Shareholder and Partnership Disputes
Sometimes even when everyone is on the same team, disputes can arise. In a business setting, such disputes can arise among partners, or between the shareholders and managers of a corporation. When escalating these matters to court or arbitration, it is vital to have an experienced legal team recognize and understand the key provisions within company documentation as well as the legal rules and regulations that govern the parties’ relationship.
Minority and individual shareholders are not without rights and recourse against overreaching, self-interested or inept officers or directors. Likewise, prudent corporate managers – even those in the majority – should expect that their management decisions might be subject to judicial review. Common forms of shareholder disputes are:
- Enforcement of shareholders’ rights, such as the right to dividends, right to inspect books and records and other rights granted under shareholder agreements;
- Actions against managers or the board for various liabilities;
- Shareholders’ derivative actions; and/or
- Corporate dissolution and receivership.
These shareholder actions can be generally divided into two categories, direct actions and derivative actions, which are subject to entirely different sets of rules and standards.
Shareholder Direct Action
A lawsuit brought by an individual shareholder or a group of shareholders for harm done to them personally is called a “direct action.” A direct action can take many forms, such as:
- Actions to compel the payment of a dividend;
- Suits brought to enjoin a corporation from impermissibly diluting a shareholder’s interest;
- Suits to protect voting rights;
- Suits demanding an inspection of corporate books and records;
- A breach of contract claim in which the shareholder is a party to the contract; and/or
- Fraud on a shareholder directly.
If you are a shareholder that has been injured by the corporation, our firm can help you assert your rights.
Shareholder Derivative Action
Shareholder derivative actions are a more complicated process, as there are many procedural safeguards to protect corporate management from harassment or overreaching minority shareholders. A derivative lawsuit is filed by a shareholder for the benefit of both the corporation and the shareholders. Derivative suits brought by one or more shareholders are not brought on their own behalf. Their goal is to protect their investment by imposing management changes and corporate governance reforms. Any proceeds of a successful action are awarded to the corporation, not the shareholders. Further, these shareholders can only take this position after issuing a demand for the corporation’s managers to bring the suit themselves. If a demand is rejected, then the lawsuit is permitted to proceed.
Derivative actions can be against third parties such as accountants or advisors, but usually some improper action or omission by the officers and/or directors is alleged, such as:
- Officers and/or directors acting in their own personal interests;
- Illegal conduct;
- Corporate waste;
- Stock price manipulation; and/or
- Gross mismanagement.
The Business Judgment Rule
Against these actions, courts, who do not wish to get into the business of second-guessing corporate governance, have given corporate management a very powerful shield known as the “business judgment rule.” Under the business judgment rule, courts defer to the determinations of officers and as to the best interests of the corporations that they serve. Courts do not inquire further into their actions in the absence of bad faith or fraud. The degree of care required is that which an ordinarily prudent person in a like-position would use under similar circumstances.
We have extensive experience both prosecuting and defending derivative actions, both substantively and procedurally. Call us to discuss our vast experience in these matters.
Dissolution and Receivership
Dissolution of a corporation can be a relatively peaceful voluntary vote and winding down, or the end of a deadlock that has rendered the corporation unable to function. Generally, a petition for dissolution is available where:
- A 50 percent shareholder demonstrates to the court that:
- the corporation’s directors are too deadlocked to take board action;
- the shareholders are too deadlocked to elect directors; and/or
- there is such internal dissention amongst two or more groups of shareholders that dissolution would be beneficial to all shareholders.
- A 20 percent or greater shareholder demonstrates to the court that those in control of the corporation have engaged in illegal, fraudulent or oppressive conduct or have looted, wasted or diverted corporate assets.
In these cases, swift action must be taken to prevent any additional injury to corporate assets. There are remedies available, such as a court-appointed receiver set in place to preserve property and carry on the business of the corporation.
If a corporation in which you have an interest needs assistance with dissolution analysis, we can aid your firm quickly and effectively.
Lawsuits among partners in a partnership can involve:
- Breach of the partnership agreement;
- Breach of fiduciary duties to the partnership or other partners;
- Expulsion of a partner from the partnership; and/or
- Dissolution of the partnership.
Partnerships are generally defined by robust partnership agreements supported by statutory provisions meant to fill in any gaps.
The Partnership Agreement
All partnerships are created through a contract, either expressed or implied. While a formal partnership agreement is the controlling document governing the relationship between partners, the New York Partnership Law serves as a “default” partnership agreement to cover anything not spelled out in a written agreement. It should be noted that where there are ambiguities in a partnership agreement, courts will allow evidence such as writings between the parties, past performance and industry custom and practice to resolve the uncertainty.
The power of a partnership agreement is prodigious. Although the most basic agreements default to the New York Partnership Law, provisions can be overridden by the terms of a partnership agreement. Those can include self-dealing, expelling partners without cause, and other acts that would normally violate the fiduciary duties partners owe to the partnership and each other.
Therefore, whether a partnership has its own agreement, relies on the provisions of the laws, or is a hybrid of the two, the review and interpretation of those provisions is the first critical step in evaluating claims and defenses.
If you are unsure of your rights under your partnership agreement or under the New York Partnership Law, we can assist you.
Fiduciary Duties of Partners
Another aspect of partnership disputes is the enhanced duties the partners owe to each other, to limited partners and the partnership itself. These “fiduciary duties” mean that when executing the business of the partnership, general partners are subject to the very high standards of loyalty and care imposed to act in the base interest of the partnership.
Examples of violations of fiduciary duty include:
- Misappropriating partnership assets for private benefit;
- Competing with the partnership; and/or
- Diverting partnership opportunities;
To establish a breach of fiduciary duty claim, the plaintiff-partner must allege:
- The partnership and/or the general partners owed the plaintiff-partner a fiduciary duty to act in good faith and deal fairly in the plaintiff-partner’s best interest;
- the defendant partner and/or partnership breached that duty and acted in their own self-interest;
- the said breach was a substantial factor in harming the plaintiff-partner; and
- the resulting damages.
Regarding damages for breach of fiduciary duty, it should be noted that cases involving breaches of fiduciary duty are treated as a “special breed” of cases where the normally stringent rules for damage calculation are relaxed. Also, where there is a breach of fiduciary duty, a plaintiff-partner might recover punitive damages, which is a money amount awarded in order to punish the defendants for particularly wanton behavior.
If a partner is acting against your interests or the interests of your partnership, we are here to help.
Dissolution of a Partnership
The dissolution, or ending, of a partnership is also governed by the New York Partnership Law. As always, the parties should be guided by the partnership agreement. If a partnership agreement is merely at will, a general partnership can be dissolved when a partner expresses an intent that they want the partnership to end.
Also, unless a partnership agreement says otherwise, the voluntary or involuntary withdrawal of a partner due to expulsion or death will dissolve the partnership.
A dissolution of the partnership can also be ordered by a court decree where a partner files an action for dissolution.
An event that triggers the dissolution of the partnership terminates all partners’ rights to act on behalf of the partnership except as necessary to complete transactions begun, but not yet completed, by the partnership.
If you need help navigating the dissolution of a partnership, we can support and guide you through that process.
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