Law Office of Adam P. Whitney Blog
Shareholder / Llc / Partnership Disputes Posts

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'Dogged' found at https://flic.kr/p/732b7n by JD Hancock (https://flickr.com/people/jdhancock) used under Creative Commons Attribution License (http://creativecommons.org/licenses/by/2.0/)
'Dogged' found at https://flic.kr/p/732b7n by JD Hancock (https://flickr.com/people/jdhancock) used under Creative Commons Attribution License (http://creativecommons.org/licenses/by/2.0/)

Employment Severance Agreements Should Be Drafted or Reviewed By Your Attorney

Severance agreements, also called separation agreements or sometimes settlement agreements are legal documents that can greatly impact legal rights and obligations. Some may consider these standard legal documents. While there are many standard provisions, careful drafting and review are in order. Even experienced attorneys make mistakes when drafting these documents. While they seem simple and straightforward, they are more complicated than one would think and there are many traps for the...

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A Minority Owner's Right to Inspect LLC Records or Corporate Books and Records

An LLC (Limited Liability Company) Member in Massachusetts has a right to inspect certain records of the LLC. This includes basic information, such as the certificate of organization, the names and addresses of all Members and Managers, and a copy of the operating agreement.

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'Money Hedge' found at https://flic.kr/p/chEbX5 by Tax Credits (https://flickr.com/people/null) used under Creative Commons Attribution License (http://creativecommons.org/licenses/by/2.0/)

The New Massachusetts Equal Pay Act - How Bad Is it for Employers?

The new Massachusetts Equal Pay Act goes into effect on July 1, 2018. The basic concept of the statute is that you cannot pay employees differently based on gender. You are busy running your business, but don't ignore this statute. You could face lawsuits that result in high damages awards and an award of the plaintiffs' attorneys' fees and litigation costs. There are attorneys who will be actively targeting your company to find violations. The statute will be irresistible because any...

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'Alec Ross and Emily Banks at the AMCHAM reception in Auckland, August 31, 2012' found at https://flic.kr/p/d79Sah by US Embassy New Zealand (https://flickr.com/people/us_embassy_newzealand) used under Creative Commons Attribution-NoDerivs License (http://creativecommons.org/licenses/by-nd/2.0/)
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Myths and Realities - Starting or Joining an LLC or Corporation with Friends, Family Members and Acquaintances.

As a lawyer who litigates disputes among partners, close corporation shareholders, and limited liability company members and managers, I hear a lot of myths about them. The myths below are in italics, with my (sometimes snide) comments below each one.

'engage stakeholders in your process. meet early, meet often.' found at https://flic.kr/p/4E1yj4 by Engin Erdogan (https://flickr.com/people/erdogan) used under Creative Commons Attribution License (http://creativecommons.org/licenses/by/2.0/)
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Breaking up is Hard to Do: Ending Your LLC Membership Interest by Sale, Resignation, Dissolution or Otherwise

What do you do when you are a minority or 50% owner and the other owner(s) are not treating you fairly? Maybe the other owner is taking an unfair salary, employing family members, or otherwise manipulating the system to take economic advantage of the situation. Maybe the other owner is taking cash and not reporting it. What do you do? What if you have taken cash too?

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Prime Motor Group Split Shows Tactics Used by Majority Owners Against Minority Owners

This is exactly what I was talking about in this recent post:

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New Ruling From Massachusetts Appeals Court Shows the Importance of LLC Operating Agreement Language

How do Limited Liability Company Operating Agreements affect the fiduciary duties owed to co-Members of the LLC? That issue was decided in the case of Butts v. Freedman, which also involved Boston Equity Advisors LLC (“BEA”) and Outcome Capital, LLC (“Outcome”).

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Business Owners and Partners Should Be Paranoid

Fox Moulder’s motto was “Trust No One.” Lawyers can understand this paranoia. Divorce lawyers know spouses cheat. Criminal lawyers know clients steal (and worse). You should know that your business partners and key employees that you trust the most can betray you. This includes both majority and minority shareholders in close corporations, members of LLC’s (Massachusetts limited liability companies), and partners in partnerships. Sadly, this also includes family members in a family business.

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Covid-19 and Law Practice

It’s been a crazy ride for several weeks. In some ways, the practice of law is the same. In some ways, it’s different. Sometimes it just feels different. In spite of the photo, I've been able to work in my satellite office and have been the only one here.

