770.319.9100

Posts Categorized: Corporation

What to do when your business partner steals from the business

Posted & filed under Corporation, Limited Liability Company (or LLC), Ownership Interest.

SJP_1423v1Many business owners in business disputes with their partners find themselves in such situations after learning that their business partners are or have been stealing from the business. There are a variety of civil claims that business owners and sometimes the business itself may be able to assert against their partner for improperly taking money from the business. While this post will briefly highlight some of these claims, whether a particular claim is applicable (as well as the likelihood of success) depends on the facts and circumstances of each unique case.

A commonly asserted claim in this situation is conversion. However, if what was allegedly stolen was money, a claim for conversion only exists if the money is part of a specific, separate, identifiable fund (i.e., money clearly allocated for a particular fund or purpose). Additionally, specific stolen checks can support a claim for conversion. Next, to establish a claim for conversion, a plaintiff generally needs to establish that the plaintiff owns the property or has the right to possess the property, the defendant currently possesses the property, the plaintiff demands that the defendant return the property, the defendant refuses to return the property, and how much the property is worth. A few of these elements, however, can be tricky. For example, a plaintiff does not have to make a demand when the defendant unlawfully obtained the property.

Other potential claims include misappropriation and breach of fiduciary duty against the partner stealing from the business. Claims for misappropriation of funds are often easier to establish than a claim for conversion, as a plaintiff only needs to establish that the funds were supposed to be used for a particular purpose, the funds were wrongfully taken by the defendant, and the plaintiff has been damaged by loss of the funds. Likewise, to establish a claim for breach of fiduciary duty, the plaintiff needs to show the existence of a fiduciary duty, breach of that duty, and damages proximately caused by the breach. A fiduciary relationship usually exists between partners.

This article is not intended to establish an attorney-client relationship and is not intended to confer legal advice. No attorney-client relationship should be inferred in the absence of a written and executed engagement agreement that expressly indicates the creation of an attorney-client relationship.

Written by: Heather Wagner

Protect Yourself from A Court Piercing Your Company’s “Corporate Veil” and Holding You Personally Liable

Posted & filed under Corporation, Limited Liability Company (or LLC), Ownership Interest.

home-imageOne of the primary reasons that business owners form a corporation or an LLC for their business is to protect themselves from potential personal liability. While this can be a successful strategy, if a business owner ignores the separateness of the corporation or LLC in order to perpetrate fraud or avoid responsibility, or if the entity is undercapitalized (when the company does not have enough capital to support the ordinary business debts) in an attempt to avoid future debts, courts may pierce the “corporate veil” and come after the individual business owners.

The idea of piercing the “corporate veil” is generally applied to remedy injustices that arise when a party has abused the corporate form in order to defeat justice, perpetrate fraud, or to evade contractual or tort responsibility. Courts pierce the corporate veil under this theory when the business is a mere vehicle for the owner to transact his own affairs so that there is such unity of interest and ownership that the separate personalities of the business and its owners no longer exist. Courts also pierce the corporate veil based on undercapitalization. For undercapitalization to pierce the corporate veil, however, there must also be evidence of an intent at the time of the capitalization to improperly avoid future debts of the entity.

There is no exact formula that determines when a court will pierce a company’s corporate veil and hold an individual business owner liable for the company’s debts because the applicability of this doctrine depends on the facts and circumstances of each case. However, complying with the following may help protect individual business owners from the company’s liabilities.

• Ensure that all letterhead, stationary, invoices, and other documents state the company’s name.
• Hold company out to the public/ third parties as a separate and distinct entity from the individual business owners.
• Open and maintain a separate bank account for the company.
• Do not commingle or confuse any of the company’s assets with the business owners’ personal assets.
• Adequately capitalize the company enough to carry the normal strains and debts upon it. It is important that the company is and remains solvent. (Solvency is when the company’s assets exceed its liabilities).
• Sign all business documents in a representative capacity on behalf of the company.
• Title all business assets in the company’s name.
• Observe all corporate formalities of the company and keep written records of compliance with those formalities. For examples, do not commingle or confuse the company’s records with your personal records, file annual registrations with the Secretary of State, obtain an Employer Identification Number (EIN) for the company, pay all taxes and license fees for the company (e.g., payroll taxes, business license, county tax), have owner meetings and document those meetings in minutes.
• Maintain the company’s office at a location/address separate from your home.

