Court rules that shareholder of Corporation A cannot utilize de facto merger doctrine to seek dissolution of Corporation B.

The petitioner in this case sought to dissolve a corporation of which, he was not a shareholder on the theory that it had entered into a de facto merger with another corporation in which he held a 25% stock interest. A New York Supreme Court dismissed the petition, noting that the petitioner cited “no authority that would allow a court to utilize the doctrine of de facto merger to shift his shareholder interest in one corporation to another corporation for the purpose of forced dissolution of the new corporation.”

Sidney Turner

www.SidneyTurnerllc.com

An SPE is a legally distinct entity with a limited life, usually an LLC

General Growth Properties, Inc., which filed the largest real-estate Chapter 11 case in U.S. history. In connection with approving the debtor-in-possession financing facility, Judge Gropper permitted affiliated debtors to use excess cash collateral from bankruptcy-remote special purpose entities which, to the surprise of many market participants, were included in the Chapter 11 proceedings.

In connection with seeking approval of the Company’s proposed debtor-in-possession facility (the “DIP Facility”), the Company also sought use of cash collateral from separately organized subsidiary bankruptcy-remote special purpose entities (“SPEs”). The property owned by each of these SPEs was intended to secure only the obligations of the pre-petition lenders to the SPE owning the property (the “SPE Lenders”). Arguing that the value of the collateral in certain of the SPEs is sufficient to protect the interests of the SPE Lenders, the Company proposed that excess cash collateral from rents be made available to support the DIP Facility.

Several pre-petition agents for the SPE Lenders (the “Pre-Petition SPE Agents”) filed objections to the Company’s proposed DIP Facility on behalf of the SPE Lenders. The Commercial Mortgage Securities Association and the Mortgage Bankers Association also filed an amici curia brief with the court addressing the implications of the proposed use of cash collateral on commercial real estate finance.

Sidney Turner

www.SidneyTurnerllc.com

 Phantom Income in Shareholder Buy-Out Agreement

If you have recently been bought out and received a Schedule K-1 tax form from your old company for last year that allocates to a substantial net income sum that you never received. Isn’t it outrageous, that former business partners are shifting taxes on earnings that stayed with the company for their benefit?

If as the selling shareholder, member or partner did not foresee the possibility of a positive net income allocation for that portion of the tax year preceding the buy-out’s effective date, and did not negotiate a tax payment distribution in the buy-out agreement to the extent of any non-distributed allocation of net income, you are likely to be writing a bigger check to Uncle Sam.

For example a firm of four brothers organized as a corporation which, as is typically done, elected for pass-through partnership tax treatment as a subchapter “S” corporation. The plaintiff was a 25% shareholder of the corporation. The majority shareholders filed a dissolution proceeding which was resolved by a stipulation and order of settlement. Under the stipulation, plaintiff received $150,000 in exchange for surrendering his interests in the corporation.

A follow-up lawsuit was triggered by plaintiff’s receipt the next year of an allegedly “untruthful” K-1 from his former firm allocating $75,000 net income to the plaintiff, which plaintiff denied receiving. Plaintiff sued his former firm and his three brothers individually, alleging that the $75,000 was allocated to him to lower their own personal tax liabilities; that prior to plaintiff’s departure in 2007, the firm routinely made distributions to cover the partners’ personal taxes; and that the defendants were liable for the $25,000 in additional taxes owed by plaintiff on his reported K-1 income.

The plaintiff moved for partial summary judgment against the firm defendants, for a determination that they are obligated to reimburse plaintiff for the personal taxes due on the $75,000 he never received, based on a provision in the 2007 stipulation of settlement in the dissolution case:

“Upon surrender by [plaintiff] of his shares of stock in the respondent [firm] . . . the respondent will hold plaintiff harmless for any liability for the payment of taxes or other debts of the respondent which exist December 31, 2007.

The court rejects plaintiff’s reliance on the provision and denies his motion. The hold-harmless provision, the court writes,

“does not support plaintiff’s interpretation that the defendants agreed to pay his personal income taxes. The settlement agreement was made within the context of a corporate dissolution proceeding and the “taxes” clearly refer to corporate, not personal, taxes.”

