The Break-Up: Considerations in Dissolving and Liquidating a Business

Transcription

1 The Break-Up: Considerations in Dissolving and Liquidating a Business Brian D. Gwitt, Esq., Partner, Woods Oviatt Gilman LLP (BGwitt@woodsoviatt.com) Kelly G. Besaw, CPA, CVA, Partner, Chiampou Travis Besaw & Kershner LLP (kbesaw@ctbk.com)

2 WOODS OVIATT GILMAN LLP Brian D. Gwitt 1900 Main Place Tower Buffalo, New York

3 CHIAMPOU TRAVIS BESAW & KERSHNER LLP Kelly G. Besaw, CPA, CVA, Partner 45 Bryant Woods North Amherst, NY

4 APPROACHES BASED ON OWNERSHIP 50/50 impasse Majority fair market salary; no distributions (starve out) Minority challenge fair market salary; pursue minority rights

5 DISSOLUTION PROCEEDINGS Closely Held Corporations (BCL 1104, 1104-a) Limited Liability Companies (LLC Law 702) Partnerships (Partnership Law 62)

6 CLOSELY HELD CORPORATIONS Business Corporation Law 1104: The Deadlock Statute 1104-a: The Oppressed Shareholder Statute Common Law Dissolution

7 Closely Held Corporations: BCL 1104 The Deadlock Statute Holders of 50% or more of corporations voting shares may petition for dissolution on one or more of the following grounds: 1. Deadlocked Board of Directors 2. Deadlocked Shareholders Unable to Elect Board of Directors 3. Inability to Carry out Corporate Purpose

8 Closely Held Corporations: BCL 1104 The Deadlock Statute Commenced by Petition and Order to Show Cause (BCL 1106) Court may grant preliminary injunctive relief to preserve corporate assets (BCL 1115) Court may appoint an Article 12 Receiver (BCL 1113) No Statutory Buy-Out NOTE: Buy-out price set by the court if the parties cannot agree

9 Closely Held Corporations: BCL 1104-a The Oppressed Shareholder Statute Holders of 20% or more of a corporations voting shares may petition for dissolution on one or more of the following grounds: 1. Directors or those in control engaged in illegal, fraudulent, or oppressive actions towards the complaining shareholders 2. Assets of the corporation are being looted, wasted, or diverted for non-corporate purposes by directors, officers, or those in control.

10 Closely Held Corporations: BCL 1104 The Deadlock Statute Commenced by Petition and Order to Show Cause (BCL 1106) Reasonable Expectations standard for oppression Court must consider less drastic remedies Respondents can elect to purchase Petitioner interest (BCL 1118) Court may adjust valuation for surcharge Court may grant preliminary injunctive relief to preserve corporate assets (BCL 1115) Court may appoint an Article 12 Receiver (BCL 1113)

11 Closely Held Corporations: Common Law Commenced by Minority Shareholders (less than 20%) who do not have standing under BCL 1104-a [A]vailable where the shareholders in control have been looting the company s assets at the expense of the minority shareholders, continuing the corporation s existence for the sole purpose of benefitting those in control, and have sought to force and coerce the minority shareholders to sell and sacrifice their holdings to those in control. Cortes v 3A N. Park Ave Rest Corp., 46 Misc. 3d 670, (Sup. Ct. 2014) Invoked when those in control have so palpably breached the fiduciary duty they owe to the minority shareholders that they are disqualified from exercising the exclusive discretion and the dissolution power given to them by statute. In re Kemp & Beatley, Inc., 64 N.Y.2d 63, 69 (1984)

12 CLOSELY HELD CORPORATIONS: COMMON LAW No Statutory Buy-Out No Statutory Authority for Special Proceeding Equitable Remedy

13 LIMITED LIABILITY COMPANIES: LLC LAW 702 A member may seek dissolution of an LLC when it is not reasonably practicable to carry on the business in conformity with the articles of organization or operating agreement.

14 LIMITED LIABILITY COMPANIES: LLC LAW 702 No statutory authority for special proceeding but courts allow it Contract-centric approach [Matter of 1545 Ocean Ave., LLC, 72 A.D.3d 121, 128 (2d Dep't 2010)(unlike dissolution standards in the BCL and Partnership Law, dissolution of an LLC based on examination of Operating Agreement)] No statutory buy-out No statutory provision for preliminary injunctive relief Court may appoint a receiver or liquidating trustee once dissolution is granted (LLC Law 703)

15 DERIVATIVE CLAIMS Claims brought by a shareholder on behalf of a corporation Seeking remedy for unlawful conduct by those in control Any award or remedy received goes to the corporation not the individual

16 DERIVATIVE CLAIMS: BCL 626 Plaintiff must: 1. Have been a shareholder (a) at the time the action was commenced, and (b) at the time the offending conduct that forms the basis of the complaint took place; and 2. make a pre-suit demand; or plead with particularity demand futility

17 DERIVATIVE CLAIMS: LLCS A member of a limited liability company may bring a derivative action Governed by common law Nevertheless, Plaintiff must: 1. Have been a member (a) at the time the action was commenced, and (b) at the time of the offending conduct took place 2. Make a pre-suit demand See Billings v. Bridgepoint Partners, LLC, 21 Misc. 3d 535, * (Sup. Ct., Erie County, Sept. 19, 2008)

18 ACCOUNTING The systematic and comprehensive recording, summarizing, and analyzing of financial transactions pertaining to a business Dissolution Proceedings and Derivative Actions Corporations, limited liability companies, partnerships NOTE: With respect to Partnerships, an action for an accounting is a prerequisite to bringing actions at law. Carlsen v Gross, 36 Misc. 3d 128(A) (App. Term, 2d Dep't 2009) ("During the life of the partnership, partners cannot sue each other at law, but may only bring a proceeding for an accounting, which is an equitable proceeding."); Danovitch v. Gersten Savage LLP, No /13, 2013 N.Y. Misc. LEXIS 2977, *6, (Sup. Ct. July 8, 2013) (dismissing claims for fraud, conversion, embezzlement, breach of the partnership agreement and breach of fiduciary duty because legal claims required inspection of the partnership books, records, and accounts)

19 VALUATION OF DISTRESSED COMPANIES

20 VALUATION APPROACHES Market Approach Income Approach Asset Approach

21 VALUATION APPROACHES Market Guideline Public Companies Method Private Transaction Multiples Method Income Discounted Cash Flows Method Capitalized Earnings Method Asset Net Asset Value Method Excess Earnings Method (Hybrid)

22 DISTRESSED COMPANIES Methods Premise of Value Going-concern Liquidation

23 DISCOUNTS Lack of Control (Minority) Illiquidity (Lack of Marketability)

24 NORMALIZATION ADJUSTMENTS Control Adjustments Non-Recurring Items Non-Operating Items

25 NON-OPERATING ASSETS/LIABILITIES Investments Real Property Related Party Loans Other

26 REVIEWING REPORTS Conclusion of Value (Opinion) Calculation of Value Comprehensive Report Summary Report

27 Questions?