Employment Severance Agreements Should Be Drafted or Reviewed By Your Attorney

'Dogged' found at https://flic.kr/p/732b7n by JD Hancock (https://flickr.com/people/jdhancock) used under Creative Commons Attribution License (http://creativecommons.org/licenses/by/2.0/)

Severance agreements, also called separation agreements or sometimes settlement agreements are legal documents that can greatly impact legal rights and obligations. Some may consider these standard legal documents. While there are many standard provisions, careful drafting and review are in order. Even experienced attorneys make mistakes when drafting these documents. While they seem simple and straightforward, they are more complicated than one would think and there are many traps for the unwary.

Businesses Should Have Every Severance Agreement Drafted or Reviewed by an Experienced Employment Attorney

If you use the severance agreement you found on the internet or that a general practitioner drafted 5 years ago, you do so at your peril. While severance agreements are, at their essence, contracts, they are also governed by a myriad of state and federal employment laws as well as agency decisions and court rulings. As a result, an agreement that was sound five years ago may not be today. Moreover, what applies to one employee may not apply to another.

Why does this matter? For example, if you don't include the right language, the release in your Severance Agreement could be ineffective against Wage Act claims and leave you exposed to triple damages and attorneys' fees. You also need specific language for Age Discrimination claims in order for them to be waived. As you may know, there are new state and federal employment laws going into effect quite frequently (including marijuana laws and pregnancy discrimination and accommodation laws), which might need to be addressed.

Even the contract issues are not as simple as you might think. For example, if you have an existing noncompete agreement with your employee, you have to be careful regarding your merger clause. Otherwise, you could inadvertently void your noncompete agreement. Employers sometimes make mistakes such as this.

Executives and Other Employees Should Have their Severance Agreements Reviewed by an Experienced Employment Attorney

Even if it is a friendly split, look out for your own best interests. When you sign a severance agreement, you will be waiving substantial rights and perhaps taking on substantial obligations, such as noncompetes or non-solicitation provisions or a duty to cooperate. A recent case report in Massachusetts demonstrates why you need professional assistance. An executive entered a severance agreement and inadvertently waived his right to valuable stock options. Although the right was not specifically addressed, the court ruled that the general release provisions controlled, and the executive was out of luck.

While severance agreements are sometimes not negotiable, sometimes they are. You might get a better deal or at least clarify problem language if you hire a lawyer to advocate on your behalf. Consider if the peace of mind and chance at a better deal would be worth the relatively small dollars.

Or you can rely on the company lawyer to do what's best for you (not really).

By Adam P. Whitney

617.338.7000

awhitney@awhitneylaw.com

A Minority Owner's Right to Inspect LLC Records or Corporate Books and Records

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An LLC (Limited Liability Company) Member in Massachusetts has a right to inspect certain records of the LLC. This includes basic information, such as the certificate of organization, the names and addresses of all Members and Managers, and a copy of the operating agreement.

Minority LLC Members who feel that they are being oppressed or frozen out will want to obtain as much information as possible, including especially financial information. A Massachusetts LLC must, by statute, have an office in the Commonwealth where it must keep certain records. These records include the following:

  1. Income tax returns for last three years; and

  2. Financial Statements, if any, for the last three years.

Any Member of the LLC shall be allowed to inspect and copy the records, at that member's expense, and at reasonable times. Subject to the provisions of the Operating Agreement or standards set by the Manager(s), each Member shall also be allowed to obtain “true and full information regarding the state of the business and financial condition of the limited liability company, [. . . inluding] other information regarding the affairs of the limited liability company as is just and reasonable.” M.G.L. c. 156C, Sec. 10.  How to determine what is "just and reasonable?"  The wise majority owners should develop uniform standards regarding access to documents to prevent a claim of unfair treatment by the minority owner. The test is whether a request is “reasonably related” to the Member's interest. A minority owner that makes repeated and numerous requests may be seen as being a pest or having an ulterior motive. By contrast, a Delaware court (addressing a similar statute) ruled that the following were “proper purposes” for requesting documents from the LLC: (1) putting a valuation on one's ownership interest; and (2) investigating potential wrongdoing by the majority.

