Articles Posted in Shareholder Disputes

It’s commonly said that you have to spend money to make money, but taken too far, that philosophy can easily bankrupt a company. When that company has investors and shareholders whose money you’re spending so you can try to make money, you have to justify your expenses to those shareholders. You have a responsibility to spend their money wisely so they can expect a good return on their investment.

According to a series of lawsuits filed against Madison Square Garden Entertainment Corp., the company allegedly made a series of moves the shareholders considered to be in violation of the company’s fiduciary duty.

One such move was the decision made by MSG Network’s board of directors and controlling stockholders to merge with MSG Entertainment. The reason given for the move was to save costs, but the minority shareholders allege the move was not made with their best interests in mind. Continue reading ›

In a recent 11th Circuit Court of Appeals decision, Warrington v. Rocky Patel Premium Cigars, Inc., No. 22-12575, 2023 WL 1818920 (11th Cir. Feb. 8, 2023), the court provided valuable lessons for partners, shareholders, and small business owners who may find themselves in disputes. This case serves as a cautionary tale, highlighting the importance of careful strategy and legal counsel when pursuing litigation or arbitration.

The dispute centered on Brad Warrington, a minority shareholder in Rocky Patel Premium Cigars, who wanted to divest from his holdings in the company. The buy-sell agreement between Warrington and Rakesh Patel, the majority shareholder, included an arbitration provision for any disputes arising out of the agreement. However, the case demonstrates how mistakes made during litigation can result in a waiver of the right to arbitration.

After years of disagreement over the value of Warrington’s shares and alleged improprieties by Patel, Warrington found a private buyer and notified Patel of his intention to sell. Patel refused to acknowledge the notice and subsequently sued Warrington in Florida state court, seeking a declaratory judgment and alleging breach of contract, among other claims.

While the state action was pending, Warrington sued Patel in federal court, bringing several counts, including breach of contract and breach of fiduciary duty. Patel moved to dismiss, remand, or stay the federal action, but the district court denied his motion. It wasn’t until June 2022 that Patel moved to stay and compel arbitration under the agreement. However, the district court denied this motion, finding that Patel had waived his right to arbitrate by initially filing in state court and moving to dismiss or remand Warrington’s federal action. Continue reading ›

When starting a business, co-owners envision the best—working together productively and profitably. But it is all too common for business partners to encounter a serious impasse over how to operate the business. When partners are unable to work through a dispute, it may be time for one partner to exit the company via a buyout of their interest. It is not uncommon for this scenario to arise in conjunction with claims that the majority shareholder or shareholders are oppressing the minority shareholder or shareholders.

For Illinois corporations, the Illinois Business Corporation Act of 1983 (BCA) permits shareholders to pursue legal action against each other based on allegations of fraud, illegal activity, corporate waste or other disruptive conduct. The BCA provides for 12 categories of relief that a court may order as an alternative to dissolving the business. Minority shareholders frequently opt to pursue the remedy of a buyout, in which the exiting shareholder’s interest is purchased by the remaining shareholders for “fair value.” Similarly for Illinois LLCs, the Illinois Limited Liability Company Act provides that a court may order the entity or the remaining members to purchase the interest of the outgoing member.

The BCA defines “fair value” as the value of the shares “taking into account any impact on the value of the shares resulting from the actions giving rise to a petition under this Section.” The statute goes on the explain that “‘fair value,’ with respect to a petitioning shareholder’s shares, means the proportionate interest of the shareholder in the corporation, without any discount for minority status or, absent extraordinary circumstances, lack of marketability.” For many companies, this provides a much more favorable valuation to a minority shareholder than selling shares for fair market value or any other metric of value normally employed when selling an interest in a small business. This is particularly true for closed (or closely held) corporations where a market for the minority’s shares might not otherwise exist since the statutory valuation does not generally speaking allow for a discount for the lack of marketability of the minority’s shares. Continue reading ›