of Contract and Shareholder Oppression Identifying Causes of Action; - PowerPoint PPT Presentation

Presenting a live 90-minute webinar with interactive Q&A Litigating Closely Held Business Disputes: Breach of Fiduciary Duty, Breach of Contract and Shareholder Oppression Identifying Causes of Action; Pursuing Emergency Injunctions, Partition and Dissolution; Tackling Valuation Issues TUESDAY, AUGUST 4, 2015 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: Michele Lorbieski Anderson, Member, Frost Brown Todd , Indianapolis Aaron Chausmer, Member, Chausmer Law , Atlanta The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .

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Litigating Closely Held Business Disputes Michele Lorbieski Anderson Member 201 North Illinois Street, Suite 1900 Indianapolis, IN 46244-0961 317.237.3216 manderson@fbtlaw.com

Today’s Topics  Causes of Action  Remedies  Valuation Issues  Derivative vs. Direct Claims 6

Causes of Action  Appointment of Receiver  Breach of Fiduciary Duty  Breach of Contract  Fraud 7

Do you have a claim?  Commingling of Funds  Officer Compensation  Restrictions on Dividends  Reduced Repurchase Price  Self-dealing  Waste 8

Appointment of Receiver Indiana  Dissolution  Insolvent  Imminent danger of insolvency  Forfeiture of corporate rights Delaware  Insolvency plus 9

Inspection of Corporate Records  Limited Access Statute Governing Documents Shareholder Agreements  Proper Purpose Whether the request for inspection is reasonably related to the individual’s interest as a shareholder.  Confidentiality Agreements 10

Inspection of Corporate Records Ind. Code § 23-1-52-2  Minutes of board of directors, committee of the board of directors, or shareholders.  Records of action taken by the shareholders or board of directors without a meeting.  Accounting records.  The record of shareholders. 11

Inspection of Corporate Records Del. Code Ann. tit. 8, § 220  Stock ledger.  List of stockholders.  Other books and records.  Subsidiary books and records (with caveats). 12

Breach of Fiduciary Duty  Duty of Loyalty Usurpation of Corporate Opportunities Self-Dealing  Duty of Care Business Judgment Rule Entire Fairness 13

Shareholder Meetings  Meetings Ind. Code § 23-1-29-1; Del. Code Ann. tit. 8, § 211  Notice Requirement Ind. Code § 23-1-29-5; Del. Code Ann. tit. 8, § 222  Shareholder Consent Ind. Code § 23-1-29-4; Del. Code Ann. tit. 8, § 228 14

Breach of Contract  Governing Documents  Shareholder Agreements  Implied Covenant of Good Faith and Fair Dealing 15

Fraud  Fraudulent Inducement  Securities Fraud  Pleading Requirements  Evidentiary Issues 16

Remedies  Temporary Restraining Order  Preliminary Injunction  Permanent Injunction  Partition  Dissolution 17

Injunctions and TROs  Reasonable likelihood of success on the merits  No adequate remedy at law  Irreparable harm  Balancing test  Public interest 18

Injunctions and TROs  Forum  Expedited Discovery  Bond 19

Partition  Physical division by sale and distribution of net proceeds.  Sale of a co- owner’s interest by another co-owner.  Partition by appraisal.  Action for partition with appointment of referee. 20

Dissolution  Limited Liability Companies  Partnerships and Corporations 21

Other Relief  Money Damages  Punitive Damages  Attorneys’ Fees  Contribution  Indemnification  Constructive Trust 22

C LOSELY H ELD B USINESS D ISPUTES Derivative or Direct Claims - and- Valuation Concerns August 4, 2015 Aaron B. Chausmer 1050 Crown Pointe Parkway, Suite 340 · Atlanta, Georgia 30338 404.856.3992 P · 404.478.8494 F · chausmerlaw.com

KNOW the Applicable Law ! Is the entity a domestic or foreign entity ? ◊ Many entities may operate solely in one jurisdiction, but have been Derivative incorporated in a different jurisdiction, such as Delaware. or Direct? ◊ See , e.g., O.C.G.A. § § 14-2-747 and 14-11- 807 (“In any derivative action in the right of a foreign [corporation or limited liability company], the matters . . . shall be governed by the laws of the jurisdiction of organization of the foreign limited liability company . . .”). 24 24 24

Is the Entity a Formal “Close” Corporation? If so, claimant may be able to proceed directly. Statutory “close” corporations often have special statutory considerations. See, e.g., Derivative O.C.G.A. § 14-2- 940 (“a shareholder of a statutory close corporation may petition the or Direct? superior court” for relief); see also Grace Bros., Ltd. v. Farley Indus., Inc., 264 Ga. 817, 819, 450 S.E.2d 814, 816 (1994) (“outside the context of a close corporation, a shareholder must be injured in a way which is different from the other shareholders or independently of the corporation to have standing to assert a 25 25 direct action”) 25

Is the Claim Direct or Derivative? To determine if claim is direct or derivative, look at the nature of the alleged wrong. Derivative ◊ Who was harmed? or Direct? ◊ Is the claim an asset of the Entity? ◊ Who needs to be protected? 26 26 26

Is the Claim Direct or Derivative? For a direct claim, Owner must generally allege a separate and distinct injury or a right that exists independent of any right of the Entity. Derivative For a derivative claim, the Owner acts on or Direct? behalf of the Entity because the Entity was harmed. ◊ Conversion or misappropriation of Entity assets ◊ Breach of Fiduciary Duty by Officers and Directors ◊ Corporate waste 27 27 27

Is the Claim Direct or Derivative? Reasons for to require derivative suit: ◊ prevents multiple lawsuits Derivative ◊ protects corporate creditors by putting proceeds back in the Entity or Direct? ◊ protects all Owners, instead of benefitting only one Owner ◊ Owner is compensated by increasing value of interest See Thomas v. Dickson , 250 Ga. 772, 301 S.E.2d 49 (1983) 28 28 28

Who Gets Recovery? Under Delaware and other states’ laws: ◊ any recovery obtained in a derivative suit must go to the Derivative corporation – then may be used in ordinary course of business or or Direct? distributed to Owners in accordance with Corporate Documents ◊ while any recovery in a direct action flows directly to the Owners, not to the corporation. 29 29 29

Derivative Claims Have Special Conditions ◊ There is generally a pre-litigation demand requirement. ◊ See, e.g., O.C.G.A. § 14-2-742 Derivative (shareholder must make written demand for “suitable action” and Entity has 90 or Direct? days to act, unless demand would be futile or irreparable injury would result) ◊ Because claim belongs to Entity, Owner must give the Entity a chance to act on the claim. 30 30 30

Derivative Claims Can Face Early Dismissal ◊ Courts may defer to the Entity’s “business judgment” and dismiss the derivative case if exercised in good faith and by independent decision-makers. Derivative ◊ See, e.g., O.C.G.A. § 14-2-743 or Direct? (may stay proceedings pending inquiry) and - 744 (may dismiss action if is “not in the best interests of the corporation” as determined by independent directors or persons). ◊ Because the Claim belongs to the Entity, not the Owner. 31 31 31