What happens in Florida when business partners fight
Video Description
Partnership disputes are commonly called a corporate divorce in Florida because the break-up of a business is just like the dissolution of a marriage. Partners and shareholders are the core of any business. When they fight amongst themselves they can ruin their own business unless they have strong documents structuring the business like operating agreements for their LLC.
In this video Board Certified expert business lawyer David Steinfeld discusses the liabilities that business owners have to each other and tells you how good corporate governance documents can help alleviate these situations.
In this video Board Certified expert business lawyer David Steinfeld discusses the liabilities that business owners have to each other and tells you how good corporate governance documents can help alleviate these situations.
Video Transcript
Hello, I'm Dave Steinfeld, a Florida Bar Board Certified business litigation attorney. That means I'm recognized as an expert in business litigation law. The video you're about to watch is from a talk I gave entitled “A primer on Florida business litigation”. This particular video examines liabilities within a company and from outside of a company. This video is not intended to provide legal advice to you but merely to give you background information on this topic. After you've watched the video please take a look at other videos and articles on my website www.DavidSteinfeld.com. Thanks for watching.
Common liabilities that businesses face
Let me talk now about some of the internal liabilities that businesses can face as well as liabilities to third parties. The easiest example to use most generally is a small closely held LLC limited liability company because that's what most of the businesses are in the State of Florida. Internally either albeit an LLC or a corporation with shareholders the managers of those businesses have certain legal obligations that are found in Florida Statues, fiduciary duties we call them, to the shareholders of a business to the members of the company to the other owners and directors or managers of their business. For example if a manager of a business was to decide that he or she was going to simply withdraw money from the corporate bank account and take a vacation, if that's not something that's authorized it's not within their job description the shareholders of the corporation or the members of the limited liability company potentially have the right to say to that director you're mismanaging the company, you're taking money for your own purposes. They are ultimately the ones who own the company, shareholders in particular that situation. They have rights under Florida law that are directed at the managers of the company. So you all who are here who are primarily CFO's and in the financial industry you may find yourselves in the position of being a director or manager of a small business. You should be aware that anyone in that position has certain obligations and duties to the other managers and to the shareholders or the members of the business.
Usurpation or theft of a corporate opportunity
Another area that oftentimes is found as liability within a corporation are where the managers or the owners of the company or directors take or usurp a corporate opportunity. What I mean by that is if someone brings an opportunity to a company to one of the officers of a company or director or the manager of an LLC and says you can invest in this new project and make a lot of money that offer is being presented to the individual in his or her capacity as the director of the business or the officer of the business or the manager of the LLC not as the individual. If that person says this is a golden opportunity but I'm not going to give it to the business what I'm going to do is say no thank you the business is not interested at this time but I'm gonna go home and I'm gonna pick up a phone and call that person back and say hi it's me I'm not I'm taking off the hat of being the director of the company now it's just me as an individual I want to invest in that opportunity. The opportunity being offered to the business is being taken by the insider of the business for his or her own uses his or her own devices and benefit.
As an officer or director of a business as a manager of an LLC those individuals have a certain obligation to the business. They can't do that. The shareholders again or the members of the business have the right at that point to pursue legal claims against those managers to say you usurped a corporate opportunity you had to offer it to the corporation first and the corporation had to reject it.
As an officer or director of a business as a manager of an LLC those individuals have a certain obligation to the business. They can't do that. The shareholders again or the members of the business have the right at that point to pursue legal claims against those managers to say you usurped a corporate opportunity you had to offer it to the corporation first and the corporation had to reject it.
Dissolution and shareholder appraisals
What are some of the responses then that that we often see in business litigation to internal liability and internal strife within businesses. There's basically two, one is a dissolution and the other one would be a shareholder appraisal in a corporation. A dissolution is more commonly referred to as a corporate divorce because essentially that's what it boils down to.
Particularly in a situation where you have an LLC that is operated by two people who are in all practicality partners. If they can't get along, if they can't decide on the course of business for the entity, if they can't decide on whether to go left or to go right, how much to spend here, how to market there, and they are at odds completely with each other and those decisions that deadlock cannot be broken then the individual who might be a minority shareholder might not be a minority shareholder in the business has the right to file a lawsuit to dissolve the business.
Now the LLC Statutes are not as well developed in this area yet as the corporate statutes [Note: Florida adopted its Amended LLC Act after the taping of this video] so it's a lot easier for us to examine the corporate statutes at this point. But it highlights why it is important particularly for LLCs to have a very clearly drafted and well worded operating agreement because in the absence of that kind of documentation the individuals who have the internal strife in the business may find that they can't get relief from a court if the statutes don't provide a support for it.
So looking at the corporate statutes we have a very robust and well drafted scheme that's based on the model business corporation act and draws its base of knowledge from New York law from Delaware law which has very well developed corporate law as well as our own body of law in Florida. A corporate dissolution of a corporation under Chapter 607 of our Florida Statues is where one party would bring the lawsuit for dissolution saying that the directors are deadlocked or the shareholders can't break the deadlock or any number of qualifying factors that are found in the statutes if not in their own shareholders agreement. At that point there's an interesting switch that can happen. The other person who is involved in the business or could be other people in the business other shareholders other directors or officers can make an election to buy out the complaining shareholder and avoid the dissolution of the business entirely.