While the above factors may help prevent a court from piercing the “corporate veil” of a company and holding the individual business owners liable, it is important to remember that there is no exact formula that determines with precision when the court will pierce a company’s corporate veil and hold its owners liable for the debts of the company.

This article is not intended to establish an attorney-client relationship and is not intended to confer legal advice. No attorney-client relationship should be inferred in the absence of a written and executed engagement agreement that expressly indicates the creation of an attorney-client relationship.

Written by: Heather Wagner

Corporate Officers’ Joint & Several Liability for Corporate Sales Tax

Posted & filed under Corporation, Ownership Interest.

home-imageIf you are a corporate officer, beware, as you may be responsible for your corporation’s unpaid sales and use taxes. In a recent Georgia Court of Appeals case, Georgia Department of Revenue v. Moore, No. A12A0216, 2014 WL 3610795 (July 16, 2014), the majority shareholder of a corporation paid the corporation’s sales and use taxes. Thereafter, in the majority shareholder’s refund action, the Georgia Department of Revenue voluntarily refunded a portion of the tax payment to the majority shareholder. While the corporation’s other officer was not a party to the refund action, the Georgia Department of Revenue sought to recoup the refunded portion of the taxes from the corporation’s other corporate officer. The Court found that as “responsible persons” (i.e., an officer or employee of a corporation (or member/manager/employee of LLC or partner or employee of a limited liability partnership) who has control or supervision of collecting taxes, and who willfully fails to collect the taxes, truthfully account for and pay amounts owed, or who willfully attempts to evade a tax obligation, shall be personally liable for the unpaid amount), both the majority owner (that first paid the taxes) and the corporate officer (who did not originally pay the taxes) were jointly and severally obligated to pay the corporation’s sales and use taxes. The Court found that under Georgia law, a jointly and severally liable person is not a “necessary” party to a lawsuit involving another jointly and severally liable person. As a result, the Court held that because the corporate officer who did not originally pay the corporation’s taxes was not a “necessary” party to the refund action, the Georgia Department of Revenue could still pursue such officer for the additional amount of taxes refunded (even though the corporate officer was not a party to the refund action). As this case illustrates, corporate officers and other responsible persons need to be aware that they could be held personally liable for their company’s unpaid sales and use taxes.

This article is not intended to establish an attorney-client relationship and is not intended to confer legal advice. No attorney-client relationship should be inferred in the absence of a written and executed engagement agreement that expressly indicates the creation of an attorney-client relationship.

Written by: Heather Wagner

Steps to Protect Directors’ Corporate Executive Compensation Decisions

Posted & filed under Corporation, Ownership Interest.

columnsDirectors of corporations are often tasked with the job of making executive compensation decisions, including decisions setting the amount of the executives’ compensation and how to structure such compensation plans. Delaware courts, which are leaders in corporate law, have seen creative ways that corporate shareholders attack such plans. While shareholders used to attack such plans by alleging that the compensation plans were excessive and thus constituted corporate waste, Delaware courts have seen a trend of shareholders attacking compensation plans based on misrepresentations about the tax deductibility of incentive plans and/or the directors’ decision regarding how to structure such plans. While these attacks are creative, many judges have found that the business judgment rule (a rule which protects directors from liability for their decisions) protects directors’ executive compensation decisions when among other things, the Board of Directors is disinterested (i.e., the directors do not have a personal stake in the decision), the Board of Directors is informed (i.e., the directors have sufficient information to make an educated decision), and the corporation’s proxy statement discloses the information the directors considered in deciding whether to adopt a particular plan, including the pros and cons of the plan, and why the Board of Directors made its decision. While there is no sure proof means to prevent all risk of liability, a corporation can lessen its liability risk for its executive compensation decisions by having a disinterested, informed Board, and including such compensation plan information in its proxy statement disclosures.

This article is not intended to establish an attorney-client relationship and is not intended to confer legal advice. No attorney-client relationship should be inferred in the absence of a written and executed engagement agreement that expressly indicates the creation of an attorney-client relationship.

Written by: Heather Wagner

Is it a Trend?

