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Posts Categorized: Ownership Interest

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

Who is the “Client” for Purposes of the Attorney-Client Privilege?

Posted & filed under Ownership Interest.

SJP_1423v1Although the attorney-client privilege protects your communications with your attorney when your attorney represents you individually, if an attorney is engaged to represent your corporation (for which you are an officer or director), your communications with “your” attorney are unlikely to be protected from the corporation’s other officers and directors. This concept is illustrated by a recent Delaware case which found that a corporate defendant could not invoke the attorney-client privilege to block an individual director from obtaining allegedly privileged attorney-client materials.  Thus, it is important that you determine at the outset of your representation whether you want “your” attorney to represent you, individually, or your corporation.  If the client is the corporation, even if legal advice is rendered to the corporation through you, you and the corporation’s other directors and officers are likely to be considered a “joint client,” and your communications with the attorney (subject to certain exceptions) may be disclosed to the other “joint client” directors and officers.

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

The Necessity of Good Faith

Posted & filed under Ownership Interest.

home-imageThe 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.

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

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