Solving Disputes Among Business Partners and Owners

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Those with ownership stakes in privately held businesses, partnerships, or family offices need to closely collaborate with and trust others. When disagreements and disputes over rights and responsibilities arise, individual emotions and personalities can complicate matters. This ongoing series will help owners anticipate potential problems when structuring their businesses and find solutions to issues that commonly arise among owners of privately held businesses, both before and during litigation.

 

 

October 20, 2021

Two Common Threshold Issues in LLC Ownership Disputes: Choice of Law and Subject Matter Jurisdiction

By Alec Kraus, Kirstie Brenson, and Adam Diederich

  • Two threshold issues may ultimately determine the outcome of an ownership dispute lawsuit involving a limited liability company (LLC): what law governs the dispute, and what court has jurisdiction to resolve the dispute?
  • Under the internal affairs doctrine, the law of the jurisdiction where the company is organized governs the relationships among a company, its members, and its managers.
  • Courts generally have broad subject matter jurisdiction to resolve issues involving domestic LLCs, but a court may not dissolve a foreign LLC.

Ownership disputes often arise from a common scenario: a few friends start an LLC together. The friends each take an ownership interest in the LLC and decide to organize their LLC under Delaware law. Over time, the business grows, but the friendship crumbles. The friends disagree about the direction of the business, resulting in a dispute over control of the company. Despite the friends’ best efforts to resolve the dispute amicably, litigation seems likely.

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August 2, 2021

Attorney-Client Privilege in Ownership Disputes: Three Ways Companies Can Shield Privileged Communications From Their Directors

By Alec Kraus, Kirstie Brenson, and Adam Diederich

Directors owe fiduciary duties to the company. To make informed decisions and satisfy those fiduciary duties, directors generally have broad access to the company’s books and records. We previously explained how this broad access may allow current and former corporate directors to access privileged communications between a company and its attorneys—even during a dispute between the company’s directors.

In some instances it may be necessary for the company to shield privileged communications from a director. Many jurisdictions allow a company to withhold its privileged communications from a director if the company can show that the director has an improper purpose or is acting adversely to the company. A company may also be able to shield its privileged records from a director if the company’s board appoints a special committee to handle a dispute involving the director, or if the director preemptively agrees to limit their access to certain company records.

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June 24, 2021

Theranos Founder Elizabeth Holmes’s Trial Tests Attorney-Client Privilege

By Kirstie Brenson, and Adam Diederich

Elizabeth Holmes, founder and ex-CEO of now-defunct blood testing start-up Theranos, is once again making headlines, this time for her upcoming criminal trial and related court proceedings.

Holmes and Theranos have been in the news for more than a decade, with initially favorable publicity about a purportedly innovative blood-testing technology, followed by investigative reporting and regulatory action concerning whether the technology worked (or even could be dangerous), and culminating in Holmes’s indictment on federal criminal charges.

In Holmes’s criminal case, the United States successfully asked a federal judge to order Holmes to disclose communications between Holmes and Theranos’s law firm. Holmes resisted the disclosure, contending that the communications were protected by the attorney-client privilege because she had sought legal advice in her personal (not her corporate) capacity. The court ruled that none of the documents was protected from disclosure.

While Holmes’s latest legal misfortune arises in the context of her criminal case, the trial court’s ruling is a good reminder to companies and their stakeholders about the importance of the attorney-client privilege in anticipation of civil litigation.

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June 7, 2021

Attorney-Client Privilege in Ownership Disputes: When Directors Can Access Privileged Corporate Records

By Alec Kraus, Kirstie Brenson, and Adam Diederich

Consider this scenario: the directors of ABC, Inc. are choosing sides over control of the company, although no director has sued any other director or the company yet. John is one of ABC’s directors. He wants to review emails between other board members and ABC’s attorneys discussing the battle for control. Can a majority of ABC’s directors withhold these privileged communications from John?

Generally, no. Corporate directors have the right, subject to certain exceptions, to inspect all company books and records, including records containing privileged communications with the company’s attorneys. (Our next post will explain these exceptions and how companies can prevent a director from obtaining privileged records.)

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March 4, 2021

Attorney-Client Privilege in Ownership Disputes: Facebook Shareholder Barred From Accessing Privileged Company Documents

By Kirstie Brenson and Adam Diederich

A recent Delaware court decision rejecting a Facebook, Inc. shareholder’s attempt to access the company’s attorney-client privileged documents concerning a Federal Trade Commission (FTC) investigation shows that, as we previously explained, it remains difficult in most jurisdictions for a shareholder to obtain its corporation’s attorney-client communications.

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January 25, 2021

Common Ways to Resolve Disputes and Deadlocks in a 50/50 Business

By Hugo A. Gallegos

At some point in a business relationship, differences of opinion are likely to arise. In businesses where there are equal owners of the company, it is important to ensure that there are carefully drafted governing documents or a standalone buy/sell agreement that detail the process for resolving a conflict or impasse.  50/50 business owners should review the company's operating agreement, shareholders agreement, or partnership agreement to determine the process for resolving that impasse.

