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In Pennsylvania, can you be liable for someone else’s breach of their fiduciary duty to a co-owner of a closely held business if you knew about the breach, were somehow involved with it, and assisted or encouraged that person’s breach? Section 876 of the Restatement (Second) of Torts addresses the civil tort (but not the criminal act) of “aiding and abetting.” The Pennsylvania Supreme Court has never expressly adopted the tort, but both the Pennsylvania…
When two or more people become owners of a limited liability company and embody their relationship in an operating agreement, they usually see sunshine and rainbows in their future. They have an idea, they have a corporate structure, and they have each other. But there comes a point in the life of many a multi-member LLC where that sunshine and those rainbows from the early days turn into a large stop sign. Disagreements about some…
Many transactional attorneys view the fiduciary duties that flow from those in control of a company—officers, directors, managers, general partners and majority shareholders—to those not in control to be a nuisance because of the uncertainty they introduce into corporate transactions. To these attorneys, those duties are particularly problematic in the context of limited liability companies, limited liability partnerships and similar non-corporate entities because their contours are less defined than in a traditional corporation. This uncertainty…
You represent a minority shareholder of a closely-held corporation and the company is having an off year. The majority shareholder is the sole member of the board and serves in every officer position. She draws significant compensation. Without a business justification, she unilaterally decides to double her salary and have the company pay the mortgage on her vacation home. Your client is the only other shareholder and likely the only person hurt by the majority…
This column previously analyzed the Commonwealth Court’s decision in Pittsburgh History and Landmarks Foundation, 161 A.3d 394 (Pa. Commw. Ct. 2017), and its potential impact on the attorney-client privilege in derivative litigation. The Pennsylvania Supreme Court subsequently granted petitions for allowance of appeal in the case, setting the stage for the court’s first decision addressing derivative litigation in more than 20 years. The court’s Jan. 23 decision in Pittsburgh History emphasized the strength of the attorney-client privilege in…
There are many ways that an owner of a closely-held business can use their superior financial resources to gain an advantage over their co-owners in a dispute. One common way is the use of a capital call provision to dilute the interest of minority owners or to create off-setting claims against them. “Weaponizing” capital call and dilution provisions can be an effective sharp elbow tactic in business divorce situations but practitioners should be wary of the…
In a perfect world, groups of potential business partners would sit down before they started their new ventures to hash out the details of their relationship. They would work in close consultation with one or more attorneys to produce detailed subscription, operating and loan agreements documenting their arrangements and clearly delineating responsibilities. In the real world, the birth of closely-held businesses is sometimes far messier. Despite their sophistication, entrepreneurs and businesspeople sometimes build and invest…
Closely held companies are like marriages but without the sex or kids to hold things together. And just like some marriages, closely held companies can fall apart. Sometimes these “business divorces” and the painful litigation they generate are inevitable. Business partners have different personalities, expectations regarding finances and strategies for interacting with the world and one another. Some business divorce litigation involving limited liability companies might be resolved more easily or avoided altogether with the…