If the majority owners refuse a request for information, the minority owner must determine what action to take. There are no “LLC Police” to call. A minority owner will have to file suit to obtain the documents it wants. If there are enough facts to support such a claim, a minority owner can also bring a claim for a freeze out, which occurs when the majority owners violate their fiduciary duties to the minority owner and frustrate her reasonable expectations of ownership.  A Member's ownership interest in an LLC is considered personal property and a Member is entitled to obtain an accounting from a fellow Member, but you will have to file suit for an accounting. At least one Massachusetts court has held that a Member of an LLC is entitled to an accounting from a controlling Member or Manager where there is a fiduciary relationship between the parties. By contrast, there is no right to an accounting against the LLC itself because there is no fiduciary duty owed by the LLC to the Members.

The rights to records of a minority shareholder of a Massachusetts corporation are similar, but not identical to the rights of an LLC Member. A shareholder should be able to articulate specific facts regarding possible mismanagement or wrongdoing by the controlling interest in order to see financial records, meeting minutes and other business records (other than the basics).

The takeaway is to first check the Operating Agreement or Shareholder Agreement or other company documents and then the statute to determine what documents a minority owner is entitled to. Both sides should consider carefully whether their dispute over records can be resolved without resorting to litigation. Perhaps an independent mediator could help the parties resolve their dispute before both sides incur substantial legal fees.  In other situations, someone is being unreasonable or someone is hiding something. This is a recipe for contentious litigation, so you better lawyer up if you think that the minority owner is being unreasonable or has an ulterior motive, or if you think that the majority is hiding something. As always, this post contains general information in a cursory fashion and is not legal advice.

By Adam P. Whitney, Esq.

617.338.7000

The New Massachusetts Equal Pay Act - How Bad Is it for Employers?

'Money Hedge' found at https://flic.kr/p/chEbX5 by Tax Credits (https://flickr.com/people/null) used under Creative Commons Attribution License (http://creativecommons.org/licenses/by/2.0/)

The new Massachusetts Equal Pay Act goes into effect on July 1, 2018.  The basic concept of the statute is that you cannot pay employees differently based on gender.  You are busy running your business, but don't ignore this statute.  You could face lawsuits that result in high damages awards and an award of the plaintiffs' attorneys' fees and litigation costs.  There are attorneys who will be actively targeting your company to find violations.  The statute will be irresistible because any employee will be able to show a prima facie case if he or she is paid less than employees of another gender for comparable work.  The statute is unclear on the employee's burden of proof, but it may fall to the employer to justify any discrepancies in pay.

In my opinion, while the statute is generally well crafted and has laudable goals, there are going to be some unintended consequences that will interfere with an employer's legitimate business judgment.  It doesn't even matter if you did not knowingly violate the statute because it is a “strict liability” statute.  The statute is tricky because you cannot necessarily pay an employee more who has a higher skill level.  You cannot necessarily pay an employee more because the employee commands a higher salary on the open market.  If you have a few outlier employees who have high earnings on your payroll, you cannot lower their compensation to bring your company into compliance with the statute.  You will either have to pay other employees performing comparable work at the same rate (unless you can justify the higher rates based on a specific factor in the statute), or you will have to fire your highly paid outliers.     

You also cannot rely on a contract.  Even a shareholder, minority owner/LLC Member with a specific contract, operating agreement or shareholder agreement could have a claim under the statute even if he or she expressly agreed to the compensation.  Under the express language of the statute, it would not matter if that person contributed less initial equity to the corporation or LLC, because that is not a specific factor in the statute that can justify a discrepancy.

I recently attended a continuing legal education course on the new statute, Mass. Gen. Laws c. 149, §105A. A representative of the Attorney General's Office spoke at the seminar, so I have a pretty good idea of what the AGO will focus on. The AGO has released some thorough and well-drafted guidelines for employers, including guidelines for performing self-evaluations (discussed below).  The AGO is not out "to get" employers, but it does want to eradicate gender-based pay discrepancies.  There are ways to reduce your risks under the statute, but you need to act very soon.  The four big takeaways are: (1) transparency; (2) salary history ban; (3) comparable work; and (4) self-evaluation.

Transparency simply means that employees cannot be prohibited from discussing salary.  You may want to check all your policies and contracts to make sure that there is nothing that prevents employees from discussing wages (limited exception for HR or managers who have access to other's compensation). Consider even putting out a new policy when the statute takes effect.

Salary history is another target of the Massachusetts Equal Pay Act.  Not only can you not ask about it, you can't use salary history to justify unequal pay.  It is potentially even dangerous to ask about salary expectations unless you are just using the expectations to see if they are in the ballpark.  The thought is that women workers are not as aggressive at negotiating.  You can't base salaries on negotiating skill.

