Articles Posted in Partnership/Shareholder Disputes

While not occurring here in Georgia, a recent federal court ruling dismissing a shareholder derivative action in California is a prime example of the extreme importance of the procedural demands placed on the plaintiffs in a derivative claim. As a shareholder plaintiff, satisfying these procedural steps is essential to getting your case to trial. On the flip side, these requirements can be the keys to a successful dismissal motion if you’re the board of directors. Either way, having an experienced Atlanta derivative action lawyer is crucial to success.

To understand the lawsuit from California, one must know the background. In 2021, the State of California took legal action against a well-known Santa Monica-based video game publishing and development company. According to the state, the company fostered a “frat boy culture” that led to rampant sexual harassment, gender discrimination (in the form of unequal pay and promotions,) and retaliation.

According to some shareholders, the 2021 legal action was the culmination of a state investigation that dated back to 2018. Allegedly, despite its knowledge of the state’s investigation, the company’s board of directors failed to take appropriate corrective steps to stop the company’s discriminatory practices.

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It’s important to recognize that derivative actions have certain specific procedural requirements and that, regardless of the strength of the evidence a shareholder has, the suit will fail if they do not follow these procedural steps. As a shareholder, it is imperative to recognize the grave risk to your case; namely, a dismissal of your claims. As a corporation or its directors, it’s important to recognize how these rules and requirements can work to your distinct advantage, offering you the chance to defeat a claim before it even gets to trial. Whether you’re a shareholder, a director, or a business entity, an experienced Atlanta derivative action lawyer can help you ensure that you are using both the substantive law and procedural rules to your maximum benefit.

A recent derivative action from here in Georgia demonstrates exactly how a procedural shortcoming can scuttle a case.

The corporation at the center of this derivative action was an Atlanta-based entity that provided fuel cards to businesses. The shareholder, J.W., was an Illinois man who alleged that the corporation “engaged in a scheme to artificially inflate its stock price between February 2016 and May 2017.” The corporation also engaged in deceptive marketing of its fuel cards as “fee-free,” despite the cards having a variety of fees like program fees, account fees, and late fees, according to the complaint.

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Any kind of business dispute has the potential to become contentious as business people who once collaborated transition to being adversaries. When the business in question is a family one, then the odds that business will become personal, and emotions will escalate along with it, increase exponentially. Whether or not yours is a family business, if you find yourself embroiled in a contentious shareholder action, you need the services of an experienced Atlanta business attorney.

Take, for example, the highly contentious shareholder action regarding a Toccoa-based propane gas company. In that case, a shareholder, W.D. filed an action alleging that the company president (who also happened to be W.D.’s cousin) had misappropriated company money and that the company board of directors had stood by and allowed it to take place.

Specifically, W.D. asserted that the president had used company funds to pay his personal bills.

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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.

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.

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.