Corporate and Partnership Disputes

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Business owners and entrepreneurs often chose to establish a corporation, a limited liability company (“LLC”), or a partnership for their enterprise. These forms of ownership have obvious advantages, including limited liability for the owners, an easy way to bring in outside investment by sharing ownership and profits, and the ability to accommodate virtually unlimited growth. While there are infinite variations in the features of these entities, they all have the potential to embody certain attributes of a democracy when more than one owner is involved. There are statutes that apply to corporations, LLCs and partnerships, but they can also have governing documents that function as a kind of constitution. Democracy is at work in these entities because when more than one owner is involved, there are nearly always decisions that require a vote, that is, where the matter can only be accomplished with a prescribed majority or supermajority of voting power being necessary to validate or implement certain decisions.

The question in nearly all democracies, and in corporations, LLCs and partnerships, is what rights does the majority have, and what rights, if any, does a minority owner enjoy? Unfortunately, business co-owners and partners, like voters in general, do not always agree. Indeed, it is common in corporations, LLCs and partnerships, with a relatively small number of owners, that disputes arise over management and business matters. Often these disputes involve litigation, and it is essential for business owners to understand that the attorney for the corporation, LLC or partnership does not and should not also represent one faction of owners over another. For that reason, if you are an owner and are concerned about your rights, you should consult your own attorney, and not necessarily the attorney for the business. Cohen Rosenthal & Kramer LLP has extensive experience advising business owners in the context of these types of disputes.   

There is a well-developed body of law that provides answers to many of the questions and common fact-patterns that result in disputes among the owners of a corporation, LLC or partnership. In an Ohio “close corporation,” for example, which is a corporation where the shares are not publicly traded and are limited to a relatively small number of owners, the majority or controlling shareholders owe a fiduciary duty to the minority shareholders. These same duties may apply in LLCs and partnerships, too, and they are powerful tools for leveling the playing field within a business.   

A fiduciary duty is one of the highest duties known to the law. It is considered a duty of utmost good faith and loyalty and requires the majority or controlling shareholders to act with the utmost candor and to refrain from self-dealing. Common examples of abuses by the majority or controlling shareholders include refusing to declare dividends, or granting themselves exorbitant salaries and bonuses while denying the same to minority shareholders, or leasing or buying property from themselves at inflated rents or prices. The law is clear concerning close corporations that majority or controlling stockholders are liable, absent a legitimate business purposes, if they breach their heightened fiduciary duty to the minority by using their majority control to their own advantage and do not provide minority shareholders with an equal chance to benefit.

This duty of majority shareholders to the minority is so powerful that even if the majority takes action it is otherwise authorized to take by law or by the governing documents of the corporation, if the action disadvantages the minority shareholders and was not undertaken in good faith and for a legitimate business purpose, then it can be considered a breach of fiduciary duty that exposes the majority and controlling shareholders to liability.

Cohen Rosenthal & Kramer LLP has been litigating cases involving disputes between shareholders, partners and members of LLCs for years. Call us if you have questions or concerns about fair and equal treatment in your business.