Employees can volunteer salary history. Also, employers can seek to confirm salary history after making an offer (although there does not seem to be much of a legitimate reason to do so).  You can also ask about an employee's sales volume at a previous employer, but not the earnings from such sales.

Comparable work is another key concept that I expect will be hotly litigated.  The basic idea is not simply “equal pay for equal work;” it is “equal pay for comparable work.”   One mistake that employers may make is to not compare employees in various divisions.  Also, the nature of the work, not the job title, will control.  If a worker of one gender is earning less for comparable, you must justify it by one of the specific, limited reasons in the statute.

Self-evaluation. This is a peculiar statute in that it gives employers a chance to carefully evaluate their payrolls to see if there is any gender discrepancies (this is likely because the statute is so potentially dangerous and burdensome).  If you make a real effort to do this and to fix discrepancies, you can get a lot of protections against damages claims.  Really, even without the protections, every employer should self-evaluate so as to comply with the statute.  The existence of the protections makes it a no-brainer.  That doesn't mean that there are no risks to a self-evaluation.  There are.  The self-evaluation could be used against you for alleged violations of federal statutes.   

But many employers may conclude that they should still perform the self-evaluation.  A lawyer, accountant or another professional can help you with this.  Smart, proactive companies are already starting their self-evaluations in an effort to protect their companies from what could be a tide of new lawsuits.

This post merely scratches the surface of this important new statute and how an employer should protect itself.  As always, this post is not legal advice.

By Adam P. Whitney, Esq.

617.338.7000


Myths and Realities - Starting or Joining an LLC or Corporation with Friends, Family Members and Acquaintances.

'Alec Ross and Emily Banks at the AMCHAM reception in Auckland, August 31, 2012' found at https://flic.kr/p/d79Sah by US Embassy New Zealand (https://flickr.com/people/us_embassy_newzealand) used under Creative Commons Attribution-NoDerivs License (http://creativecommons.org/licenses/by-nd/2.0/)

As a lawyer who litigates disputes among partners, close corporation shareholders, and limited liability company members and managers, I hear a lot of myths about them.  The myths below are in italics, with my (sometimes snide) comments below each one.

I will be an owner, so of course, I will be employed by the Limited Liability Company.

Unless you have a strong employment agreement for a term of years (or until you die or retire) or employment is guaranteed in the Operating Agreement, there is nothing inherent in being a Member/Owner of an LLC that guarantees employment.  

An LLC Operating Agreement is a standard document that can be found on the internet.

That Operating Agreement that you found on the internet is worth every penny that you paid for it.  It may be even worth less than nothing.  An Operating Agreement that the parties do not understand and that is not specifically tailored to meet the needs and expectations of the members may have unintended consequences.  The provisions might work in your favor, but they might just as well work against you.

We hired a lawyer to set up the company, so she will look out for my interests.

Not necessarily. It is understandable to want to save costs when setting up a company and to jointly hire a lawyer to draft the Operating Agreement or By-Laws.  But that cost-savings comes with a price.  The lawyer cannot advocate for any one of the founders.  The minority owners are in particular need of protection, but the lawyer cannot advocate for the minority because she owes a duty to all the founders.  In a perfect world, everyone gets their own lawyer, but of course, this rarely happens.  If you are the minority owner or you are joining an existing company, at least consider having an independent lawyer review the Operating Agreement and suggest changes to protect you and your expectations in the company.

We are equal owners, so we must get paid the same salary and have equal say.

Nope.  The people running the business (President, CEO or Managers) will decide the compensation.  You could argue that the compensation is unreasonable, but you will have to prove it and you may have to file suit to do anything about it.

As for equal say, usually, the officers, managers or board of directors have all the say.  If you are not one of those, your opinion may count for very little.

At least my business partners won't withhold dividends or engage in self-dealing.

But what if they do?  You need to guard against this as much as possible.  When it does happen, you have a few options: (1) a legal battle; (2) sell your interest to the majority at a discount; (3) go away with your tail between your legs.  

My business partners and I trust each other, so that's enough.

Ha!  That one made me laugh.

Of course, you might be right that your business partners are good and decent people.  But even those rare birds will have legitimate disagreements. Documenting your expectations can help avoid this.

