) “At the core of the fiduciary duty is the notion of loyalty – the equitable requirement that, with respect to the property subject to the duty, a fiduciary must always act in a good faith effort to advance the interests of his beneficiary” Dweck v. Nasser, 2012 WL 161590 (Del. Ch.) Lundy Beldecos & Milby

  19. Fiduciary Duties - Usurpation of Corporate Opportunity The doctrine of corporate opportunity is one aspect of the fiduciary duties owed by a corporate officer or director to the entity. A corporate officer or director may not take a business opportunity for his or her self if: • the corporation is financially able to exploit the opportunity, • the opportunity is within the corporation’s line of business; • the corporation has an interest or expectancy in the opportunity; and (4) by taking the opportunity for his own, the corporate fiduciary will thereby be placed in a position inimicable to his dutiesto the corporation.Broz v. Cellular Info. Sys., Inc., 673 A.2d 148, 155 (Del. 1996) (citing Guth v. Loft, 5 A.2d 503, 509 (Del. 1939)). Lundy Beldecos & Milby

  20. Fiduciary Duties - Usurpation of Corporate Opportunity Conversely, a “director or officer may take a corporate opportunity if: ` • the opportunity is presented to the director or officer in his individual and not his corporate capacity; • the opportunity is not essential to the corporation; • the corporation holds no interest or expectancy in the opportunity; and (4) the director or officer has not wrongfully employed the resources of the corporation in pursuing or exploiting the opportunity.Broz v. Cellular Info. Sys., Inc., 673 A.2d 148, 155 (Del. 1996) (citing Guth v. Loft, 5 A.2d 503, 509 (Del. 1939)).

  21. Fiduciary Duties - Minority Oppression Many states specifically recognize a cause of action for minority oppression. • Under Pennsylvania law “majority shareholders have a duty not to use their power in such a way to exclude minority shareholders from their proper share of benefits accruing from the enterprise”. They may “act in their own interest, but when they do act in their own interest, it must also be in the best interest of all shareholders and the corporation.” [A]n attempt by a group of majority shareholders to “freeze out” minority shareholders for the purpose of continuing the enterprise for the benefit of the majority shareholders constitutes a breach of the majority shareholders' fiduciary duty to the minority shareholders. Vienerv. Jacobs, 834 A.2d 546, 556 (Pa. Super. 2003) • Where a majority shareholder stands to benefit from his decisions as a controlling stockholder, the law requires that the majority's action be “intrinsically fair” to the minority interest. A policy of corporate governance which has as its objective the denial of benefits to the minority interest runs afoul of this fairness standard . . . .Orchard v. Covelli, 590 F. Supp. 1548, 1556 (W.D. Pa. 1984) This cause of action makes it much easier for a minority interest to challenge certain actions such as a reverse stock split or squeeze out merger when the objective is to cash out a minority interest. Lundy Beldecos & Milby

  22. Books and Records Any stockholder, in person or by attorney or other agent, shall have the right: • upon written demand under oath, • stating the purpose thereof, • during the business’ usual hours • for any proper purpose (reasonably related to the stockholder’s interest as such) • to inspect and to make copies and extracts from: • The corporation's stock ledger, • a list of its stockholders, and • its other books and records If the company refuses to permit the inspection or does not respond to the demand within 5 business days after the demand, the stockholder may apply to the Court of Chancery for an Order to compel the inspection. See Del. Code Ann. tit. 8, § 220. Lundy Beldecos & Milby

  23. Trade Secrets and Confidentiality • Trade Secret and Confidentiality claims are often directed at preventing a director, officer, owner, or employee from using company secrets to compete unfairly with its current or former company. • Trade Secret claims are usually statutory whereas Confidentiality claims are usually contract based. Confidentiality claims can, however, fall under a fiduciary duty claim. • Almost all of the states and territories have adopted the Uniform Trade Secrets Act with few if any modifications. • As expressed in Delaware, a court may enjoin misappropriation of trade secrets when necessary to: 1. “protect the secrecy of the misappropriated information”, 2. “eliminate the unfair advantage obtained by the wrongdoer”, and • “reinforce the public policy of commercial morality.”Agilent Technologies, Inc. v. Kirkland, 2010 WL 610725, *31 (Del. Ch.) • Further a Court may award compensatory damages to the victim of the misappropriation, typically measured by lost profits. Where the damage is difficult to measure, the Court may award damages as measured by the gain accruing to the defendant as a result of the misappropriation. Lundy Beldecos & Milby

