Resolve Commercial Business Ownership Disputes
with Confidence

Fiduciary duty includes a duty of loyalty, good faith, full disclosure, and reasonable care. It means that the fiduciary should not usurp business opportunities that belong to the company. The fiduciary must disclose any conflict of interest and cannot self-deal or compete with the company. The fiduciary must also exercise reasonable care and prudence.

Not every co-owner owes fiduciary duties. The extent of the duties depends on the entity type, the operating documents (such as operating agreement, partnership agreement, bylaws) and the default rules of the governing law. The default rules vary state by state and may have exceptions, but typically, the following may apply.

• In a partnership, partners may owe fiduciary duties to each other, depending on the partnership agreement.
• In a limited liability company, the members owe fiduciary duties, but it depends on whether the LLC is member-managed or manager-managed.
• In a corporation, the corporate officers and directors usually owe fiduciary duties to the company and the shareholders. Shareholders typically do not owe fiduciary duties to each other or to the company.

Since the duties may vary depending on the operating documents and the state law, please consult with an attorney to understand the scope of fiduciary duties.

The "business judgment rule" (BJR) is a policy of deference to corporate decision-making. Under this rule, a corporate officer or director is not liable for discharging their corporate obligations, as long as they acted in good faith, in the best interests of the corporation, and with such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances. BJR gives corporate officers and directors a limited immunity from the court's intervention in their corporate decisions.

However, BJR may not apply when the corporate decision involves a conflict of interest, or the corporate officer or director acted in bad faith or negligently.

In limited liability companies, the BJR may be limited depending on the type of LLC (member-managed v. manager-managed), the operating documents, and the applicable default rules of the state law.

This question is usually decided based on the operating documents, the agreement with the transferee, or through the buyout and valuation.

If the share is bought back by the company or other co-owners
The operating documents and founder agreements typically have provisions about buyout, the right of first refusal, and the procedures for determining the price of the buyout. The price may be set as a market value, which requires a company valuation. The price may also be determined by a formula or through other means. If the parties do not agree about the price, they must follow the procedures described in the operating documents and founder agreements to resolve the dispute. They may also use a third-party valuation, mediation, or ask the court.

If the share is transferred to a non-owner
If an owner wants to transfer his share to a person outside the business, he needs to check whether the operating documents and agreements have restrictions on such a transfer. If there are no restrictions, then the price may be determined by the agreement between the transferer and transferee. There are legal regulations on how the share transfer should be handled, including the disclosure and notice requirements. Please check with an attorney.

It depends on the issue decided and the voting procedures.

Type of the issue decided
Some decisions can be made by a simple majority, but some of them must be decided unanimously or by a supermajority. For example, the issues of merger and acquisition, or dissolution, usually require a unanimous vote. The issues of strategic business decisions may require a supermajority, depending on the operating documents* or the state laws.

The voting procedures
Even if the decision can be made by a simple majority, the company still should follow the voting procedures. The operating documents usually contain the rules about the required notice, quorum, threshold number of votes, and the governance's responsibilities. If the operating documents are unclear or do not exist, then the decision-making issues should be resolved according to the default rules of the governing law. Each state has laws on LLCs, corporations, and partnerships. Please consult with an attorney.

* The operating documents include operating agreements (for LLCs), bylaws (for corporations), or partnership agreements (for partnerships).

The rights of minority owners may vary substantially. They depend on the entity type, on whether fiduciary duties exist, on the governing documents, and on the governing law.

Minority owners' rights may include:

• the right to inspect books and records
• the right to be notified about decisions requiring a vote
• the right to vote
• the right to the distribution of profit
• the right to sue on behalf of the company if the corporation failed to act to protect itself from harm
• the right to request judicial dissolution in extreme cases
• the right to request a buyout

To understand the minority's rights in terms of a specific situation, please consult with an attorney.

Judicial dissolution is a remedy that allows the court to order the company's dissolution.