Also, think about what happens if your reasonable business partner dies and her crazy husband Larry inherits her ownership interest.  A buy-sell agreement with life insurance can address this, but it also shows why you need a strong operating agreement or shareholder agreement.

If I need to liquidate or if I can't work with my partners, I can just sell my shares. 

Maybe you can in theory if there are no restrictions on transferability.  But if the environment is toxic, no one will want to buy your interest.  You need an exit strategy going in.  You need to foresee potential disputes and guard against them.

If my business partners try to screw me over, I'll just call the LLC Police.

Okay, I made that one up.  The point is that no one is going to assist you in a private business dispute other than a lawyer that you hire on your dime.  You can't expect the Attorney General or Secretary of State to get involved unless there is a public interest.  

If you have a clear case of embezzlement, maybe you can get law enforcement interested.  But these situations are usually not clear-cut and law enforcement sees them as civil matters.

My own father/son/mother/brother/sister won't turn against me.

Maybe not your family member, but I've seen all of these unsavory situations in family businesses.  

At least I can't be personally liable for corporate obligations or wrongs that I or the LLC commit.

This is partially true part of the time, but now always.  Clear? Here's the thing, if you properly follow corporate procedures and record keeping, you may avoid contracts that you did not personally guaranty and wrongs that you were not involved in.  The reality is that the owners of most small businesses are involved in all actions and decisions.  Creditors, banks, landlords and others may insist that you personally guaranty company obligations.  So personal liability can be hard to avoid unless you are a larger, more established business.

As always, the above is not legal advice.

By Adam P. Whitney, Esq.

617.338.7000

Breaking up is Hard to Do: Ending Your LLC Membership Interest by Sale, Resignation, Dissolution or Otherwise

'engage stakeholders in your process. meet early, meet often.' found at https://flic.kr/p/4E1yj4 by Engin Erdogan (https://flickr.com/people/erdogan) used under Creative Commons Attribution License (http://creativecommons.org/licenses/by/2.0/)

What do you do when you are a minority or 50% owner and the other owner(s) are not treating you fairly?  Maybe the other owner is taking an unfair salary, employing family members, or otherwise manipulating the system to take economic advantage of the situation.  Maybe the other owner is taking cash and not reporting it.  What do you do?  What if you have taken cash too?    

Maybe the other owner is buying all the supplies from his other business or just shifting business from your company to his other company.  Maybe the other owner is taking supplies or equipment for his other business.  Maybe the other owner didn’t contribute his fair share to begin with.  What do you do?  What if things are not well-documented and your business partner is a master manipulator or con artist?  

Maybe the other owner is hiding the financial records of the company.  You don’t know if there is a profit or how much.  You don’t know how much money is coming in, let alone where it is going.  What do you do?  You usually have certain rights to financial records.  https://awhitneylaw.com/blog/a-minority-owners-right-to-inspect-llc-records-or-corporate-books-and-records 

What do you do if the majority terminated your employment?  Does it matter if the other owner is the Manager of the LLC? Does it matter if you have no employment contract? Does it matter if they have something on you?  No one is perfect, of course, and it’s inevitable that they will have something to complain about.  But does that give them the right to fire you from your own company?  Maybe, but maybe not.  Owners often have a reasonable expectation of employment and cannot be fired so easily.

Should you dissolve the LLC?  Put it in receivership? Maybe you are not getting along with the other owners.  They are abusive.  They are not treating you fairly.  They are trying to drive you out.  What do you do?  Maybe you can take one of these extreme remedies, but is it a good idea?  This is a complicated question and you need guidance from someone who has done it.

Can you sell your LLC Membership interest?  Does it matter if it’s a Massachusetts Limited Liability Company?  A Limited Liability Company formed in Delaware or some other state and operated in Massachusetts?  Can you force the LLC to buy your share?  Maybe, but it depends in part on if there is an Operating Agreement and what it says.  It depends on which state’s law controls.  You also need to follow the right procedures, which can be spelled out in an Operating Agreement.  You also must know how to value your share.  

Can you simply resign your interest?  The answer is the same, but the potential liabilities increase, so you have to proceed strategically and with caution.  Just giving up your interest may seem simple and without consequences, but that is not necessarily true.  At least do it the right way and get a full release and know the tax consequences.

