Dissenter’s Rights in a Business Divorce

Dissenters’ rights is a little known and little used statutory procedure that can be invoked under particular circumstances which may solve disputed issues in a business divorce. The basic concept of dissenters’ rights is to allow a shareholder to be bought out at fair value when a substantial change in corporate structure is about to take place. Utah statutes provide a detailed procedure for the exercise of dissenters’ rights. No comparable provision exists in the Utah limited liability company statutes.

Dissenter's Rights in a Business Divorce

TRIGGERS FOR DISSENTERS’ RIGHTS

A number of corporate actions trigger the right of a shareholder to dissent and obtain fair value for the shares. First, if the corporation is a party to a plan of merger, including where a subsidiary is merging into a parent company, dissenters’ rights apply. If the corporation is a party to a share exchange and the shareholders are entitled to vote on the plan dissenters’ rights are triggered. Next is when a sale or exchange of all or substantially all of the property of the company occurs, unless the sale is pursuant to a court order or a sale for cash payable one year from the date of the sale. Dissenters’ rights exist if there is going to be an amendment to the Articles of Incorporation that materially and adversely affects a dissenters’ preferred rights in shares, creates or alters a right of redemption, alters a preemptive right, or excludes the right of the shares to vote on any matter including cumulative voting for directors. If a shareholder elects to dissent from any of these actions, a shareholder may not object or challenge the corporate action unless such action is fraudulent. Finally, the right to dissent is not applied to shares traded on a national exchange.

DISSENTERS’ RIGHTS PROCEDURES

If any of these proposed actions will be submitted to a vote at a shareholder meeting, the meeting notice must state that the shareholders may assert dissenters’ rights. Even if there is no meeting, a notice still must be given in writing to shareholders about their right to dissent to the corporate action. Once the notice is received, any shareholder who may want to dissent must deliver in writing their intent to demand payment for their shares and dissent. It is incumbent upon the corporation to send a writing to all shareholders not later than ten days after the triggering corporate action is taken and advise the shareholders where payment demand must be sent and where share certificates may be deposited. That same notice will advise the dissenting shareholder when the corporation must receive the shareholder’s demand for payment of their shares. The shareholder must comply and send a demand for payment consistent with that notice. If no demand for payment is received the rights are waived. Upon receipt of the payment demand, the corporation shall pay the dissenter what the corporation estimates to be the “fair value” of the shares and shall send to the shareholder the Company balance sheet together with an explanation as to how the fair value estimate was calculated.

If the shareholder is dissatisfied with the corporation’s estimate of the fair value, the dissenter may notify the corporation in writing of their estimate, less any payment tendered or otherwise reject the offer and demand full payment of fair value. Thereafter, if the matter is not resolved, the corporation is required to commence a court proceeding within sixty days and ask the court to determine the fair value of the shares, or otherwise pay the amount the dissenter estimates to be the fair value. All disputing dissenters must be a part of this action. There is no right to a trial by jury and the court may appoint a master or others to assist it in determining fair value. Each dissenter is entitled to obtain a judgment for the amount which the court finds is the fair value of the shares exceeding the amount offered by the corporation, if any. This is often called an “appraisal proceeding.”

THE COURT DETERMINES FAIR VALUE

The court shall take evidence and determine fair value but has a right to assess expenses and attorney fees. The expenses assessed may also include the cost of experts. The court may find against the corporation in favor of the dissenter if it finds the corporation did not comply with procedural requirements, against the dissenter if the fair value does not materially exceed” the amount offered by the company; or against either the company or dissenter if it finds that the party against whom the fees and expenses assessed acted “arbitrarily, vexatiously, or not in good faith with respect to the rights provided …” by the dissenters’ rights process.

The term “fair value” is defined in the dissenters’ rights statutes to mean the value of shares immediately before the effectuation of the corporate action to which the dissenter objects excluding any appreciation or depreciation in anticipation of the corporate action unless such exclusion is inequitable. The statutory definition does not deal with the issue of discounts for either a minority interest or lack of marketability, discounts commonly given for fair market value calculations. However, in Utah, case law states that fair value is not the same as fair market value and does not include discounts for marketability or minority interest.

The practitioner should be alert to any of the possible triggering events during an owner dispute as the existence of any such triggering device may conclude a business divorce. The parties must carefully calculate their estimations and demands of fair value since the entire cost of the proceeding, including expert fees is at risk of being awarded to a successful party. The statutes were designed to deter an actual court proceeding by increasing the risk of loss. The court proceeding should probably only be one day with the evidence likely limited to the expert reports and perhaps some other related matters.

The dissenters’ rights statutes present an admirable, limited procedure to allow a shareholder, under key circumstances, to remove themselves from their business partners and hopefully terminate a dispute receiving fair value for their interest in the company.

Free Initial Consultation with a Business Divorce Lawyer

It’s not a matter of if, it’s a matter of when. Legal problems come to everyone. Whether it’s your son who gets in a car wreck, your uncle who loses his job and needs to file for bankruptcy, your sister’s brother who’s getting divorced, or a grandparent that passes away without a will -all of us have legal issues and questions that arise. So when you have a law question, call Ascent Law for your free consultation (801) 676-5506. We want to help you.

