Shareholder Disputes

Purchaser of Economic Interest in LLC Lacks Standing to Bring Breach of Fiduciary Duty Claim

December 8, 2020 | Peter S. Lubin and Patrick Austermuehle

After the plaintiff purchased an economic interest in an LLC at a UCC sale, she brought claims for breach of fiduciary duty and breach of good faith and fair dealing against the manager of the LLC. The plaintiff alleged that she was entitled to inspect the books and financial documents of the LLC under the membership agreement, and that the LLC had not properly distributed her share of the profits of the sale of its sole asset. The trial court rejected the plaintiff’s arguments, finding that she had only an economic interest, and not a membership interest, in the LLC. The appellate court affirmed, finding that the plaintiff lacked the standing to bring her claims as she was not a member of the LLC under the LLC Act or the amended operating agreement

CFC is an Illinois limited liability corporation created to manage, convert, and sell an apartment complex in Grayslake. The original members of CFC executed an operating agreement which provided that each member’s ownership interest depended on their capital contributions. The Stanley A. Smagala Revocable Trust contributed $3,465,000 and owned 45%, the McGlynn Trust and Grayslake Investments each contributed $1,925,000 and each owned 25%, and John R. Kelly contributed $385,000 and owned a 5% interest.

Smagala was the manager of CFC and had full authority to direct, manage, and control the business of CFC and also to employ accountants, legal counsel, managing agents, and other experts to perform services for CFC. At the end of 2006, the members signed an amended agreement changing their interests from a capital contribution interest to an “economic interest” in the company’s profits and losses.

To fund its $1,925,000 contribution, Grayslake Investments had borrowed $1,500,000 from Founders Bank. Founders Bank filed a UCC-1 to secure its interest in CFC. In July 2009, the Illinois Department of Financial and Professional Regulation of Banking closed Founders Bank, and the Federal Deposit Insurance Company was named receiver. Some assets, including the loan made to Grayslake and its security interest, were sold to Private Bank. Private Bank then renewed its UCC-1 and the note matured in January 2010. Grayslake was unable to refinance or repay the balance of the note, and Private Bank began foreclosure proceedings. Continue reading ›

Promega Settles Lawsuit with Minority Shareholders

November 30, 2020 | Peter S. Lubin and Patrick Austermuehle

We talked about the lawsuit between Promega Corp., a biotech company based in Madison, Wisconsin, and its shareholders a couple months ago in this blog post. At the time, Circuit Judge Valerie Bailey-Rihn said she was convinced minority shareholders had been oppressed by the company and its founder and CEO, Bill Linton, but she was unsure of the best way to remedy the situation and make sure the oppressed shareholders received a fair return on their investment. If she accepts the settlement agreement reached by both parties, she might not have to spend any more time deliberating.

Over the summer, both parties had said they were willing to have a third party buy the shares from the minority investors. All that was needed was to define the terms of the settlement, which they did. Afterwards, they submitted an order to dismiss the case.

The third party is Eppendorf AG, a German company that makes life science instruments. Having a third party buy the shares off the minority investors is a solution that works for everyone because the minority shareholders get a return on their investment without the company having to liquidate any assets to come up with the money to buy the shares back. The judge had mentioned the option of dissolving the company in order to come up with the funds to pay back the minority shareholders, but that would have been a drastic option.

The amount of the settlement has not been made public, but Karen Burkhartzmeyer, a spokesperson for Promega, has said the settlement is fair to all parties and affirms Promega’s commitment to remaining a private company. Continue reading ›

Recent Opinion Highlights Strategy for Shareholders Opposing Corporate Action: Invalidity

November 8, 2020 | Peter S. Lubin and Patrick Austermuehle

In a recent opinion, the Delaware Court of Chancery considered a summary judgment motion in an action by Applied Energetics, Inc. against George Farley, who at the time of the challenged actions was the sole member of the company’s board of directors and compensation committee as well as an officer. The suit sought to undo certain actions taken by Farley on behalf of Applied and recover certain amounts the company paid him. The company sought a declaration that Farley’s actions on behalf of Applied were invalid for lack of authorization. The Court granted the company summary judgment on the issue of whether Farley’s actions were invalid for a lack of authorization but denied summary judgment on the other claims, including on the issue of whether Farley’s actions could potentially be validated under §205 of the Delaware General Corporation Law and that Farley could potentially recover damages from Applied for allegedly unpaid compensation.

Applied was founded in 2002 in response to the terrorist attacks on 9/11. The company markets, develops, and manufactures products for the defense and security industry. At its peak in 2006, the company achieved a market capitalization of nearly $1 billion. However, things went downhill for the company after that and just two years later, the company’s share price had fallen by nearly 98%. The company continued its decline over the next decade shedding employees and directors until five of the company’s six directors had resigned, leaving Farley as Applied’s only remaining director.