Unfortunately, there are no easy answers to any of these questions.  There are no “LLC Police” to report your business partners to.  It’s unlikely that any government agency will be of much assistance.  The government doesn’t want to get involved in private business disputes unless there is a public interest, illegal activity or tax evasion.  Even then, a bad situation could become worse.  I have seen all the above situations and more.  Some business partners lie, cheat and steal. Some are sneaky. Some are tyrants. Some are substance abusers. Some are sexual harassers. Some are poor business people.  And some just have different priorities and visions for the business.  

There is help.  A lawyer who is experienced in these matters can come up with a plan and help you to decide what to do. Sometimes there are certain strategies and tactics that can provide your business partners with the motivation to do right by you.  Don’t you deserve that?  You invested blood, sweat, tears, and dollars into the business.  Are you willing to give up what you deserve, or do you want to fight for it?   

If you are having problems with your business partners and you cannot work it out personally, contact me so that I can help you come up with the best solution that works for you.  

Adam P. Whitney

617.338.7000

awhitney@awhitneylaw.com

www.awhitneylaw.com

Fine print: the above is not legal advice, but general information.  I cannot provide legal advice without a written fee agreement and a full review of your legal matter.




Prime Motor Group Split Shows Tactics Used by Majority Owners Against Minority Owners

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This is exactly what I was talking about in this recent post:

 :https://awhitneylaw.com/blog/breaking-up-is-hard-to-do-ending-your-llc-membership-interest-by-sale-resignation-dissolution-or-otherwise

A day after I posted my blog on LLC breakups, the Massachusetts Supreme Judicial Court (“SJC”) issued a ruling regarding the break up of Prime Motor Group partners, Automile Holdings, LLC v. McGovern, __ Mass. __ (Jan. 14, 2020).  

https://law.justia.com/cases/massachusetts/supreme-court/2020/sjc-12740.html

While not the main focus of the case, the SJC described the tactics that the majority used to force the minority owner to sell his shares in the company, as found by the trial judge. 

First, they amended Prime’s operating agreement to remove a provision that allowed for the distribution of profits sufficient to cover the owners’ tax liabilities.  Such provisions are commonplace, and without it, McGovern faced a tax liability of between $500,000 and $600,000 for the 2015 tax year.  Additionally, Abrams and Rosenberg [collectively, the majority interest] denied McGovern access to Prime’s financial information, leaving McGovern unable to calculate his expected tax obligation for the 2016 tax year.  Abrams and Rosenberg also demanded that McGovern and his wife return the company vehicles that they had been using and threatened to report McGovern to the authorities as being in possession of stolen automobiles.  As the trial judge remarked, these tactics amounted to Rosenberg and Abrams applying “as much pressure as they could manage to put on [McGovern] to take the best deal they could get” in purchasing McGovern’s minority stake before the company’s anticipated liquidity event.

Slip Opinion at p. 6.

The SJC was less than impressed by these tactics.  It indicated that:

the sale of McGovern’s business interest did not resemble a prototypical arm’s-length transaction with a third-party purchaser.  Rather, Rosenberg and Abrams pressured McGovern to sell his interest to them, despite the fact that Abram’s company was the majority shareholder in a closely held corporation and owed a fiduciary duty of utmost good faith and loyalty in its dealings with minority shareholders.

Slip Opinion at 25.

This statement about “a fiduciary duty of utmost good faith and loyalty” to minority shareholders creates a powerful weapon for minority shareholders.  To be sure, this is not new.  The courts of Massachusetts have ruled on this duty for decades.  And keep in mind that the duty applies to minority shareholders as well.  But the fact that the SJC seemed to go out of its way to suggest a breach of this duty by high-pressure tactics bodes well for minority shareholders who will be litigating these claims in Massachusetts.  One other takeaway here, McGovern was a sophisticated and experienced business person, but he was still subject to majority pressure tactics.  Abrams got quality legal help and apparently sold his interest for full value.  What will you do?

The decision also made some statements about restrictive covenants in employment agreements that should make Massachusetts employers very nervous.  More on that later.

Adam P. Whitney

617.338.7000

awhitney@awhitneylaw.com

www.awhitneylaw.com


Fine print: the above is not legal advice, but general information.  I cannot provide legal advice without a written fee agreement and a full review of your legal matter.



New Ruling From Massachusetts Appeals Court Shows the Importance of LLC Operating Agreement Language

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How do Limited Liability Company Operating Agreements affect the fiduciary duties owed to co-Members of the LLC?  That issue was decided in the case of Butts v. Freedman, which also involved Boston Equity Advisors LLC (“BEA”) and Outcome Capital, LLC (“Outcome”). 