Michael R. Anderson, JD

Ascent Law LLC
8833 S. Redwood Road, Suite C
West Jordan, Utah
84088 United States

Telephone: (801) 676-5506

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Claims in a Business Divorce

When conflict within a privately owned company cannot be resolved through negotiation and the parties stand at the brink of filing litigation to resolve their disputes, the parties must analyze whether their claims are direct or derivative in nature. The distinction between direct and derivative claims and claim procedures may trap the unwary.

Claims in a Business Divorce

Direct Claims in a Business Divorce Case

Direct claims are those claims brought by an owner for losses suffered directly to that owner and are unique to the owner. In the personal injury context, the plaintiff is entitled to bring claims based upon their bodily injuries caused by the wrongful conduct of the defendant(s).Similarly, claims by a business owner must only be for the economic harm or equitable relief necessary to correct the wrong by the defendant(s).

Derivative claims are claims brought by an owner on behalf of or in the right of a corporation or LLC. The shareholder steps into the shoes of the company to enforce the rights of the company against the defendant(s).The owners’ claims arise because of their ownership in the company.

Stemming from these basic definitions are issues related to whether damages being sought are truly direct or damages suffered by all shareholders. If the damages claimed are suffered by all shareholders then the claim is not direct.

Derivative Claims in a Business Divorce

In Utah, the code discusses the necessary steps for a derivative claim. An LLC derivative proceeding is governed similarly under the Utah Code Annotated as well. First, a shareholder may not commence or maintain a derivative proceeding until it is established that the shareholder was an owner in the corporation at the time of the act or omission or became a shareholder through transfer by operation of law from someone who was an owner at the time of the wrongdoing. In addition, the shareholder must fairly and adequately represent the interest of the company in enforcing the rights of the company.

A shareholder may not start a derivative lawsuit until a written demand has been made upon the corporation to take suitable action to correct the wrongdoings and recover losses for the company. In addition, once a written demand is received, ninety days must expire from the date of the demand before a lawsuit may be commenced. Exceptions to this rule exist when the demand has already been rejected, the statute of limitations will expire within the ninety days, or irreparable injury to the company would result by waiting for the expiration of the ninety days. The purpose of the written demand is to give the company an opportunity to investigate the claims and take action prior to being embroiled in litigation. If the corporation does commence an inquiry even after the demand and a Complaint has been filed the court may take action to stay the derivative proceedings for a period necessary to complete such investigation.

If the parties are now prepared to file their litigation, they must also comply with the Utah Rules of Civil Procedure. The Complaint should be verified and allege that the plaintiff was a shareholder or member of the company at the time of the transaction or obtained their ownership interest by operation of law from someone who was such an owner. The Complaint must further allege with particularity the efforts made to obtain the action desired from the directors or other management authority of the company and the reasons for the plaintiff’s failure to obtain the action sought or for not making such an effort. In addition, the plaintiff must demonstrate that they fairly and adequately represent the interest of all shareholders or members similarly situated in enforcing the rights of the company.

Termination of Derivative Proceedings

A derivative proceeding may not be dismissed or compromised without approval of the court after notice. On the termination of the derivative proceedings, the court may make orders with respect to expenses incurred including attorney fees. If the court finds that the plaintiff’s derivative action has resulted in a substantial benefit to the corporation it may order the corporation to pay the plaintiff’s expenses and fees. However, if the court finds that the derivative proceeding was commenced or maintained without reasonable cause or for an improper purpose, the court may order the plaintiff to pay all defendant’s reasonable expenses and fees.

The Utah statutes have a procedure which effectively terminates the plaintiff’s derivative claim and the right to be heard before a jury or a judge if certain conditions are met. First, if the corporation investigates the matter and resolves internally the issues raised in the derivative demand the basis for the lawsuit is eliminated. The second method available to obtain early termination of the litigation is for the corporation to move the court to appoint a panel of one or more independent persons to determine whether the maintenance of the derivative proceeding is in the best interest of the corporation. The court appointed panel, like the company appointed panel, must conduct a reasonable inquiry in good faith and if it concludes that the maintenance of the derivative proceeding is not in the best interest of the corporation, the corporation may ask the court to dismiss the claim. In sum then, the plaintiff’s claim falls to the hands of either a court appointed or company appointed independent panel to determine whether or not the claim should effectively be maintained in litigation. If in fact it is determined by this panel that the maintenance of the derivative proceeding is not in the best interest of the corporation, the plaintiff then has the burden to prove by clear and convincing evidence that the panel has not acted in good faith, may not have conducted a reasonable inquiry and has drawn a conclusion that is not in the best interest of the company.

In a business divorce context, plaintiffs pushing for separation who file direct or derivative claims, effectively have two fronts to attack the wrongdoers or those from whom they would like to separate. Derivative proceedings present a procedure that may reduce the cost of litigation by use of the independent panel. The pressures of litigation may force the parties to separate hopefully by settlement rather than litigation because of the direct or derivative claims.

