Husband Not Allowed to Dismiss Request for Judicial Dissolution of Family Firm

Be careful what you request in your complaint, particularly if it's a request for judicial dissolution.  According to a Court of Appeals opinion this week, you'll be stuck with that request if your defendant asks for the same thing.

In Bradley v. Bradley, a husband-wife team were the shareholders and officers of a legal recruiting firm, Laura Segal & Associates ("LSA").  When the couple separated, the business basically did too -- the wife asserted that the husband misappropriated corporate funds and denied her access to the company's books, records, and accounting software.  The husband alleged that the wife was trying to usurp the intellectual property of LSA, freeze the husband out of the business, and terminate his employment.

The husband filed a complaint seeking judicial dissolution, appointment of a receiver, and damages for breach of fiduciary duty.  The wife counterclaimed for judicial dissolution or appointment of a receiver.  The trial court entered a TRO and later a preliminary injunction preventing the parties from taking various actions against each other and "established a procedure allowing the management of LSA’s accounts receivable and payable without the parties having to directly interact with each other."

The husband filed a notice of voluntary dismissal of his dissolution and receivership claims.  The trial court set aside the voluntary dismissal and granted summary judgment on the defendant's counterclaims for judicial dissolution and appointed a receiver.

Three legal issues of note arose in the Court of Appeals opinion:

  • The trial court properly set aside the husband's voluntary dismissal of his dissolution and receivership claims.  The voluntary dismissal was void on its face because, once the wife asserted counterclaims arising from the exact same transactions, the husband lost the authority to voluntarily dismiss claims without the wife's consent.
  • The husband could not challenge the wife's right to dissolution because his own complaint pled facts supporting dissolution (and, of course, he requested dissolution himself).  The husband was not allowed to contradict his judicial admissions.
  • The Court rejected the husband's assertion that the appointment of a receiver should be reviewed de novo.  Instead, the Court followed earlier cases reviewing such appointments for abuse of discretion.

 Full Opinion

Minimizing Windfall: Dissolution Valuation by Royalty

Valuing a closely held business is often a debate over hypothetical dollars, particularly when the company's sole asset is unproven technology.  The Business Court confronted such a situation recently in Vernon v. Cuomo.

The company in question developed a new technology with potential widespread medical application:  silicone-free syringes, which would enable syringes (especially of high-priced medicines) to be pre-filled without risk of contamination.  The potential of the technology, however, was not enough to keep the company together.  Two shareholders asserted dilution and self-dealing claims against the other shareholders.  After a bench trial, the Court concluded that the defendants engaged in self-dealing and breached their fiduciary duty to the plaintiffs.  The Court ordered the judicial dissolution of the company to protect the interests of the complaining shareholders pursuant to N.C.G.S. § 55-14-30(2)(ii).  (Mack wrote about the bench trial opinion last year).

In lieu of dissolution, the defendants exercised their statutory option to purchase the plaintiffs' shares at fair value under N.C.G.S. § 55-14-31(d).  That statute neither defines fair value nor specifies the procedures for a court to use in arriving at it.  In Vernon, Judge Tennille followed a procedure similar to two previous valuation cases, Garlock v. Hilliard and Royals v. Piedmont Electric Repair Co.:  solicit the opinion of an independent appraiser, "but also [take] into account other equitable and practical considerations based on the arguments and submissions of counsel and matters of record."

The added complication of Vernon was that, with the only asset an unproven technology, there was a high risk of windfall on both sides:  "One of the key problems faced by the Court in this valuation process has been how to protect against a windfall by the majority shareholders if the technology proves to be extremely valuable while not requiring the majority to pay an initial price that may be too high if the technology is not adopted widely in the industry."

The Court approved of the methodology of the appointed appraiser, who had extensive IP valuation experience.  The appraiser's methodology included:

  • the discounted future economic income method to discern fair value
  • Latin Hypercube simulation algorithms to generate income estimates
  • a Fisher Pry model to project a market adoption rate for the technology
  • Monte Carlo simulation methods to consider uncertainties in the company's underlying earnings potential

However, because of the uncertainties and the windfall risk, the Court concluded that a royalty sharing arrangement would best capture the value of the technology for both sides.  The Court found that the plaintiff's shares were worth a specific amount, plus a royalty sharing arrangement of a specified percentage.  (The amounts themselves are redacted in the public version of the Court's opinion).  The Court ordered the closing to take place within 20 days, with 50% of the purchase price paid at closing and the balance paid in two annual installments with no interest.

Recognizing the novelty of the approach (and the appellate courts' distrust of novelty), the Court also reached a backup conclusion of the total fair value of the plaintiffs' shares, which would take effect if an appellate court struck down the royalty sharing arrangement.

 

 

[The photo of the syringe is from Zaldylmg's photostream on Flickr, some rights reserved.]

Donovan v. Huffman, September 2, 2009 (Diaz)(unpublished)

The Court granted the motion to dismiss of a member of an LLC in which the Plaintiff sought dissolution, ruling that “'[i]t is not necessary to join members as parties to a proceeding to dissolve a limited liability company unless relief is sought against them individually, however the court shall order that appropriate notice of the dissolution proceeding be given to all members by the party initiating the proceeding.'” N.C. Gen. Stat. § 57C-6-02.1(b) (2007). The law is also clear that '[a] member of a limited liability company is not a proper party to proceedings by or against a limited liability company, except where the object of the proceeding is to enforce a member’s right against or liability to the limited liability company.” N.C. Gen. Stat. § 57C-3-30(b) (2007).'"