Underlying Facts:

Mr. Butts and Mr. Freedman co-owned BEA.  They were the founders and held equal ownership.  A third defendant, Mr. Ben-Joseph worked at BEA as an independent contractor. Butts and Fredman began having disagreements with one another, mostly about Ben-Joseph’s compensation.  Freedman and Ben-Joseph decided to leave BEA and join Outcome, a competing enterprise.

At first, there were discussions of merging BEA and Outcome.  Freedman and Ben-Joseph did not inform Butts of their meeting and discussions with Outcome.  After Butts found out that Freedman and Ben-Joseph joined Outcome, he/BEA sued for breach of fiduciary duty against Freedman (and another claim not relevant to this post against both Freedman and Ben-Joseph).  

Why Butts/BEA Lost:

The Appeals Court agreed that Freedman owed Butts and BEA fiduciary duties.  The Appeals Court explained that under Massachusetts law “fiduciaries may plan to compete with the entity to which they owe allegiance, provided that in the course of such arrangements they do not otherwise act in violation of their fiduciary duties.”

The question of whether Freedman “otherwise acted in violation of [his] fiduciary duties” depended on the interpretation of the Operating Agreement.  Specifically, the Operating Agreement of the LLC broadly provided that Members may engage in other business ventures and investment opportunities.  Notably, there was not a non-compete provision in the Operating Agreement or otherwise.  

The Appeals Court ruled that the language of the Operating Agreement limited the fiduciary duty of Freedman such that he had no duty to disclose the Outcome opportunity or to share the Opportunity with Butts or BEA.

Freedman made cogent arguments that the language was just boilerplate and that literal application would allow members to take corporate opportunities away from their LLC. However, the Appeals Court essentially ruled that the freedom to contract overrode those concerns.  Freedman prevailed in his defense.  

Takeaway

The lesson here is that the words of an Operating Agreement matter.  Some people think that they are “standard” and that they are all boilerplate.  But what do you think will happen when your business partner has disagreements and they go to a lawyer?  The lawyer will parse through each sentence of the Operating Agreement to find language that will support your opponent in a lawsuit.  So Operating Agreements don’t matter. Until they do.

If you are are going into an LLC, read the proposed Operating Agreement carefully and strongly consider having a lawyer review it with you.  It’s important to understand your business and your goals because each situation is unique.  I get that it seems like an unnecessary expense when you are starting a business, but you could be dooming yourself for failure if you don’t pay attention to the details.  

If you already have an Operating Agreement and you are having disputes with your co-owners, have a qualified lawyer review the language to see what leverage you have.  Or, maybe you can renegotiate and enter a new Operating Agreement.

Adam P. Whitney

617.338.7000

awhitney@awhitneylaw.com

www.awhitneylaw.com


Fine print: the above is not legal advice, but general information.  I cannot provide legal advice without a written fee agreement and a full review of your legal matter.

Business Owners and Partners Should Be Paranoid

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Fox Moulder’s motto was “Trust No One.”  Lawyers can understand this paranoia.  Divorce lawyers know spouses cheat. Criminal lawyers know clients steal (and worse).  You should know that your business partners and key employees that you trust the most can betray you.  This includes both majority and minority shareholders in close corporations, members of LLC’s (Massachusetts limited liability companies), and partners in partnerships.  Sadly, this also includes family members in a family business. 

I refer to all such persons as “partners,” because that is how people generally think of one another.  The term itself, partner, holds a special meaning of trust to the business person, as it should.  It’s no coincidence that the word also means a person with whom one has an intimate relationship, also founded on trust.

Trust may work fine for you, but don’t trust blindly. Someone reading this blog has a partner who is cheating them.  The obvious form of this is that the cheating partner is taking more than his or her share from the business.  He is paying his car payments from the company accounts while you pay for your own car.  She secretly increased her salary without informing you. Maybe’s he’s paying for his mistress’ apartment.  Or his cocaine addiction.  Or gambling.  Or her son’s college tuition. Maybe he’s going on shopping sprees with the company credit cards.  Maybe she fires you when you complain.  Or cuts your salary and forces you out.  This is a classic freeze out.