  24. Uniform Trade Secrets Act • Adopted in all but a couple of states. • Defines “Trade Secret” as “information including a formula, pattern, compilation, program, device, method, technique, or process, that: • (i) derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use, and • (ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy. • (§1 (4)) Note – relying on the broad provisions of the UTSA alone is risky. Subparagraph (ii) (reasonable efforts) suggests that having confidentiality agreements in place with all directors and employees, with a subjective definition of the company trade secrets, is an important factor in persuading the court to grant relief in favor of the party seeking protection of the trade secrets in a business divorce. • Permits a court to enjoin “actual or threatened misappropriation” for such period of time as would “eliminate commercial advantage that otherwise would be derived from the misappropriation”. (§2(a)) Lundy Beldecos & Milby

  25. Uniform Trade Secrets Act • “In exceptional circumstances an injunction may condition future use upon payment of a reasonable royalty for no longer than the period of time for which use could have been prohibited. Exceptional circumstances include, but are not limited to, a material and prejudicial change of position prior to acquiring knowledge or reason to know of misappropriation that renders a prohibitive injunction inequitable.” (§2(b)) • Provides for monetary damages measured by actual loss and unjust enrichment “not taken into account in computing actual loss”. Court may alternatively award “a reasonable royalty”. Court may also award exemplary damages for willful and malicious misappropriation.” (§3) • Court may award attorney’s fees for certain bad faith conduct, by the claimant or defendant, or for willful misappropriation. (§4) • Intended to preempt common law claims. (§7) Lundy Beldecos & Milby

  26. Injunctive Relief Plaintiff may obtain a preliminary injunction if it establishes: • a reasonable likelihood of success on the merits, • imminent, irreparable harm will result if an injunction is not granted and • the damage to Plaintiff if the injunction does not issue will exceed the damage to the defendants if the injunction does issue. The elements are not necessarily weighted equally. A strong showing on one element may overcome a weak showing on another element. However, a failure of proof on one of the elements will defeat the application.Cantor Fitzgerald, L.P. v. Cantor, 724 A.2d 571, 579 (Del. Ch. 1998). Irreparable harm is harm for which there is no adequate remedy at law. It is often said that there can be no irreparable harm when the injury can be compensated by monetary damages. Hence, irreparable harm is usually the most difficult element to establish in a commercial dispute where money is often the heart of the matter. However, “[i]t is not necessary that the injury be beyond the possibility of repair by money compensation’ but only that it ‘be of such a nature that no fair and reasonable redress may be had in a court of law and that to refuse the injunction would be a denial of justice.” T. Rowe Price Recovery Fund, L.P. v. Rubin, 770 A.2d 536, 557 (Del. Ch. 2000) Lundy Beldecos & Milby

  27. Case Study: Dweck v. Nasser - How not to effectuate a split • Nasser, a resident of Switzerland, owned 100% of Kids, an apparel company, after being tapped by Dweck to purchase from her family who lost a key customer (Wal-Mart) after pleading guilty to criminal charges relating to customs regulations. • Per the agreement, Dweck ran the company and became a 27.5% owner after Nasser was repaid his investment plus interest. Later her share increased to 30%. • Eventually Dweck wanted to be controlling shareholder, feeling she was responsible for Kids’ success, but Nasser refused to sell any portion of his shares. • Further, Nasser decided the owners should not receive salaries and declared himself a bonus to equalize the distributions. • So, Dweck started a new company, Success Apparel, to take advantage of “new opportunities” without disclosing this to Nasser. Lundy Beldecos & Milby

  28. Case Study: Dweck v. Nasser, cont’d • Dweck operated Success out of Kids’ premises • Dweck operated Success with Kids’ employees • Dweck caused Success to pay Kids a grossly inadequate 1% of sales administrative fee disguised on the financial statements as “Due from affiliates”. • It was conservatively estimated that Kids employees spent 20% of their time on Success business. • Success reimbursed Kids rent of about $14,500 whereas they paid $437,000 after moving to its own space. • Success’ marketing materials used Kids’ logo, cited awards won by Kids and cited Kids’ success record. Lundy Beldecos & Milby

  29. Case Study: Dweck v. Nasser, cont’d • The operations were so intertwined that Clients were confused by the operations: • Several clients drafted license agreements with Kids as licensee • Dweck requested that the licensee name be changed to Success • One client issued a press release describing its licensee as “Success Apparel Group, LLC also known as Kids International . . .” • Kids was the only name on the office. • The operation was so surreptitious that the employees just thought it was a brand and not a separate company. Lundy Beldecos & Milby