Sidney Turner

www.SidneyTurnerllc.com

1)   Inadequate and defective documentation of ownership interest in a business is an all too common feature of closely held businesses and, after a dispute arise, litigation over an assert claim by adversely effected business partner’s standing (right) to sue is challenged.

The reasons for this state of affairs are many and diverse, e.g.: The owners lack a sophisticated understanding of the legal formalities involved in an ownership interest in the chosen form of business entity. The owners are unable or unwilling to spend the money for necessary legal and accounting services. The owners are family members or long-time friends who trust one another and believe they don’t need any written agreement or certification of ownership interests.

The usual issue is whether the complaining party ever became a shareholder or, if the case involves a limited liability company, ever held a membership interest. This type of dispute has been the subject of many disputes. However many variations arise.

2)    A Manhattan Supreme Court granted an interim injunction restraining directors of a Delaware corporation from committing acts that constitute grounds for dissolution.  The unusual preliminary injunction in a dispute between two shareholders of a New York based Delaware Corporation, requiring that the directors “not commit acts that constitute grounds for dissolution under NY law, and that corporate records are made available.  The question is how does a director comply with an injunction against “oppression” of a minority shareholder?

3)    Court rules that shareholder of Corporation A cannot utilize de facto merger doctrine to seek dissolution of Corporation B. The petitioner in this case sought to dissolve a corporation of which, he was not a shareholder on the theory that it had entered into a de facto merger with another corporation in which he held a 25% stock interest. A New York Supreme Court dismissed the petition, noting that the petitioner cited “no authority that would allow a court to utilize the doctrine of de facto merger to shift his shareholder interest in one corporation to another corporation for the purpose of forced dissolution of the new corporation.”

Sidney Turner

www.SidneyTurnerllc.com

A DLOM’s basic premise is that shares of a closely held corporation cannot be readily sold on a public market and therefore should be discounted to reflect the additional risk factors associated with the time and difficulty of finding buyers for non-publicly traded shares.

Sidney Turner

www.SidneyTurnerllc.com

I handle corporate workouts, reorganizations and dissolutions and other types of disputes among co-owners of privately owned companies, in other words I advise clients when they are experiencing adverse business situations.

But what does it really mean to be a business lawyer handling dissolution and other types of disputes among co-owners or adverse business situations? Does it require a special temperament and skill set? Here’s my take on the answers to these questions:

It Means understanding business and the relationships that make it work.

This is the Sixth of the Six Major Points Series

Number SIX of the Six Major Points Series

It Means Knowing the Purposes and Limitations of Litigation. When I give presentations on business workouts and reorganizations, I tell the audience that the vast majority of cases involving a viable business ultimately leads to a buyout settlement, and that it’s only a question of how much time, distraction and legal expense the parties are willing to bear before they realize that the legal system is not an efficient or even wise way to decide the fate of a living, breathing company. However, for many different reasons litigation can be an unavoidable and necessary tactic in reaching the strategic goal of separating business partners who no longer can co-exist as owners and managers. Sometimes there’s just no other way to grab the attention of the other side. The litigation will take its normal, unpredictable course. The parties’ expectations of a quick resolution are undermined by many delays and procedural and discovery skirmishes attendant to all litigation. As the case drags on and the legal costs mount, the clients begin to reassess the costs and benefits of a buyout settlement.

The business lawyer must be willing to take the lead in re-evaluating and advising the client of litigation and settlement prospects at every stage of the engagement.

If you missed any please check out my other blog postings

Sidney Turner

www.SidneyTurnerllc.com

I handle corporate workouts, reorganizations and dissolutions and other types of disputes among co-owners of privately owned companies, in other words I advise clients when they are experiencing adverse business situations.

But what does it really mean to be a business lawyer handling dissolution and other types of disputes among co-owners or adverse business situations? Does it require a special temperament and skill set? Here’s my take on the answers to these questions:

It Means understanding business and the relationships that make it work.