Posted & filed under Corporation, Ownership Interest.

SJP_1423v1For the second time in less than a month, Delaware courts have allowed shareholder derivative dilution claims to proceed as direct claims. In Carsanaro v. Bloodhound Technologies, the Delaware Court of Chancery allowed a direct action, even though defendants argued that there was no controlling shareholder before the sale at issue. The court ruled that the plaintiff shareholders did not need to identify the control group, but needed to allege that the interests of certain defendants were not aligned with the interests of the common shareholders. Because the directors favored themselves, and their interests were not aligned with that of the shareholders’, plaintiffs’ allegations stated a direct claim. If this is a pattern in Delaware, it may soon become a trend elsewhere, as Delaware is a trend-setter for corporate law. So the question remains— Is this a pattern?

This article is not intended to establish an attorney-client relationship and is not intended to confer legal advice. No attorney-client relationship should be inferred in the absence of a written and executed engagement agreement that expressly indicates the creation of an attorney-client relationship.

Written by: Heather Wagner

Delaware Courts Allowing Shareholder Derivative Dilution Claims as Direct Claims

Posted & filed under Corporation, Limited Liability Company (or LLC), Litigation, Ownership Interest.

home-imageGenerally, derivative claims, which require a shareholder to make a demand before bringing a claim, are claims that are based on harm to the business and/or claims that hurt all owners of the business. On the other hand, direct claims, which can be directly brought by a shareholder, are claims that are intended to harm one particular shareholder and/or are unique to one particular business owner.

A dilution claim is a shareholder’s claim that other shareholders (usually the majority shareholder(s)) took some action to decrease their ownership interest percentage, which in turn decreases (or “dilutes”) their voting power. While dilution claims would appear to be derivative when they are brought by multiple shareholders whose interests have been diluted, a recent Delaware decision found otherwise.

In In re Nine Systems Shareholders Litigation, shareholders of Nine Systems Corporation filed a lawsuit in the Delaware Court of Chancery alleging that their shares in the company had been diluted by the three largest shareholders during a recapitalization planned by these majority shareholders. Under the defendant shareholders’ plan, new series of stock were issued, which reduced the plaintiff shareholders’ proportionate interests in the corporation. Although defendants argued that not all three majority shareholders benefited from the recapitalization, the court found that the focus is on the control group, not its individual members. The Delaware court found that derivative dilution claims can proceed as direct claims in instances where controlling shareholders benefited from the dilution of the plaintiffs’ shares.

In sum, while shareholders usually have to make a demand before they can bring a derivative claim, Delaware courts allow a direct claim when control group members (the ones controlling the corporation) benefit at the expense of the minority shareholders.

This article is not intended to establish an attorney-client relationship and is not intended to confer legal advice. No attorney-client relationship should be inferred in the absence of a written and executed engagement agreement that expressly indicates the creation of an attorney-client relationship.

Written by: Heather Wagner

Stop and Think Before You “Give” Away 50% Ownership in Your Business

Posted & filed under Corporation, Limited Liability Company (or LLC), Ownership Interest.

columnsIf you are a business owner who is the sole owner of a business, at some point in time you may consider adding a business partner or giving an ownership interest in your business to an employee as a reward for hard work. Either way, business owners should think long and hard before they give away a 50% interest in their business. Once a business owner gives away a 50% interest in his business, there is generally no getting it back, and it is no longer “his” business, but his and his business partner’s business. While this may not be problematic when there are no disagreements, this could result in deadlock if the owners later disagree over a major or even minor business decision. Alternatively, if a business owner really wants to add a business partner, that business owner may want to consider giving away only a small ownership interest in the business so he maintains control of his business (although this imposes fiduciary duties on the majority business owner). If a business owner wishes to reward or incentivize an employee, the owner may want to consider bonus incentive plans tied to the profits of the business. This rewards the employee and encourages the employee to maximize the company’s profits without taking away the business owner’s decision-making powers.