Particularly in a situation where you have an LLC that is operated by two people who are in all practicality partners. If they can't get along, if they can't decide on the course of business for the entity, if they can't decide on whether to go left or to go right, how much to spend here, how to market there, and they are at odds completely with each other and those decisions that deadlock cannot be broken then the individual who might be a minority shareholder might not be a minority shareholder in the business has the right to file a lawsuit to dissolve the business.
Now the LLC Statutes are not as well developed in this area yet as the corporate statutes [Note: Florida adopted its Amended LLC Act after the taping of this video] so it's a lot easier for us to examine the corporate statutes at this point. But it highlights why it is important particularly for LLCs to have a very clearly drafted and well worded operating agreement because in the absence of that kind of documentation the individuals who have the internal strife in the business may find that they can't get relief from a court if the statutes don't provide a support for it.
So looking at the corporate statutes we have a very robust and well drafted scheme that's based on the model business corporation act and draws its base of knowledge from New York law from Delaware law which has very well developed corporate law as well as our own body of law in Florida. A corporate dissolution of a corporation under Chapter 607 of our Florida Statues is where one party would bring the lawsuit for dissolution saying that the directors are deadlocked or the shareholders can't break the deadlock or any number of qualifying factors that are found in the statutes if not in their own shareholders agreement. At that point there's an interesting switch that can happen. The other person who is involved in the business or could be other people in the business other shareholders other directors or officers can make an election to buy out the complaining shareholder and avoid the dissolution of the business entirely.
What happens in a corporate divorce
When I said that it's an interesting switch what happens is the lawsuit switches from a dissolution of the business to a valuation of the business. The dissolution lawsuit is essentially paused by the court in favor of having the complaining shareholder’s shares valued oftentimes by a business valuation expert. Usually both sides will obtain their own experts and the issue that the judge has to deal with is which business valuation expert is correct, how to divide up in the shares between those two and there are other claims that can come into play such as if the corporation has not been properly managed is not always necessarily a 50/50 split but that's where business litigation attorneys can guide you and guide your business with their expertise.
The end result of a corporate dissolution can be the purchase of the complaining shareholder’s shares it can also be if the election is not made to buy that individual out it could also be the dissolution of the business which would be the liquidation of all the businesses assets and the judicial dissolution and termination of that business. If a business has a growing concern it's operating it's earning money people are employed in that business generally it's more beneficial for everyone involved for them to buy out the complaining shareholder and that's why I mentioned it’s commonly termed a corporate divorce.
The end result of a corporate dissolution can be the purchase of the complaining shareholder’s shares it can also be if the election is not made to buy that individual out it could also be the dissolution of the business which would be the liquidation of all the businesses assets and the judicial dissolution and termination of that business. If a business has a growing concern it's operating it's earning money people are employed in that business generally it's more beneficial for everyone involved for them to buy out the complaining shareholder and that's why I mentioned it’s commonly termed a corporate divorce.
What are shareholder appraisal rights
Another response that we often see to internal strife and liability inside of a corporation would be shareholder appraisals and appraisal rights. Those are also found likewise in Florida's corporate code in Chapter 607 however it's different than a dissolution in that the complaining shareholder may not have the rights to trigger a dissolution or may not want to dissolve the entity. There may be an event that occurs either by statute or the shareholders agreement that triggers the appraisal rights to have the corporation buy out the complaining shareholder’s shares.
I'll give you an example of how this is actually seen in the real world in all practicality. I represented a client not too long ago who was in business with her boyfriend, significant other so it was really like a partnership in that sense. It was a small closely held business just the two of them and they were a very cash rich business. The nature of their business required that they keep a lot of cash on hand. They had several hundred thousand dollars in the bank account and unfortunately a problem developed between the two that was completely unrelated to the business it was in their personal lives.
And the response that my client’s boyfriend took was to take all of the money out of the corporate bank account, transfer that to a personal bank account, notified the State that my client had been removed from the corporation unilaterally, created a new bank account for this corporation, and moved the money into this new bank account. It was essentially what we would also term sometimes a minority shareholder freezeout except they were 50/50 owners, she was literally locked out of the business and found herself no longer an owner of the business on paper and found herself without access to the corporation’s monies half of which were hers as a half owner of the business. We were able to efficiently utilize the court system to bring a lawsuit for dissolution but to within that obtain a very quick injunction by the court that prevented the other party from moving that money anywhere. The effect of that the net effect was to grind the business to a halt and it instantly resolved the matter between the two of them. It actually wound up being a very positive result for my client.
I'll give you an example of how this is actually seen in the real world in all practicality. I represented a client not too long ago who was in business with her boyfriend, significant other so it was really like a partnership in that sense. It was a small closely held business just the two of them and they were a very cash rich business. The nature of their business required that they keep a lot of cash on hand. They had several hundred thousand dollars in the bank account and unfortunately a problem developed between the two that was completely unrelated to the business it was in their personal lives.
And the response that my client’s boyfriend took was to take all of the money out of the corporate bank account, transfer that to a personal bank account, notified the State that my client had been removed from the corporation unilaterally, created a new bank account for this corporation, and moved the money into this new bank account. It was essentially what we would also term sometimes a minority shareholder freezeout except they were 50/50 owners, she was literally locked out of the business and found herself no longer an owner of the business on paper and found herself without access to the corporation’s monies half of which were hers as a half owner of the business. We were able to efficiently utilize the court system to bring a lawsuit for dissolution but to within that obtain a very quick injunction by the court that prevented the other party from moving that money anywhere. The effect of that the net effect was to grind the business to a halt and it instantly resolved the matter between the two of them. It actually wound up being a very positive result for my client.
