Business Divorce - Douglas Hirsch

Typical examples of misconduct include stealing assets from the business, stealing business opportunities, using the business to pay for personal assets, paying the operators of the business inflated salaries instead of making a distribution to all stakeholders, paying family members inflated or no-show salaries, falsifying financial records, siphoning customers, competing with the business while working for the business and misappropriating the business’s intellectual property.

Stakeholders that have been damaged by such misconduct have a wide array of remedies to recover their losses and monetize their stake in the company. Often, the wrongdoer owes a fiduciary duty to the stakeholder, even where a partnership or operating agreement disclaims fiduciary duties. Therefore, business divorce cases usually focus on claims for breach of fiduciary duty and fraud.  Additional remedies may include a derivative action (similar to a class action), appraisal rights or a dissolution action. While business divorce cases often involve significant damage recoveries, those recoveries are usually accompanied by a settlement agreement whereby one party buys the other party’s stake in the business, hence the term “business divorce”.
 

DOUGLAS HIRSCH

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Douglas Hirsch is a founder of Sadis & Goldberg LLP and is recognized as one of the leading business divorce attorneys in New York and Delaware. With over thirty-five years of experience, Mr. Hirsch has secured significant verdicts and appellate victories in cases involving disputes between members of limited liability companies, disputes involving limited partnerships and shareholder disputes.

Some of Mr. Hirsch’s representative cases include:

• SkyBridge Capital II LLC v. Premium Point Investments LP, et al., Supreme Court New York, Index No. 653172/2018. Obtained $26M of recoveries for an investor in a limited partnership as a result of fraudulent marking of partnership assets.
• Fasano et al. v. Dangdang Holding Company Ltd. et al., United States District Court, S.D.N.Y., Civil Action No. 16-8759. Obtained $21M settlement for a class of ADR holders who alleged the company was taken private by controlling shareholders at a below fair value price.
• Weisz v. Palliatech Florida LLC, AAA Arbitration. Secured a first of its kind ruling under Florida’s revised LLC Act that a minority member could not waive its right to dissolution. Recovered $14.5M for client.
• SDF Funding LLC v. Fry, Delaware Court of Chancery, C.A. No. 2017-0732. Secured $12M settlement in a derivative action on behalf of minority shareholders alleging breach of fiduciary duty by a controlling shareholder.
• Stavroulakis v. Bareburger Group LLC et al., Index No. 653478/2015 (N.Y. County, J. Kornreich). Summary judgment in favor of a minority investor for breach of fiduciary duty and oppression. Recovered a multi-million dollar settlement for client.
• Celia v. Celia, NY Supreme Court, Saratoga County, Index No. 2020-2282. Secured a confidential settlement for a minority shareholder in a dispute over ownership and valuation of a successful New York-based construction company as well as a related development company.
• Moyal v. Group IX, Inc. et al., Supreme Court of NY, Index No. 601973/2007. Obtained a complete defense verdict in a shareholder derivative suit alleging breach of fiduciary duty.

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CoNTINGENCY FEES

Mr. Hirsch often represents clients on a full contingency basis if the case involves more than $6M of damages. For cases involving less than $6M of damages, Mr. Hirsch generally handles the case on a reduced hourly basis with a “success fee”. If you suspect misconduct in connection with a business venture in which you hold a stake or have questions about your rights in a partnership, limited liability company, or corporate entity, please contact Douglas Hirsch for a free consultation. Below are some typical questions and answers regarding business divorce disputes from an article Mr. Hirsch authored.
 

Top Five Mistakes Minority Investors Make in Business Divorce Disputes

1. “I own a very small interest in the entity so I really have no rights.” This is incorrect. Minority investors have many rights provided by statute and common law, some of which cannot be waived.
2. “I signed an LLC Operating Agreement with a provision stating I waived my right to seek a dissolution, so therefore, I cannot seek dissolution.” Not all waivers are enforceable. States that adopted the model Uniform LLC Act often have LLC Acts that prohibit the waiver of the right to dissolution. We recently handled such a case and obtained a ruling that the dissolution waiver was unenforceable. This was a primary factor in allowing us to secure a $14.5 million buyout of our client’s minority membership interest in a Florida cannabis LLC.
3. “I don’t have a formal signed agreement documenting my interest in the company, so I have no rights.” This is not necessarily true. Oftentimes, emails or other conduct are a sufficient writing to form an enforceable contract. In certain situations, even an oral agreement regarding ownership in a partnership or company can be enforceable.
4. “The Deal Will Be Approved No Matter How I Vote, So There’s Nothing I Can Do.” Wrong. Minority investors have appraisal rights to opt out of a bad merger, acquisition, or similar deal and to instead get paid the fair value of their investment plus interest, as decided by a court. Minority investors can also sue to recover damages for deals involving conflicts of interest or a grossly unfair deal price. We have won appraisal rights actions awarding investors a premium of 12% to 200% over the deal price, with total recoveries over $60 million.
5. “The Largest Investor Has All the Power, So I Have to Do What He Says Or Else.” Not true. The law protects minority investors against coercion, self-dealing, oppression, waste, and other misconduct by majority investors, officers, and directors. Courts can award you significant damages, or invalidate majority investor actions that involve wrongdoing. We have won many cases for minority investors who thought they had no real options before they spoke to us. With the right lawyer and the right fee arrangement, you can stand up to the bully.