Alone at the helm of the company which had ceased all operations by that time, Farley attempted to revive Applied with the help of Steven McCahon, one of the company’s founders who had previously served as its chief technology officer. McCahon had left Applied to form his own company. Farley and McCahon decided that Applied would contract with McCahon’s new company to assemble a scientific team and develop new technologies based on Applied’s patent portfolio. To pay McCahon, Farley and McCahon agreed that Applied would issue shares of common stock to McCahon and accrue cash compensation for him at a rate of $150,000 per year, payable once the company had sufficient funds to make the payments. Continue reading ›

The Downside of Going into the Family Business: When Family Problems Become Business Problems

November 2, 2020 | Peter S. Lubin and Patrick Austermuehle

Leprino Foods Co. is the largest manufacturer of mozzarella cheese in the world and is solely responsible for making all the mozzarella that goes on top of Domino’s, Papa John’s, and Pizza Hut’s pizzas. It’s worth billions of dollars, but it’s also a family business.

It was founded in Denver, Colorado in the 1950s by Michael and Susie Leprino. The couple had five children, including Michael Jr. and James. James went into the family business as soon as he had graduated from high school, and while Michael Jr. was involved in the business, he also had his own career in banking and real estate.

James and his daughters, Terry Leprino and Gina Vecchiarelli, together own 75% of the company’s stock.

Michael Jr. died in August of 2018 and his daughters, Nancy, Mary, and Laura Leprino, together own the remaining 25% of the stock in the company. In July, Nancy and Mary sued their uncle and cousins in Denver District Court for allegedly managing the company in a way that provided the greatest financial reward for them, while ignoring the financial interests of the minority shareholders.

The lawsuit alleges James and his daughters tend to align their votes so the outcome always provides them with the greatest financial benefits, but allegedly leaves Nancy and Mary out in the cold. Nancy and Mary also allege they have been unable to obtain financial records to which they are legally entitled as shareholders of the company. Continue reading ›

Manufacturer of Hearing Implant Technology Went from Promising to Distressed

October 15, 2020 | Peter S. Lubin and Patrick Austermuehle

Envoy Medical is a medical device manufacturer based in Minnesota with technology that has the ability to restore hearing to the deaf. Unfortunately, the company’s prospects were allegedly cut short after Glen Taylor took over as CEO, which not only caused financial harm to the company but denied life-changing technology to the deaf.

As CEO of the medical-device company, Patrick Spearman guided the company to the early success it enjoyed, including getting FDA approval for the invention and marketing the company’s new device as a replacement for hearing aids. A video advertising the device that showed a mother getting emotional when she heard her voice for the first time after getting the implant went viral.

Another remarkable story of the potential of the device was of a Deputy Sheriff with profound hearing loss who, after receiving the implant, passed the hearing test that allows him to work the streets, while law enforcement officers with hearing aids are kept off the streets.

The medical invention was also featured on a variety of prominent television programs, including The Celebrity Apprentice, CNN, and the Ellen DeGeneres Show, among others. In 2011, Google gave the company an award for having created one of the top 11 inventions of the year.

In 2012, Taylor’s daughter was fired with cause by Spearman’s management team, at which point Taylor allegedly retaliated by having Spearman fired as CEO and taking his place in that role. Taylor allegedly then went on to fire all the key people who had the knowledge necessary to ensure the company’s financial success.

The billionaire business owner and majority shareholder of the Minnesota Timberwolves and the Minneapolis Star Tribune allegedly went on to use his money and influence to force control of the company out of the hands of its shareholders by using a series of loans and preferred share purchases to dilute their voting power. According to the lawsuit, the terms of those loans and purchases were allegedly not fully disclosed to the shareholders. Continue reading ›

Two Major Luxury Brands Were Scheduled to Merge, But There’s Been a Hiccup

October 10, 2020 | Peter S. Lubin and Patrick Austermuehle

LVMH Moët Hennessy-Louis Vuitton SE was scheduled to acquire Tiffany & Co. no later than August 24^th, 2020, but the merger came to a halt when LVMH failed to even apply for antitrust clearance.

Antitrust laws exist to avoid monopolies. If two major companies merge to form one company, there’s a fear that the existence of a huge corporation, which now owns the market shares of both companies involved, might dominate the industry, thereby making it difficult, or even impossible for any other company to compete with them. Since healthy competition promotes innovation and helps drive down prices, it’s necessary for a healthy economy.

As a result, when two major corporations merge to form one company, they have to file for antitrust clearance with the authorities in the markets in which they operate, meaning the authorities look at the market share of the two companies and agree that the merger would not create a monopoly. But according to a recent lawsuit filed by Tiffany, LVMH has not only failed to acquire the antitrust clearance by the agreed-upon date but has failed to even file for antitrust clearance.

The terms of the merger allowed for an extension to November 24^th, 2020 if antitrust clearance had not been obtained by August 24^th, but the fact that LVMH still has yet to even file for antitrust clearance in two of the three relevant markets raises doubts about whether they’re taking this merger seriously. Tiffany has responded by filing a lawsuit in the Court of Chancery of the State of Delaware.

The lawsuit is asking the court to provide an order that LVMH must abide by the terms of the acquisition, which had been agreed upon by both companies.