This is the Fifth of the Six Major Points Series:

Number FIVE of the Six Major Points Series

It Means Understanding Valuation Basics. In many instances, by the time lawyers are brought into the picture the relationship between the business owners has deteriorated past the point of no return. If it’s a viable business, one or the other is going to have to be bought out. The single biggest impediment to amicable resolution becomes the disparate views of the company’s value as seen through the very different lenses being worn by the potential purchaser and the potential seller. The business lawyer is not a business appraiser, but he or she must be able to elevate the client’s understanding of basic appraisal approaches and methodology, along with any applicable legal concepts such as the case-law-driven rules surrounding minority and marketability discounts in “fair value” buyout proceedings. The lawyer’s grasp of appraisal doctrine becomes even more critical when collaborating with a professional business appraiser who has been engaged to prepare a valuation report and to testify as an expert at a valuation hearing. The business lawyer must be able to speak the language of appraisal and understand its doctrinal basis to put on a persuasive valuation case.

If you missed any please check out my other blog postings

Sidney Turner

www.SidneyTurnerllc.com

More than two years later, W received a voicemail message that stunned her: H wanted to revise their settlement. W refused, and H sued.

When the couple split their assets evenly, the largest chunk of money was invested with Mr. Madoff. H kept much of his funds in the Madoff account, which was held in his name. W, who said she had no interest in investing with Madoff, received her settlement proceeds in cash.

Shortly after Madoff admitted wrongdoing in December 2008, H, filed court papers to drastically alter the terms of his divorce settlement.

W, he argued in the lawsuit, should be required to turn over millions of dollars that she had received in their settlement to make up for the substantial losses he had sustained in the fraud. H began arguing that he and W were mistaken about the existence of the account. “There was in fact no account and no securities or other assets,”

A ruling in this case would only have a direct effect on New York’s laws, but a decision by the influential court could influence how judges interpret laws in other states.

Sidney Turner

www.SidneyTurnerllc.com



I handle corporate workouts, reorganizations and dissolutions and other types of disputes among co-owners of privately owned companies, in other words I advise clients when they are experiencing adverse business situations.

But what does it really mean to be a business lawyer handling dissolution and other types of disputes among co-owners or adverse business situations? Does it require a special temperament and skill set? Here’s my take on the answers to these questions:

It Means understanding business and the relationships that make it work.

This is the Forth of the SIX Major Points Series

Number FOUR of the Six Major Points Series

It Means Understanding Finance and Accounting Basics. Almost every business divorce case involves some degree of dispute over company finances and accounting. Many small companies involved in business litigation do not prepare any financial statements; much less do they have an outside CPA who prepares audited financial statements. The company’s tax returns may present a distorted picture of the company’s income, compensation to principals, and other expenses. A business lawyer must have a basic understanding of financial and tax accounting, including the ability to comprehend financial statements, internal reports such as QuickBooks, and (last but not least) tax returns, in order to converse intelligently with the client and the client’s accountant about financial issues that likely will take center stage in the litigation.

If you missed any please check out my other blog postings

Sidney Turner

www.SidneyTurnerllc.com

I handle corporate workouts, reorganizations and dissolutions and other types of disputes among co-owners of privately owned companies, in other words I advise clients when they are experiencing adverse business situations.

But what does it really mean to be a business lawyer handling dissolution and other types of disputes among co-owners or adverse business situations? Does it require a special temperament and skill set? Here’s my take on the answers to these questions:

It Means understanding business and the relationships that make it work.

This is the Third of the SIX Major Points Series

Number THREE of the Six Major Points Series

It Means Knowing the Law. Each form of business entity, be it partnership, corporation or limited liability company, is governed by a separate statutory scheme with rules that, in many key instances, are significantly different as is the case law that has developed around each form. The standing requirements to bring a dissolution proceeding vary among the entities, and even within the same type of entity depending on the statute invoked. The availability of a buyout remedy depends on the type of entity and the alleged statutory basis for dissolution. Under still-evolving case law the filing of a dissolution petition may inadvertently trigger a right of first refusal under a shareholders’ agreement. Particularly with corporations, there are numerous, mandatory, statutory provisions that come into play at the board level. The availability of a court-appointed receiver can differ depending on the entity type. The list goes on and on. The business lawyer must have a thorough understanding of the legal framework within which closely held businesses operate and whose rules govern forced judicial dissolution, derivative actions and other varieties of owner vs. owner litigation.

If you missed any please check out my other blog postings

Sidney Turner

www.SidneyTurnerllc.com