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Posts Categorized: Limited Liability Company (or LLC)

Aiding and Abetting a Breach of Fiduciary Duty

Posted & filed under Fiduciary Duty, Limited Liability Company (or LLC).

home-imageA common claim in litigation between and among business owners and a business is a breach of fiduciary duty claim.  A claim for breach of fiduciary duty requires proof of the existence of a fiduciary duty, breach of that duty, and damage proximately caused by the breach.  Importantly, there must be a “fiduciary duty.” For example, a manager in a manager-managed limited liability company generally owes fiduciary duties to the LLC’s members.

Sometimes, however, a wrongdoer does not owe a fiduciary duty to the business owner harmed by the breach of fiduciary duty.  Fortunately, the law may provide a remedy if this individual procured the breach of fiduciary duty.  Although less common, Georgia law recognizes a claim for aiding and abetting a breach of fiduciary duty (i.e., procuring a breach of fiduciary duty) if a plaintiff can show that the wrongdoer engaged in wrongful conduct without privilege (which it had no right to engage in) to procure a breach of the fiduciary’s duty to the plaintiff; that the wrongdoer knew the fiduciary owed a fiduciary duty to the plaintiff but purposely intended to injure the plaintiff; the wrongdoer’s conduct actually procured the breach of the fiduciary’s duty; and the wrongdoer’s conduct proximately caused damage to the plaintiff.  In such cases where a third party intentionally induces an individual owing fiduciary duties to another to breach those duties, the third party (even though he does not himself owe any fiduciary duties to the plaintiff) can be held liable to the plaintiff. This gives the plaintiff an additional avenue of recovery for his damage.

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

 

Go Ahead and Get Creative in Your LLC Operating Agreement

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

columnsWhile many business owners choose to structure their business as a limited liability company, not all business owners are aware of all of the advantages associated with LLCs.  One such advantage is flexibility.  Generally, it is the policy of Georgia’s LLC Act to enforce the terms of an LLC’s operating agreement. This allows business owners to be creative and customize their operating agreement for their business. An example of one such creative provision that was upheld and enforced in a recent Georgia case, Davis v. VCP South, LLC, involved a provision that gave each member of the LLC, following the death of the other member, the option to purchase the deceased member’s interest at a price determined by the company’s certified public accountant. The Court found that the intent of the members was clear in authorizing the company’s CPA to determine the purchase price and the Court enforced the operating agreement. Because Georgia courts are likely to enforce legal terms in an LLC’s operating agreement, business owners should carefully consider whether their current operating agreement reflects the true terms of their “deal” and consider adding creative terms that are unique to their business.

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

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

Statutory Gap Fillers in Limited Liability Companies

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

SJP_1423v1Many business owners who are anxious to start a new business venture may quickly form a limited liability company in an attempt to protect themselves from liability. Many such owners, however, in haste to start their business, fail to enter into a comprehensive operating agreement (if one is entered into at all). If these business owners later get into a dispute with one another, and their operating agreement (if they have one) is silent as to an issue in dispute, statutory “gap fillers” come in to fill the gaps in the members’ agreement. This article will discuss a few of the many gap fillers that may apply to LLCs.

In regards to management, the gap fillers provide that LLCs are managed by its members (i.e., its owners). In order to be manager managed, on the other hand, there must be a provision in the LLC’s articles of organization or operating agreement providing for a manager managed LLC. This is significant because in manager managed LLCs, the owners who are not managers have no fiduciary duties to the LLC or its other owners solely by reason of being a member of the LLC.

The gap fillers provide that voting shall be one vote per member (for member managed LLCs) or one vote per manager (for manager managed LLCs) and that generally, a majority of the members or managers is needed to decide any matter about the business and affairs of the LLC. The gap fillers further provide that some matters require unanimous consent/vote of the members. These consist of the dissolution of the LLC, a merger of the LLC, the sale, exchange, lease, or other transfer of all or substantially all of the assets of the LLC, the admission of new members to the LLC, an amendment to the articles of organization or operating agreement, actions to reduce or eliminate an obligation to make a capital contribution, actions to approve distributions before dissolution, and an action to continue an LLC.

The statutory gap fillers for LLCs also include specific requirements for member and manager meetings. For example, two days notice of any meeting is required, manager meetings may be called by any manager, member meetings may be called by at least twenty-five percent of the members, a majority of the managers for a manager meeting (and a majority of the members for a member meeting) constitutes a quorum, and if a quorum is present, the act of a majority is needed to take action on any matter where a vote is required.

It should be reiterated, however, that generally, these gap fillers only apply unless otherwise agreed by the members/managers in the LLC’s articles of organization or an operating agreement.

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.

Fiduciary Duties Associated with “the Cloud”

Posted & filed under Corporation, Fiduciary Duty, Limited Liability Company (or LLC).

home-imageMany business owners understand their fiduciary duties to look after the best interests of their corporation or limited liability company, and while many business owners may believe they are adequately doing this, many business owners have not considered the risks associated with “the cloud.”  In today’s modern cyber-world, where security, hacking, privacy breaches, and data protection are serious concerns, business owners should consider these risks in order to act with the standard of care that the law requires.

In order to act with the requisite standard of care, business owners and/or directors should be aware of their business’ significant risks and address those risks in a reasonable manner. Today, many businesses are outsourcing many of their services to the cloud.  While this may result in increased efficiencies and cost savings for a business, this outsourcing creates significant risks that business owners should recognize and address.  For example, business owners/directors should engage in due diligence regarding their vendors (i.e., understanding how the vendors will deal with data segregation, recoverability, and/or reliability), determine a way to audit and oversee their cloud vendors, consider the challenges associated with terminating a cloud vendor (i.e., consider the challenge of recovering your data when you are unsure of the exact location of the data), and consider how to deal with multiple vendors, including some that you do not know.  Failure to consider and reasonably address the risks associated with the cloud in today’s business landscape may subject your business, and you individually, to liability.  In sum, business owners that decide to use the cloud should include its board of directors in this decision-making process, consider the risks associated with cloud computing, and establish methods and procedures for evaluating and addressing risks associated with cloud computing.

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: John P. Tomaszewski, A Board’s Legal Obligations for the Cloud: You Have to Carry an Umbrella, Business Law Today, Aug. 2013.

The Necessity of Good Faith

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

SJP_1423v1The law is filled with references to “good faith” and the requirement that parties deal with each other in “good faith,” but many business owners may not understand the significance of this doctrine.  A pending Delaware case demonstrates the importance of good faith.  In this case, the Delaware court was faced with the question of whether a limited partnership acted in good faith when it removed its general partner for failing to produce audited financial statements within 120 day after the end of the fiscal year.  The limited partnerships claimed that it acted in good faith because the managing partner continuously failed to complete the limited partnership’s audited financial statements within the required 120 day time period.  However, the general partner argued that the limited partnership exceeded its authority and was unable to prove that its decision to remove the general partner was made in good faith.   Specifically, the general partner argued that there was no misconduct, due to the bad real estate market it was necessary to produce delayed financial statements, and there had been years of delayed financial statements.  While the Delaware Supreme Court is expected to issue an opinion in the next couple of months, this case indicates the significance of the doctrine of good faith.  It is of utmost importance that business owners always act in good faith.  

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.