If, however, you are already a 50-50 business owner, even if things are going well and you do not expect your business partner to betray, desert, or even disagree with you, there are things you can do now while the relationship is cordial to minimize the impact of deadlock down the road, as deadlock can be fatal to a business, even if the issues are relatively minor. Minor deadlock might result from disagreements over operational decisions such as which supplier to use, the hours to open a business, how many employees to have, etc. To resolve future deadlock over minor issues, business owners may want to include a tie-breaker provision in their governing document to eliminate this potential. For example, the tie-breaker provision could require the owners to pre-select a third party (oftentimes, a trusted advisor such as the company’s CPA) to cast the deciding vote.

For major decisions that are disagreed upon (such as a sale of the business, merger, adding owners, etc.), including a forced exit plan eliminates deadlock and the potential for litigation. A “Russian Roulette” provision, or any other forced buy-sell can allow the owners to each go their own separate ways, with one owner selling his interest, and the other owner buying that interest. Generally, these provisions allow one party to make an offer to buy the other owner’s interest at a specified price. The other owner can then decide whether to sell his interest at the specified price, or buy the offering owner’s interest at the offering owner’s specified price. This encourages fair offers and allows owners to resolve their deadlock and should result in a business solely owned by one of the disagreeing owners.

This article is not intended to establish an attorney-client relationship and is not intended to
confer legal advice. No attorney-client relationship should be inferred in the absence of a written
and executed engagement agreement that expressly indicates the creation of an attorney-client
relationship.

Written by: Heather Wagner

Pay Attention to Statutes of Limitations

Posted & filed under Corporation, Limited Liability Company (or LLC), Ownership Interest.

columns If you are a business owner who been wronged—whether a business partner stole from you, a business partner misused the business’ assets, a contract was breached, someone interfered with your business, you were slandered, a business partner put his personal interests above the business,’ you were defrauded, or any other act that caused you or your business damage—if you want to assert claims against such wrongdoer, you cannot wait too long or you may not be able to seek redress for the wrong. This is because of the statutes of limitations. Statutes of limitations are laws that limit the time after an event in which you can bring a claim. Once the applicable statute of limitation for your claims runs, subject to limited exceptions, your claims are barred. Every category of claim has an applicable statute of limitation, but generally statutes of limitations for many civil claims common to business owners range from 1 to 6 years. Thus, it is very important that you do not wait too long to determine whether you have a viable claim to assert, as waiting too long could bar any potential recovery.

While claims are generally barred once the statutes of limitations run, there are other considerations and exceptions that may impact the statutes of limitations in particular cases. First, it is important to determine when the clock starts ticking for statutes of limitations purposes. Some claims have very specific rules regarding this issue. For example, in First Benefits, Inc. v. Amalgamated Life Ins. Co., No. 5:13-CV-37, 2013 WL 4011015 (M.D. Ga. Aug. 6, 2013), the court found that statutes of limitations on the plaintiffs’ claims against his business partner did not begin to run until the dissolution of the partnership.

Second, statutes of limitations can be tolled until discovery of a claim when a defendant’s fraud prevented the plaintiff from discovering the wrong. This does not mean, however, that a potential plaintiff can toll the statutes of limitations simply because the plaintiff did not make the discovery in time. A plaintiff must exercise reasonable diligence to discover a cause of action in order to toll the statutes of limitations.

In sum, if you think you have a claim that you may want to assert (or as soon as you discover a potential claim), do not wait, as waiting creates risk that your claim will be barred by the applicable statutes of limitations.

Written by: Heather Wagner

This article is not intended to establish an attorney-client relationship and is not intended to confer legal advice. No attorney-client relationship should be inferred in the absence of a written and executed engagement agreement that expressly indicates the creation of an attorney-client relationship.

What makes a promise of ownership in a company binding?

Posted & filed under Corporation, Ownership Interest.

columns  Were you promised ownership in a company that was later denied? Have you received an oral promise of ownership in a company? These scenarios (and others) may make the ownership of a company murky. While every situation involves a fact specific analysis to determine if a promise of ownership is in fact binding, there are some general legal principles that apply to this determination.