  30. Case Study: Dweck v. Nasser, cont’d • Dweck forms another company, Premium, to take advantage of another apparel licensing agreement. • Like Success, Premium uses Kids’ offices, employees, etc • To add insult to injury, Dweck charged over $450,000 in personal expenses to Kids including Club Med vacations and luxury goods from Armani, Prada, Gucci, and Bergdorf Goodman on top of her $850,000 to $1.3 million annual salary. • Dweck stopped sending quarterly financials to Nasser. • Nasser became concerned and was tipped off by an employee that “something was going on”. Lundy Beldecos & Milby

  31. Case Study: Dweck v. Nasser, cont’d • In a January 5th meeting, the first formal meeting ever, Nasser appointed a relative and the employee who tipped him off to the Board tasking the relative to find out what was going on. • Dweck, unhappy with the new oversight, prepared to leave, found new office space for Success and Premium, and began diverting all of Kids’ future orders to Success. • Nasser called a March 11 meeting. As a result of confusion over the meeting location, Dweck showed up at Nasser’s lawyer’s office while Nasser showed up at Kids. Nasser was placed in the conference room where Success and Premium samples adorned the walls. As Dweck raced back, she called and instructed an employee go into the conference room and remove the samples. Nasser sat in the conference room and watched this bungled attempt at concealment firsthand. Lundy Beldecos & Milby

  32. Make a New Plan, StanDissolution and the Business Divorce Peter B. Ladig Morris James LLP

  33. Dissolution and Other Judicial Remedies • Common Law • Corporations • 8 Del. C. §273 • 8 Del. C. §291 • Limited Liability Companies • 6 Del. C. § 18-802 • Limited Liability Partnerships • 6 Del. C. § 17-802 • Court-Implemented Dissolution

  34. Common Law • Very limited right to dissolve a solvent entity under common law • “[O]nlyupon a showing of gross mismanagement, positive misconduct by corporate officers, breach of trust, or extreme circumstances showing imminent danger of great loss to the corporation which, otherwise, cannot be prevented.” Carlson v. Hallinan, 925 A.2d 506 (Del. Ch. 2006)

  35. 8 Del. C. § 273 • Dissolution of joint venture corporation having 2 stockholders, each owning 50% • Under Section 273(a), if the stockholders are unable to agree upon the desirability of discontinuing the joint venture and disposing of its assets, either stockholder may (unless otherwise provided in the certificate of incorporation or a stockholder agreement), file a petition in the Court of Chancery stating that it desires to discontinue the joint venture and dispose of the assets

  36. 8 Del. C. § 273 (cont.) • Under Section 273(a), the petition shall: (1) attach a copy of the proposed plan of discontinuance and distribution; and (2) a certificate stating that copies of such petition and plan have been transmitted in writing to the other stockholders and any officers or directions

  37. 8 Del. C. § 273 (cont.) • Under Section 273(b), unless both stockholders file with the Court of Chancery: • Within 3 months of the date of the petition, a certificate similarly executed and acknowledged stating they have agreed on such a plan, or a modification thereof, and • Within 1 year from the date of the petition, a certificate similarly executed and acknowledged stating that the distribution provided by such plan is completed, the Court of Chancery may dissolve the corporation and may appoint 1 or more trustees or receives under 8 Del. C. § 279 to administer and wind up the affairs.

  38. Talking Points re: Section 273 • Section 273 doesn’t define “joint venture,” but the Delaware Supreme Court has defined it as: “(1) a community of interest in the performance of a common purpose, (2) joint control or right of control, (3) a joint proprietary interest in the subject matter, (4) a right to share in the profits, [and (5) a duty to share in the losses which may be sustained.” Warren v. Goldinger Bros., Inc., 414 A.2d 507 (Del. 1980) • Whether or not a corporation is a “joint venture” is an element of the claim that can also be litigated. See In re McKinney-Ringham Corp., 1998 WL 118035 (Del. Ch. Feb. 27, 1998)

  39. Talking Points re: Section 273 • Section 273 proceedings are narrow in scope (usually no counterclaims). In re Arthur Treacher’s Fish & Chips of Ft. Lauderdale, Inc., 386 A.2d 1162 (Del. Ch. 1978) • The Court has held that a Section 273 proceeding is not the appropriate vehicle to seek damages or the imposition of a constructive trust for breach of fiduciary duty. In re Data Processing Consultants, Ltd. 1987 WL 25360 (Del. Ch. Nov. 25, 1987)

