Articles Posted in Partnership/Shareholder Disputes

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As a businessperson, you must face many challenges. One of the challenges your corporate entity may encounter is the disgruntled shareholder. Fortunately, the law limits what disgruntled shareholders can do by prohibiting them from undertaking a direct lawsuit (limiting them only to shareholder derivative suits) in many, though not all, situations. Whether you are a shareholder of a corporation needing to defend itself against an improper direct action or are a shareholder who needs to take legal action, you are someone who should retain the services of an experienced Atlanta business attorney to help you navigate your case.

Here’s an example from right here in the Metro Atlanta area. T.C., P.S. and K.W. were the three corporate shareholders of a suburban Atlanta-based mortgage lender. Each had a 1/3 interest in the company. After several years, the business failed, and the lender ceased operations.

T.C. subsequently filed a direct lawsuit against the other two shareholders, along with a number of corporate structures that P.S. and K.W. controlled, alleging that the defendants were liable for breach of fiduciary duty, unjust enrichment and violations of Georgia’s RICO Act.

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Business and commercial venture breakups are a bit like marital breakups… you hope that everything will proceed smoothly and amicably, but it often doesn’t. When you’re a member of an LLC who has decided to leave the company, you may often simply want to go your own way. Sometimes, though, the LLC won’t let that happen. When that happens to you, make sure you have the legal protection you need from a vigilant and experienced Atlanta commercial litigation attorney.

J.O. was one of those kinds of LLC members. Back in 2014, he was one of the members who formed a Conyers-based multi-level marketing LLC. In 2017, after experiencing concerns about his compensation as well as the company’s leadership, J.O. decided to leave the company. Around the same time, J.O. signed up as a customer of another multi-level marketing entity.

After J.O. left the company, the LLC sued him on the basis that he had breached the LLC’s operating agreement. According to the LLC’s complaint, J.O., who had been a vice president of sales, had breached his contractual obligations by working for a competing company.

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Sometimes, some things that might seem straightforward still require considerable litigation to resolve. This is one reason why, if you are involved in a business dispute, it pays to have an experienced Georgia business litigation attorney working on your behalf. One example in which this was true occurred recently when the Georgia Court of Appeals issued a ruling re-affirming that LLCs are bound by their operating agreements, regardless of whether the LLC signed the agreement or not.

The case that prompted the ruling centered around a business providing outsourced payroll and human resources solutions to medical practices. Four owners of the business established an LLC. The LLC’s operating agreement called for each of its four individual owners, Richard, Helen, Marty, and Robert, to have one vote, either directly or through the owner’s designated entity. Eventually, due to a conflict, counsel advised the parties to combine the ownership interest of Richard and Helen into one new LLC called Practice Benefits LLC.

From 2010 to 2013, the LLC members allowed four votes to be cast – one by Marty, one by Robert, and two by Practice. Then, in 2013, Clark became the LLC’s manager. He refused to allow Practice to continue casting two votes and refused to allow any amendment to the governing documents with regarding to voting procedures.

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A ruling from the 11th Circuit Court of Appeals has clarified which legal responsibilities an issuer of stock has when it hires outside analysts to write glowing reviews of its stock. The federal appeals court in Atlanta upheld a lower court ruling in favor of the company and against a class of shareholders, stating that the company did not have an obligation to shareholders or potential shareholders to disclose its business relationship with the analysts. Since the company’s nondisclosure wasn’t improper, and its plan of hiring analysts to tout its stock wasn’t an illegal price manipulation scheme, that meant the shareholders had no basis for their lawsuit. Whether your shareholder dispute involves a well-established legal claim or an issue of law that is unsettled (as this one was), it pays to have experienced Georgia business attorneys representing you in your case.

The lawsuit was a class action launched by shareholders of a small pharmaceutical firm based in Norcross. The company made several stock offerings in 2013 and 2014. During that same time, the company retained multiple outside entities to promote or tout the value of the company’s stock as a good buy. The promoters published articles with headlines that urged “Investors Should Consider” the company’s stock (as a purchase). Several of the articles did not indicate anywhere within them that they were authored by companies hired by the pharmaceutical company itself. The goal was to pump up the company’s stock prices, but the stockholders in the lawsuit did not allege that the firm engaged in a “pump-and-dump” scheme.

After the firm’s stock promotion scheme was exposed by other analysts, however, its stock prices collapsed from almost $16 a share to just over $7 per share. The shareholders sued.

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When you are pursuing a commercial litigation action in Georgia, you might find yourself faced with many different types of arguments about why you should not be allowed to pursue your case. While some may relate directly to the facts of your case, others may have nothing at all to do with the underlying facts that led you into court. Whether the arguments against your case are factual, statutory, or procedural, it helps to have an experienced Georgia commercial litigation attorney on your side to make sure that your rights and interests are sufficiently represented and protected.

One case recently decided by the Georgia Court of Appeals involved a defense argument built on a specific statute:  Georgia’s Anti-SLAPP law. The seeds of the dispute dated back to 2015, when members formed a Cumming, Ga.-based LLC holding company to hold some 2,718 acres in Santa Rosa County, Fla. An additional entity was formed at the same time for the express purpose of serving as the managing member of the holding company. There were four entities that were members of that managing member LLC.

Less than a year later, allegations were made that several entities had breached the holding company’s operating agreement. Specifically, the allegation was that they hadn’t made required capital contributions, a claim they denied. Nevertheless, the manager LLC was voted out as the managing member of the holding company and replaced with a different LLC. The members of that new managing member then announced their intention not to develop the bulk of the Florida property but instead to donate it to the government of Santa Rosa County as a tax write-off.