Free Consultation with a Utah Business Lawyer

If you are here, you probably have a business law issue you need help with, call Ascent Law for your free business law consultation (801) 676-5506. We want to help you.

Michael R. Anderson, JD

Ascent Law LLC
8833 S. Redwood Road, Suite C
West Jordan, Utah
84088 United States

Telephone: (801) 676-5506

Ascent Law LLC

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Fiduciary Duties and Business Judgment in a Business Divorce

When business owners are in conflict, they must be aware of their fiduciary duty obligations to the company and the other owners. As a business lawyer in Utah, I try hard to make sure that our business clients understand how business divorces work and how to manage conflict. As conflict builds, an owner’s management is more critically reviewed, decisions questioned, and unpopular results criticized. Many business decisions are protected by the Business Judgment Rule. It is important for business owners to know and distinguish their fiduciary duties and understand the application of the Business Judgment Rule.

The fiduciary duty arises out of a confidential business relationship of trust. Owners who are employed and/or manage the business are put in a position of trust by all owners and the company. This trust duty encompasses acting in the best interest of the company and its owners, protecting the assets of the company, and making the most of those assets for the benefit of the owners. Because fiduciaries are in the position of control, they are charged with the highest duty recognized in law, the fiduciary duty.

The fiduciary duty requires the exercise of utmost good faith, fair dealing, disclosure and avoiding even the impropriety of self-interest or self-dealing. If you owe to another a fiduciary duty you must exercise honesty, fairness, and be reasonable, and recognize the reasonable expectations of those to whom you owe that fiduciary duty.

Fiduciary Duties and Business Judgment in a Business Divorce

Generally speaking, the fiduciary duty is divided between the duty of loyalty, the duty of care and the duty of disclosure. This duty of care is well set forth in the Utah Business Corporations Act which requires directors and officers to exercise their duties in good faith, in what they believe to be in the best interests of the company, and as a reasonable director or officer would act. Thus, a duty of care does encompass a “negligence” standard subject to the Business Judgment Rule discussed below.

The duty of loyalty requires that the fiduciary put the interests of those to whom the duty is owed ahead of their own interests. When a fiduciary is faced with a choice to benefit themselves or the company/owners, the fiduciary must choose the company/owners. Corporate opportunities must be preserved for the company. Conflicts of interest must be avoided where the fiduciary may have an interest in a company transaction. But if certain disclosures are made and approvals obtained, safe harbors exist for fiduciaries to participate in conflicting interest transactions. If the fiduciary faces accusations of self-interest or self-dealing, the Business Judgment Rule does not apply.

The duty of disclosure requires, with some limitations, the fiduciary to be open, forthright, and disclose to whom a fiduciary duty is owed all important and relevant information. This follows from the fact that a person who puts trust and confidence in their fiduciary should be advised on material matters so that fiduciary actions are well known and proper decision making is made. But disclosure could be avoided if the proprietary information passed on would be used for an improper purpose.

Courts will not interfere with the decision making of company management if the duty of due care is properly exercised by those making an informed, reasonable decision in the best interests of the company. If directors and officers in a Utah corporation demonstrate that they met the standard of care of good faith, acting in what they believe to be in the best interests of the corporation and as a reasonable director and officer would do, a decision will likely be protected by the Business Judgment Rule. In fact management has the right to rely on knowledgeable experts to assist them in making good business judgment decisions. An objecting party is required to demonstrate by clear and convincing evidence the director or officer failed to discharge their duties, rebutting the presumption such duties were properly discharged.

If the business decision is questioned as not being in the best interests of those to whom the fiduciary duty is owed, the business decision may not be protected by the Business Judgment Rule. If the decision is being attacked because the fiduciary has arguably made a decision in his or her best interest, ignoring others, protections of the Business Judgment Rule vanish.

The fiduciary duty and Business Judgment Rule are actively utilized in business divorce. Currently these legal principles are entrenched in corporate law where directors and officers owe fiduciary duties to the corporation and its shareholders. In the partnership context, a managing partner owes fiduciary duties to the partnership and the partners. It is generally accepted that fiduciary duties exist between shareholders in a corporation and partners in a partnership. In Utah we found no statute nor published case establishing a fiduciary duty in an LLC. The fiduciary duty concept and Business Judgment Rule create leverage for negotiation, potential liability or liability avoidance. With leverage and potential liability, economic decisions causing alleged economic losses, perhaps protected by the Business Judgment Rule, assist the practitioner in arguing a settlement when owners conflict. These legal principles are essential in settling the business divorce.

Free Consultation with a Utah Business Lawyer

If you are here, you probably have a business law issue you need help with, call Ascent Law for your free business law consultation (801) 676-5506. We want to help you.

Michael R. Anderson, JD

Ascent Law LLC
8833 S. Redwood Road, Suite C
West Jordan, Utah
84088 United States

Telephone: (801) 676-5506

Ascent Law LLC

4.9 stars – based on 67 reviews


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