Generally, although Georgia law does not favor the destruction of contracts on grounds of uncertainty, to be enforceable, a contract—whether written or oral—must be definite.  The contracting parties must agree on all material terms, and those terms cannot be incomplete, vague, uncertain, or indefinite.  Issues, however, usually arise in determining what is sufficiently definite to be enforceable.  In deciding whether a contract is sufficiently definite to be enforceable, courts have looked at past dealings of the parties to determine the terms of the agreement.  Thus, if you have a previous relationship with the other party to a contract, the Court may use this past relationship to clarify the terms of a disputed contract.  For example, in McLean v. Cont’l Wingate Co., Inc., 212 Ga. App. 356 (1994), the Georgia Court of Appeals found that although a contract did not contain a formula for calculating profits, based on the parties’ past dealings, the parties understood the meaning of the term “net proceeds” and the method for determining the percentage of profits due to an employee for his services. The contract was sufficiently definite to be enforceable.   

Another issue courts look at is whether there are material terms left to future negotiations.  If yes, courts are more likely to find a contract not sufficiently definite to be enforceable. For example, in Massih v. Mulling, 271 Ga. App. 685 (2005), the Georgia Court of Appeals found an oral agreement to give an employee a 20% ownership interest in a company unenforceable when there were several material details about the ownership that were never resolved, as the parties did not discuss when the employee would receive her ownership interest or how her ownership interest was to be structured. On the other hand, in Kitchen v. Insuramerica Corp., 296 Ga. App. 739 (2009), the Georgia Court of Appeals found a promise to make an employee an owner sufficiently definite when the parties’ agreement addressed the timing of the stock assignment, a method for calculating the equity, and that the tax implications (an area left to future determination) was not material to the transaction.

Additionally, courts look at the consideration given for a promise of ownership.  While Georgia courts have found oral promises of ownership valid, there must be consideration.  An oral promise to give an employee shares of stock after the employee has already been working for the employer (and already receiving the compensation he was promised for such work), has been found unenforceable for lack of consideration because the employee is not doing anything additional to benefit the employer in exchange for the ownership interest. Thus, there needs to be some new consideration to support a promise of ownership to a current employee.  

In sum, while every question of whether a promise of ownership is binding is a fact specific question, a definite promise that is supported by consideration and which does not leave any material terms to future negotiation is most likely to be enforceable.  If you have been denied such a promise of ownership, you may have a breach of contract action against your company.  You cannot wait too long, however, to assert your claim, or you could risk your claim being barred by applicable statute of limitations.

This article is not intended to establish an attorney-client relationship and is not intended to confer legal advice. No attorney-client relationship should be inferred in the absence of a written and executed engagement agreement that expressly indicates the creation of an attorney-client relationship.

 

Fiduciary Duties in the Face of Corporate Bankruptcy

Posted & filed under Corporation, Fiduciary Duty.

SJP_1423v1While many corporate officers and directors understand their duties to their corporation, they may be unaware of their potential duties to their corporation’s creditors in the face of bankruptcy. Although the law is not necessarily consistent regarding officers and directors’ duties to creditors, if you are an officer or director of a corporation facing bankruptcy, there are steps you can take to help avoid personal liability for creditors’ breach of fiduciary duty claims.  

First, you should make sure you have current financial data so you can inform yourself of the company’s current financial condition and have the data necessary to make competent decisions. Second, you should keep detailed records that show that you diligently and thoroughly reviewed the corporation’s financial options.  For example, you should keep records of any financial presentation and/or meetings regarding the company’s financial options. Third, because disclosure is a defense to many creditors’ claims, you should regularly communicate with the company’s key creditors about the company’s prospects. Fourth, you should not favor one type of creditor over another (i.e., employees, lenders, vendors)—you should remain neutral. Fifth, you should avoid personal financial dealings with the corporation or at a minimum, have those dealings reviewed by the corporation’s disinterested directors, as these “insider” deals will be closely looked at when the corporation is facing bankruptcy. Sixth, you may want to consider staying with the company, as that is the only way to be able to provide input in the company’s decisions and hopefully avoid personal liability claims.  Finally, you should consider retaining legal counsel and financial advisors, as independent expert advice can help you make better decisions and provide a defense to a potential breach of fiduciary duty claim.

This article is not intended to establish an attorney-client relationship and is not intended to confer legal advice. No attorney-client relationship should be inferred in the absence of a written and executed engagement agreement that expressly indicates the creation of an attorney-client relationship.

Reference: Jeffrey Baddeley, Defending Directors and Officers Against Breach of Fiduciary Duty Claims in Bankruptcy, Bloomberglaw.com, 2013.