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Ideally, in a perfect world, corporate shareholders of a family-owned business would always get along and cooperate effectively. Unfortunately, the real world is not a perfect world, and sometimes shareholder disputes arise and end up in litigation. That is when you need to be sure you have experienced Georgia business attorneys on your side. One such shareholder dispute recently went all the way to the Georgia Supreme Court earlier this year, with that court reversing a trial judge’s decision and sending the case back for more action.

The corporate entity at the center of this dispute demonstrates the issues that can arise when family relationships and business relationships collide. The business, an electric services contractor, had been in existence since 1937 and incorporated since 1959. In 1988, the incorporator decided to award ownership interests to each of his three sons, all of whom were working for the company at the time. (The bylaws restricted stockholders to employees of the entity.) Two sons, Gary and Phillip, got 25% each. A third son, Doss, received 16.67%. (The father retained 33.33% himself.)

The sons moved in different directions. Doss ended his employment at the family business in 1994. Gary and Phillip went on to become the company’s CEO and CFO, respectively. By 2011, the brothers were in court. Doss alleged that he had not received a payment that the business owed him for his stock. All sides agreed that only employees of the business could be stockholders and that Doss ceased being an employee in 1994. Doss, in his complaint, contended that the entity’s bylaws required the company to buy out his stock and to pay him for his ownership interest based upon the book value of the stock. This buyout and payment, Doss alleged, never took place.

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Whenever any business person or entity decides to create a new joint venture, the people behind that venture likely hope for great success. Sometimes these joint ventures do go on to yield positive results. Other times, however, the venture doesn’t work out. When joint ventures fail and break up, that can sometimes lead to litigation. When they do, the exact language that was contained in your operating agreement may prove to be the key to resolving the case. Whether your joint venture has failed and entered into the court system, or you are at the beginning phase and are fleshing out the terms of an operating agreement, it is important to make sure you have experienced Georgia business attorneys handling your case.

An example of a joint venture that didn’t meet with success and did trigger litigation was an Athens-based LLC formed to develop medical technology. Ownership of the joint venture was split equally between a holding company and another LLC, Healthy-IT, that was formed expressly for the purpose of entering into the joint venture. Specifically, the venture’s goal was to develop electronic medical record software.

Eventually, the venture devolved into a dispute, and the joint venture LLC, along with the holding company and others, sued Healthy and related entities for, among other things, breach of contract, breach of fiduciary duty, and misappropriation of trade secrets. The defendants filed a counterclaim that accused the plaintiff of breach of contract, among other things.

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Winning your commercial litigation matter is about more than just making sure that you have the facts on your side. It is about having the law on your side and also making sure that you have cleared all of the necessary procedural hurdles, like pursuing your case in the correct venue. These are all areas in which knowledgeable Georgia business litigation counsel can help you ensure that you are equipped to succeed.

One recent case in which venue was an issue was an action pitting against each other two former business partners whose relationship had definitely deteriorated. The defendant was a Norcross-based real estate developer. The plaintiff was an Israeli company that raises capital for real estate investments. In 2008, the two businesses consummated a Solicitation Agreement. The agreement came with an arbitration clause. That provision said that the parties agreed to arbitrate their disputes. If the capital company brought the case, the arbitration would proceed in Atlanta. If the developer brought the case, it would be arbitrated in Tel Aviv.

Some time later, once the relationship had soured, the capital company brought a breach of contract claim. In that same action, which was handled in Atlanta, the developer brought a counterclaim that accused the capital company of defaming the developer in statements made to other Israeli investors.

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In your complex business litigation case, there may be several points in the process at which you could find yourself in a “courtroom battle” situation with the other side. Obviously, the trial is one. Before that, though, you may have to litigate disputes over things like the disclosure of certain information. In business, much information can be material that is kept hidden and whose disclosure could be harmful to that entity’s business interests. To that end, it may be important to take any steps available to avoid making that disclosure. On the other hand, obtaining certain disclosures may be the key to achieving success in your business litigation lawsuit. For these and other adversarial battles, it pays to have experienced Georgia business litigation counsel on your side.

A recent case from the federal courts provided an example of this and the processes that can be involved in certain complex business litigation actions. The plaintiffs in the case were a finance company and an individual. The pair were both minority shareholders in a Luxembourg-based entity that was in the life insurance settlements business. The minority shareholders planned to bring a legal action in Luxembourg against one of the company’s board of directors for his undisclosed ownership interest in another third-party life settlement management entity.

The minority shareholders brought their 28 USC 1782 action in the Southern District of Florida federal court because the undisclosed life settlement company, which they sought to compel to produce certain documents for the Luxembourg case, was based in Pompano Beach. The trial court sided with the minority shareholders and ordered the Pompano Beach-based company to give the minority shareholders the information they sought.

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When you form a business venture with another person, you doubtlessly hold out high hopes that the collaboration will be fruitful and rewarding for all. Unfortunately, that does not always happen. In real life, sometimes relationships sour and disputes arise. When they do, it is important to make sure that you have an experienced Georgia business lawyer on your side to protect your commercial interests and rights.

One example of a business entity whose shareholders ended up in litigation was a pair of North Georgia dermatologic surgeons who formed a practice together. At some point after problems erupted, one doctor (the president) threw the other (the vice president) out of the practice. This meant removing him not only as a employee but as an officer and director of the practice as well. Both doctors were equal shareholders in the practice. The expelled doctor took two steps:  he formed his own practice, and he sued for being thrown out of the original practice.

The expelled doctor won his lawsuit, and the court ordered him reinstated as an employee, as well as the vice-president, secretary, and treasurer of the practice. That case went to the Georgia Court of Appeals, and the appellate court upheld the lower court’s decision because it decided that the action was improper. (One doctor threw out the other when only the practice’s board of directors could properly take such an action.)

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