Owners should consider outlining the types of disputes and the different procedures for resolving those disputes in their governing documents. Having these discussions early in the process of setting up a business may help the owners resolve disputes quickly and effectively.

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January 5, 2021

Death, Disability, Divorce, and Disputes: Know What Your Company’s Governing Documents Dictate in the Event of a Crisis

By Adam Diederich, Allison K. Pfeifle, and Kirstie Brenson

2020 was an unprecedented year for business owners. It brought a pandemic, a deep recession, a civil rights movement, and civil unrest in cities across America. While it’s tough to prepare for the unprecedented, companies are routinely faced with four serious challenges that should be addressed in their plans and governing documents: when an owner dies, becomes disabled, or gets divorced, or when multiple owners have a dispute.

Now is a good time to review your company’s governing documents and succession plans to ensure the company is prepared to deal with whatever the future brings before it happens.

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December 16, 2020

Minority Shareholders: Understand Your Fiduciary Duties and How to Eliminate Them

By Kirstie Brenson and Adam Diederich

When acquiring shares in a corporation, minority shareholders often evaluate the profitability of the corporation, the value of their shares, and what protections are in place to shield them from wrongdoing at the hands of the controlling shareholders. Most minority shareholders likely believe that they do not owe any obligations to their fellow shareholders or to the corporation. But under Illinois law, minority shareholders of certain types of corporations may actually owe fiduciary duties even if they are not directors or officers of those corporations.

This post explains the circumstances in which minority shareholders may owe fiduciary duties and steps that shareholders may take to eliminate any fiduciary duties they might owe. (Our prior posts explain common areas of disagreement between equal owners and rights that minority owners should seek.)

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October 26, 2020

Minority Shareholders: Seek These Rights Early On

By Turner J. Binkley and Nicholas M. Tipsord

Minority owners of a business face unique challenges. With limited or no control over the management and governance of a business, minority owners can be unfairly left in the cold or squeezed out. However, deliberate preparation and negotiation at the initial stages of the business can set up minority owners with the necessary tools to eliminate or reduce many of these difficulties and even avoid future conflict.

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October 19, 2020

Four Considerations When Entering Into a 50/50 Business Relationship

By Hugo A. Gallegos and Nicholas M. Tipsord

Unlike businesses with a single controlling owner or several owners, a 50/50 business by its very nature is ripe for disagreement between its owners. Owners of a 50/50 business will need to proactively consider how to handle disagreements when setting up their business venture and drafting their operating agreement, shareholders agreement, or partnership agreement.

This first post explains common areas of disagreement between 50/50 owners. (Our next post will explore deadlocks between 50/50 owners and explain how to resolve them.)

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October 7, 2020

Attorney-Client Privilege in Ownership Disputes: Illinois Corporations and Other Jurisdictions

By Adam Diederich and Kirstie Brenson

We previously illustrated a scenario where the majority member and manager of an Illinois Limited Liability Company (LLC) investigates one of the LLC’s minority members for suspected wrongdoing. We explained that the minority member could likely obtain copies of emails between the LLC’s manager and attorney through a books and records request or through discovery in litigation – even if the company’s investigation of the minority member is the subject of those emails – unless the LLC’s operating agreement places limitations on the member’s right to access those documents.

But that is not the case in every jurisdiction. Rather, in most jurisdictions, a member of an LLC or a shareholder of a corporation generally cannot obtain access to the privileged communications of their LLC or corporation. Only in rare circumstances can a member or shareholder demonstrate, after a fact-intensive analysis, that they have good cause to access the LLC’s or corporation’s privileged communications.

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September 30, 2020

Attorney-Client Privilege in Illinois Ownership Disputes: Protecting Privileged Documents

By Adam Diederich and Kirstie Brenson

Consider this scenario: an Illinois limited liability company (LLC) has a majority member and three minority members. The majority member also happens to be the LLC’s manager, who we will refer to here as “Manager.” Manager suspects that one of the minority members (Minority Member) is embezzling company funds and begins to investigate Minority Member’s actions with the LLC’s attorney. Can Minority Member obtain copies of emails between Manager and the LLC’s attorney, either through a books and records request or through discovery in litigation? Unless the LLC’s operating agreement states otherwise, it is certainly possible. (See our prior post, which explains how members of an Illinois LLC can pierce the LLC’s attorney-client privilege to obtain communications between the LLC’s managers and its attorneys.)

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September 23, 2020

Attorney-Client Privilege in Illinois Ownership Disputes: Accessing Privileged Documents

By Adam Diederich and Kirstie Brenson

Business divorces are often messy. Those who individually or collectively control a private business sometimes seek to force out owners of non-controlling shares. The reasons vary – personality-driven disputes, disagreements over business direction, or timing and distribution of earnings. In other circumstances, controlling shareholders may want to push out a non-controlling owner because of alleged misconduct, including embezzlement, fraud, or self-dealing. When majority owners seek the legal advice of the company’s attorney to formulate and execute a plan to force out a minority owner, the company wants and expects this advice to be covered by the attorney-client privilege and therefore shielded from disclosure.

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