Even before the lawsuit was filed the acquisition had been having problems. LVMH had claimed that Tiffany had suffered a Material Adverse Effect (MAE) as a result of the COVID-19 pandemic, and had tried to buy shares of Tiffany at a lower price per share than the price they had agreed upon in the terms of the contract. Continue reading ›

NCLAT Overturns Firing of Executive Chairman of Tata Sons and Reinstates Him As Chairman

September 18, 2020 | Peter S. Lubin and Patrick Austermuehle

We often hear people talk about private companies going public, but it’s not as often that it goes the other way around – from a public company to a private one. There’s a lot of paperwork involved either way, but unless you have a plan for repaying your investors, going from public to private also means you are denying your shareholders (especially minority shareholders) the stake in the company for which they have already paid.

The National Company Law Appellate Tribunal (NCLAT) said as much in a recent ruling in which it decided against allowing Tata Sons, the holding company of Tata Group, to convert itself from a public company to a private one. Although the Registrar of Companies had approved the transition, the NCLAT said that approval went against Section 14 of the Companies Act of 2013. The NCLAT also pointed out that the move, made by the directors and majority shareholders of the software conglomerate, would be oppressive towards the company’s minority shareholders.

The NCLAT also reinstated Cyrus Mistry as the company’s executive chairman. He had previously been fired back in October of 2016 due to a supposed lack of performance, but the NCLAT ruled that his firing had been illegal.

Mistry’s family owns an 18.4% stake in Tata Sons, making them a minority shareholder of the conglomerate, and Mistry’s legal troubles with Tata Sons began in 2016 with accusations of mismanagement and oppressing minority shareholders – charges that eventually led to Mistry getting ousted as executive chairman. Continue reading ›

Maryland High Court Officially Recognizes Independent Cause of Action for Breach of Fiduciary Duty

September 16, 2020 | Peter S. Lubin and Patrick Austermuehle

Maryland’s highest court, the Court of Appeals, recently settled a longstanding question regarding whether Maryland law recognized an independent cause of action for breach of fiduciary duty. With its opinion in Plank v. Cherneski, the Court resolved an area of confusion that has troubled Maryland courts for more than 23 years since the Court’s 1997 opinion in the seminal case of Kann v. Kann.

In 1997, the Kann court held:

There is no universal or omnibus tort for the redress of a breach of fiduciary duty by any and all fiduciaries. This does not mean that there is no claim or cause of action available for breach of fiduciary duty. Our holding means that identifying a breach of fiduciary duty will be the beginning of the analysis and not its conclusion.

Judge Agrees Shareholders Were Oppressed, But Deliberates Over How to Compensate Them

September 12, 2020 | Peter S. Lubin and Patrick Austermuehle

Investing is supposed to be a long-term strategy to build wealth, but expecting shareholders to wait more than 60 years before they can get a fair return on their investment is far beyond what any investor would consider reasonable.

That was allegedly the case for the minority shareholders of Promega Corp., the biotechnology company based in Fitchburg, Wisconsin. According to a lawsuit filed by shareholders back in 2016, Bill Linton, Promega’s founder and CEO, allegedly used manipulative and bullying tactics to become a majority shareholder of the company. His actions allegedly left the minority shareholders with no hope of getting a decent return on their investments before 2078 at the earliest.

Circuit Judge Valerie Bailey-Rihn, who has been hearing the case, has said that she was leaning towards the plaintiffs and agreeing that they had been oppressed by Linton’s actions. Now the only two things left to determine are 1) how to punish Promega and provide restitution for the minority shareholders who were allegedly oppressed by Linton’s actions; and 2) how to determine the price of the stocks for which the minority shareholders are allegedly owed compensation. Continue reading ›

MetLife Allegedly Underreported Claims to Investors

July 29, 2020 | Peter S. Lubin and Patrick Austermuehle

Back in January of 2012, the City of Westland Police and Fire Retirement System filed a class-action lawsuit against MetLife Inc. They alleged that the insurance company used data from the Social Security Administration’s “Death Master File” (DMF) to determine when to stop paying annuities to deceased policyholders, but allegedly did not use the same database to determine when to pay out life insurance policies or the Retained Asset Account, although it could have easily done so.

The insurance company also allegedly failed to include data from the DMF regarding its pending payouts in its quarterly reports to its shareholders, thereby underreporting to its investors the amount of money it would have to pay out to policyholders and overestimating its quarterly profits. This withholding of information made MetLife’s investors think the company had less money in outgoing payouts than it actually had, which allegedly resulted in MetLife maintaining stock prices that were artificially high – as soon as the information was made public, the insurance company’s stock prices allegedly dropped and the plaintiffs of the lawsuit allege they suffered financial damages.

Despite the fact that regulators had looked into the insurance company’s alleged misuse (or at least misreporting) of the data contained in the DMF, MetLife also allegedly failed to disclose to its shareholders the fact that regulators were investigating the insurance company’s misuse of the DMF. Continue reading ›