Partnership / Shareholder / LLC and LLP Disputes

Orange County Partnership / Shareholder / LLC and LLP Disputes

The most common types of business association disputes revolve around breaches of duty, shareholder malfeasance, and refusal to dissolve.

Breach of Fiduciary Duty

A fiduciary duty refers to the duty that an individual must abide by when acting on behalf of another person or a business. Business partners, directors and officers in partnerships and corporations owe a fiduciary duty to the organization or partnership.

The fiduciary duty comprises of several distinct duties, these include the duty to act in the utmost good faith and fair dealing, and the duty of confidentiality and loyalty. Examples of violations of the fiduciary duty include putting the individual’s interests over the businesses. A common form of the breach of fiduciary occurs when a business partner learns of an opportunity in his work as a partner, and takes advantage of the opportunity for his personal benefit without first notifying or receiving the consent of his other partners.

Shareholder Squeeze-Out and Freeze-Out Litigation

A squeeze-out, also known as freeze-out, is a strategy that majority shareholders use in order to force minority shareholders to relinquish ownership of the company. This can include when the majority shareholders incorporate a second corporation then merge the second corporation with the first in order to pressure the minority shareholders to sell their shares.

California law provides some protection against these tactics. When a constituent corporation or its parent corporation owns either directly or indirectly more than half the voting power of the constituent corporation prior to a merger the 50/90 rule applies.

The 50/90 rule prevents the non-redeemable common shares or non-redeemable common equity of an acquired constituent corporation from being converted into anything besides non redeemable common shares of the surviving company. However, this rule does not apply to short-form mergers; instances where the commissioner of certain state regulatory boards approves the terms and conditions of the transactions, or if all the shareholders in the class to be affected consent.

However, if squeeze out tactics are applied the most common remedy is for judicial dissolution. California Corporations Code § 1800(b)(4) provides this remedy. Section 1800(b)(4) allows a shareholder group that owns more than one-third of a non-closely held corporation’s shares to file for dissolution if the majority has acted in “persistent and pervasive fraud, mismanagement or abuse of authority or persistent unfairness toward any shareholders.” The question in determining whether to dissolve the corporation revolves around the blameworthiness of the majority's conduct.

Judicial Dissolution – LLC and Partnerships

When differences of opinion in management decisions become too unwieldy the best situation may be to dissolve the business. However, all partners may not agree with the decision to dissolve. In these circumstances an involuntary (judicial) dissolution may be required.

The process to obtaining a judicial dissolution varies in California depending on the type of business association.

Dissolutions for limited partnerships may be brought by a partner if it becomes unreasonably practicable to carry on with the business as required by the partnership agreement. In California Limited Liability Companies (LLC) any member or manager may initiate the proceeding, but must prove one of 5 circumstances warrants the dissolution including it being unreasonably practicable to carry on with the business and meet the requirements of the articles of organization; fraud; or other reasons enumerated by California law. Further, it is important to remember that LLCs and Limited Partnerships often are managed by operating agreements which bar a majority member from taking action to dissolve the business.

Contact an Experienced Orange County Business Litigator

Tony T. Liu is an experienced business lawyer with expertise in corporate, partner, and LLC disputes. Schedule a consultation today by calling (714) 415-2007.

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