Grounds
The grounds for judicial dissolution are usually stated in the state laws. They depend on the entity type (partnership, LLC, or corporation). Generally, a company may be judicially dissolved if it is not reasonably practicable to carry out the business in conformity with its operating documents. Other grounds may include:

• deadlock
• illegal conduct
• oppression of minority owners' rights
• waste of the company's assets
• insolvency
• tax delinquency

Who can ask for judicial dissolution?
A business owner may ask to dissolve the company, but his/ her/ its rights may be limited in the operating documents and applicable state laws. The state may also request dissolution if the company is delinquent on taxes.

Procedures
The operating documents and the state laws may require certain pre-litigation procedures before the petitioner may ask for judicial dissolution. This may include the demand or attempt to remedy the underlying dissolution issues. If the pre-litigation procedures did not help, the petitioner may file a lawsuit requesting the court to dissolve the company.

Alternative buyout
In some situations, the company may have an option to buy the petitioning owner out of the business. Please consult with an attorney to determine the grounds, procedures, and alternative remedies for judicial dissolution.

To resolve a deadlock in a company, business owners should consider the following steps.

Assess the options
To analyze available options, business owners and the company should consider all facts and applicable rules. It is important to understand whether the deadlock can be resolved through voting, internal company procedures, or other means. The operating documents and the governing state laws contain rules about voting, decision-making, governance, and remedies. In urgent situations, the law provides for judicial intervention tools, such as restraining orders and preliminary injunctions.

Negotiate
After assessing the situation and available options, it is important to have a clear negotiation strategy, based on the proper use of leverage, zone of potential agreement (ZOPA), and best alternative to no agreement (BATNA).

Mediate
Mediators may help parties come to the negotiation table. Parties are not bound by the mediator's suggestions, but they may use the mediator's suggestions to facilitate the negotiations. Mediations are usually confidential. It is important to come to the mediation prepared and with a clear understanding of the party's goals, ZOPA, and BATNA.

Litigate
Parties may file a lawsuit to resolve the deadlock. Depending on the reasons for the deadlock, the court may enjoin the opposing party, issue a restraining order, order a judicial dissolution, appoint a special master, or order to pay. Please consult with an attorney to understand the available legal remedies.

The general rule is that a business entity exists separately from its owners, meaning that the owners' personal assets are protected from the company's creditors. However, there are exceptions to this rule:

1. Guarantor. The business owner is a guarantor for the company's liabilities. The owner becomes liable under the terms of the guaranty agreement.
2. Assumption of liabilities. The business owner assumed the company's liabilities in an agreement or by his conduct.
3. Alter Ego. The company is the owner's "alter ego". This is a legal theory allowing the courts to pierce the corporate veil when there is a unity of interest between the company and the owner and injustice or inequity results from such entanglement. The Alter Ego theory is fact-specific.
4. Agency and joint liability. The owner acted as the company's agent or co-tortfeasor, or conspirator.
5. Fraudulent conveyance. The owner improperly acquired the company's assets via fraudulent transfer without adequate consideration.
6. Successor of liability. The owner is a "successor of liability" of the company when it acquired a line of products. This may be applicable in product liability cases.
7. General partnership. The owner is a partner in a general partnership.

Each exception has its legal elements and is fact-specific. To protect the assets, the owner should consult with an attorney regarding available defenses to the above theories.

Yes, but only on specific grounds.
The business owner may sue co-owners, directors, or corporate officers on behalf of the company. This is called "derivative action."

Grounds
The grounds for derivative action are usually stated in the state laws. They may include:

• breach of fiduciary duties
• self-dealing
• waste of the company's assets
• illegal or fraudulent conduct
• failure to disclose a conflict of interest
• mismanagement

Procedures
The operating documents and state laws may require certain pre-litigation procedures before the petitioner may file a derivative action. This may include the demand or attempt to remedy the underlying issues. If the pre-litigation procedures did not help, the petitioner may file a lawsuit requesting the court to intervene, enjoin a transaction, order proper accounting, or dissolve the company.