Sometimes the partner who is not in charge of the books can cheat as well.  By submitting false expenses. By moonlighting. By directing the business to his own secret company or a friend’s company.  By taking the customer’s payments.  By preparing to leave and start a competing business.  Maybe both of you are cheating the other in your own way.

I’ve seen all of these things, and much more happen.  It’s human nature to be tempted in financial matters.  It’s easy to tell yourself that you deserve it because you work hard. Your partner is lucky to have you.  Or to tell yourself that you’ll pay back the money next month.  There is always some justification.  

If you sense something is wrong, it probably is.  If you nip small things in the bud, you may be able to save the business.  Get involved in all aspects of the business.  You need access to the company books and financial records on a regular basis.  You generally have a right to this information.  If you let things go for too long, it may be too late to save your company.

If you discover that your partner has cheated you in some way or the other, you do have legal recourse.  That’s true even if you are not 100% clean yourself. Start to take control of the situation by addressing it directly.

Adam P. Whitney

617.338.7000

awhitney@awhitneylaw.com

www.awhitneylaw.com

Fine print: the above is not legal advice, but general information.  I cannot provide legal advice without a written fee agreement and a full review of your legal matter.

Covid-19 and Law Practice

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It’s been a crazy ride for several weeks.  In some ways, the practice of law is the same.  In some ways, it’s different.  Sometimes it just feels different.  In spite of the photo, I've been able to work in my satellite office and have been the only one here.

Litigation slowed but is picking back up with hearings being held via Zoom and telephone.  I hear that our hard-working state court judges are ready, willing, and able to take on matters in this fashion. They are public servants, and they want to do their jobs.

Some of the other salient issues during this pandemic:

PPP Loans; Employee Layoffs; Unemployment Issues

I’ve advised employers on laying off employees.  Then bringing them back when financing comes in.  There is potential exposure for employers every step of the way.  

I’ve counseled private businesses on how to not run afoul of PPP Loan Certifications (dreaded question 31, now alleviated for loans under $2 million).  

Both employers and employees have lots of unemployment questions, unsurprisingly.

And all the regular employment law issues do not go away in a pandemic.  I’ve had the honor to represent or consult with several nursing professionals.

Commercial Leases

I’ve represented both commercial landlords and tenants for work out agreements I would have never thought possible.  Both sides are being reasonable and working in earnest to compromise, which is great to see.  Professionalism and respect for one another go a long way to working out deals.  It’s not always just dollars and cents.

Noncompete and Trade Secret Litigation; Employers and Executives

On behalf of an employer, I geared up for a major injunction hearing for a Noncompete at the BLS, to be held via video conference.  The matter is now on hold.  I was actually working on a weekend.  During the pandemic. 

I’m helping several executives who have been terminated.  Some are dealing with issues related to company trade secrets that they needed to have access to while working at home.  This could pop up more as everyone is working remotely.  How are companies protecting trace secrets? 

I’ve helped several other executive-level employees with contracts and noncompetes.  

I represented another employer to resolve a declaratory judgment complaint about a noncompete.  

It’s interesting how many noncompete and trade secret issues are coming up.  Maybe it’s just a function of so many people being terminated and a certain percentage have noncompetes and were privy to trade secrets and proprietary business information.

LLC and Partnership Buyouts and Dissolutions

It’s an interesting time to split up a business, but sometimes shareholders and partners just need to go their separate ways.  This economy makes business valuation challenging. I haven’t seen an uprising in these matters, but it has been steady.

Business Contracts

Business marches on!  I have worked on several business contracts, including oversea supplier contracts and technology service contracts.  Some businesses remain optimistic and are prepared for this new economy.  American enthusiasm is great to see.

Real Estate Deposits

I’ve handled several disputes between buyers and sellers of real estate when the deal has failed and the parties are fighting over the deposit.  This indicates to me that more transactions are being put into question, either because of financing issues or buyers getting cold feet.

Mediations By Zoom or Phone

Many mediations are now being conducted by Zoom or even by phone.  I have several scheduled.  Let’s see how they go.  

We can all get through this and lawyers can still practice law during the pandemic and the upcoming “new normal.”  We can embrace the challenge and look forward to helping our clients.  My family and friends have fortunately remained healthy.  I know that others are dealing with tragedy and many frontline heroes are putting themselves at risk.  As lawyers, all we can do is to show kindness and respect to clients and opponents alike and be cognizant of what they may be dealing with.

By Adam P. Whitney

617.338.7000

awhitney@awhitneylaw.com