  40. Talking Points re: Section 273 • However, the Court will consider allegations by the respondent regarding the possibility of a conspiracy or bad faith in connection with the petition for dissolution. Id. • For Example, the Court has stated that the only basis upon which it may refuse to dissolve is if the actual foundation for the action is something other than a genuine inability to agree upon the desirability of discontinuing the joint venture. Arthur Treacher’s; In re McKinney-Ringham Corp., 1998 WL 118035 (Del. Ch. Feb. 27, 1998)

  41. Talking Points re: Section 273 • The word “may” in Section 273(b) clearly indicates that the remedy is discretionary, but the Court’s discretion not to grant dissolution should be applied sparingly. In re McKinney-Ringham Corp., 1998 WL 118035 (Del. Ch. Feb. 27, 1998) • Moreover, there is no specific time period of disagreement that must exist before the Court may order dissolution. Matter of Bermor, Inc., 2015 WL 554861 (Del. Ch. Feb. 9, 2015)

  42. Talking Points re: Section 273 • The Court may also order one 50% holder to sell to the other in lieu of dissolution. Fulk v. Washington Service Assoc., Inc., 2002 WL 1402273 (Del. Ch. June 21, 2002) • Note: If the stockholders are in agreement, they may proceed with a voluntary dissolution under 8 Del. C. § 275

  43. Talking Points re: Section 273 • Can be used to dissolve a corporation that is part of a larger joint venture, even if not seeking dissolution of other entities • McKinney-Ringhamand Bermorboth involved requests to dissolve corporations serving as general partners of limited partnerships • In each case, court rejected arguments that petitioner was acting in bad faith by seeking dissolution of general partner as part of plan to dissolve limited partnerships

  44. 8 Del. C. § 291 • Receivers for Insolvent Corporations • Upon the application of any creditor or stockholder of an insolvent Delaware corporation, the Court of Chancy may, in its discretion, appoint one or more persons as receivers for the corporation • Receiver obligated to manage the assets, business and affairs of the corporation and collect outstanding debts, claims and property

  45. Talking Points re: Section 291 • Petitioner bears the burden of establishing that insolvency existed at the time of the filing of the petition. Banks v. Cristina Copper Mines, Inc., 99 A.2d 504 (Del. Ch. 1953) • Insolvent for purposes of Section 291 if either: (1) liabilities exceed assets; or (2) unable to meet its currently maturing obligations in the ordinary course of business. Production Resources Group, L.L.C. v. NCT Group, Inc., 863 A.2d 772 (Del. Ch. 2004)

  46. Talking Points re: Section 291 • Court will exercise discretion if it is shown that the appointment is required by “special circumstances of great exigency” and would benefit stockholders or creditors. In re Townsend Acres, Inc., 1977 WL 2571 (Del. Ch. May 3, 1977) • A receiver will not be appointed where such appointment will not benefit the petitioning creditor and will cause injury to other creditors. Boggs v. Bellevue, Inc. of Washington, D.C., 156 A. 202 (Del. Ch. 1931) • “Creditor” includes judgment creditors, contract creditors and creditors at large. Velcut Co. v. United States Wrench Mfg. Co., 140 A. 801 (Del. Ch. 1928)

  47. Talking Points re: Section 291 • Appointment of a receiver does not result in dissolution • The Court may subsequently discharge the receiver and return the assets to the corporation, may order the assets reduced to cash for distribution to creditors and stockholders

  48. 6 Del. C. §18-802 • Judicial Dissolution of an LLC: “On application by or for a member or manager the Court of Chancery may decree dissolution of a limited liability company whenever it is not reasonably practicable to carry on the business in conformity with a limited liability company agreement.” • Dissolution is an “extreme remedy”

  49. Talking points re: 18-802 • “Member” under 18-101(11) means a person who is admitted to a limited liability company as a member …. • “Manager” under 18-101(10) means a person who is named as a manager of a limited liability company in, or designated as a manger of a limited liability company pursuant to, a limited liability company agreement or similar instrument under which the limited liability company is formed

  50. “Reasonably Practicable” Under 18-802 • What is the defined purpose of the LLC? • If the purpose is broad (such as “any lawful activity”), difficult to establish impracticability. Wiggs v. Summit Midstream Partners, LLC, 2013 WL 1286180 (Del. Ch. Mar. 28, 2013); In re Arrow Investment Advisors, LLC, 2009 WL 1101682 (Del. Ch. Apr. 23, 2009) • If the purpose is narrow, it is easier to establish impracticability if the ability to achieve the limited purpose of the LLC is impaired. Vila v. BVWebTies LLC, 2010 WL 3866098 (Del. Ch. Oct. 1, 2010); In re Silver Leaf, LLC, 2005 WL 2045641 (Del. Ch. Aug. 18, 2005)

More Related