The Court further ruled that to the extent the complaint asserted claims against the Defendant regarding his management of the LLC, those claims were derivative in nature and Plaintiff was not entitled to pursue them individually.

Full Opinion

Brief in Support of Motion to Dismiss

Brief in Opposition to Motion to Dismiss

Reply Brief in Support of Motion to Dismiss

Mitchell, Brewer, Richardson, Adams, Burge & Boughman, PLLC v. Brewer, 2009 NCBC 10 (N.C. Super. Ct. March 26, 2009)(Jolly)

When a member leaves an LLC, whether his or her departure is a withdrawal or a dissolution can make a significant difference.  In this case, the characterization of the nature of the Plaintiffs' departure from a law firm LLC determined whether they were entitled to proceeds from contingent fee cases generated after their departure.

If a dissolution had occurred, Plaintiffs' rights were governed by N.C. Gen. Stat. §§57C-6-04(b) and 57C-6-05(3), which said that the law firm would continue in existence and that its managers would be obligated to obtain "as promptly as reasonably possible. . . the fair market value for the [LLC's] assets" and to distribute the recovery to the members of the LLC.  That interpretation might have yielded a significant distribution from the in-process contingent fee cases.

But if the actions of the Plaintiffs constituted a "withdrawal," the Plaintiffs' rights would be governed by N.C. Gen. Stat. §57C-05-07, and their final distributions would be limited to the fair value of their interest in the firm as of the date of withdrawal.  The value of the contingent fee cases was potentially nothing under this analysis.

The Court held in what it described as a case of first impression that the LLC Act does not allow a voluntary withdrawal by a member unless the articles of organization or a written operating agreement provide for a withdrawal.  There was none in this case   It rejected Defendants' arguments to cobble together an operating agreement from various documents, though it did hold that "it may well be in a given case, multiple documents viewed collectively could constitute a written operating agreement as contemplated by the Act."

The Court nevertheless ruled that Plaintiffs were estopped from disputing that they had withdrawn from the LLC.  Judge Jolly held that estoppel is "kaleidoscopic," that it could arise "by conduct, deed, or misrepresentation," and that estoppel "is viewed as 'flexible' in its application." 

The factors he considered in concluding that estoppel applied were (a) the Plaintiff's oral and written representations that they intended to withdraw, including one Plaintiff's statement "I am out of here," (b) the treatment by all parties of Plaintiffs' departure as a withdrawal, (c) the Plaintiffs' formation of their own firm, (d) Defendants' detrimental reliance on Plaintiffs' representations of withdrawal, and (e) Plaintiffs' silence "on the pivotal issue [of whether there had been a dissolution or a withdrawal] for approximately one year."

The Court rejected Plaintiffs' arguments that they could not have withdrawn because they "did not appreciate the distinction between withdrawal and dissolution" at the time they left the firm.  Judge Jolly said that "when they unilaterally chose to leave the Firm, and characterized their leaving as a 'withdrawal,' the Plaintiffs were charged with knowledge of the consequences of their actions; and Defendants were entitled to rely and act upon those actions."

Full Opinion

Brief in Support of Motion for Summary Judgment

Brief in Opposition to Motion for Summary Judgment

Reply Brief in Support of Motion for Summary Judgment

Vernon v. Cuomo, 2009 NCBC 6 (N.C. Super. Ct. March 17, 2009)(Tennille)

Minority sharehoders did not have a "reasonable expectation" of continued employment after serious issues arose between them and the majority which rendered them unable to work together.

Those same shareholders did have enforceable reasonable expectations that their stock ownership interest would not be diluted, however, and the Court invalidated steps taken by the majority to improperly issue themselves more shares in the company.  

The Court held that the Defendants had been engaged in self-dealing through the transactions which diluted the ownership interest of the Plaintiffs.  It rejected the argument that the Defendants were entitled to the protection of N.C. Gen. Stat. §55-8-31(a), which allows for conflict of interest transactions under certain defined circumstances.

Given the receipt by the directors of a personal financial benefit from the transaction, the Court held that the directors were not entitled to the benefit of the Business Judgment Rule.  And in light of the self-dealing nature of the transaction, the burden of proof fell on the Defendant to prove that the transactions were fair, just, and reasonable. They were unable to carry that burden.

The Court ordered the dissolution of the Company, subject to the right of the Company to purchase the Plaintiffs' shares at fair value.

Full Opinion

Reasonable Expectations Of Minority Shareholders Frustrated By Dilution of Ownership, But Not By Termination Of Employment

The "reasonable expectations" of minority shareholders as to continued employment and continued stock ownership were the issue in Vernon v. Cuomo, 2009 NCBC 6 (N.C. Super. Ct. March 17, 2009), decided yesterday by the North Carolina Business Court.

Judge Tennille ruled after a one week trial that the Plaintiffs did not have a reasonable expectation of continued employment, given extreme animosity that had developed among the shareholders of the Company. 

On the dilution issue, however, the Court ruled that Plaintiffs had a reasonable expectation that their ownership interest in the Company would not be diluted, at least not through the means that the Defendants chose to accomplish that dilution. Plaintiffs were restored by the Court to their original ownership position and the Court ordered dissolution of the Company.

The Plaintiffs were two shareholders with a 40% ownership in TriboFilm, Inc., which was developing technology to eliminate silicone as a necessary lubricant in syringes.  They had a serious falling out with the Defendants, five other shareholders who controlled the remaining 60% of the Company.  The Court described the situation as "intolerable" and "dysfunctional."

The majority stripped the Plaintiffs of their status as employees, officers, and directors. Then, after each faction rejected an offer by the other to be bought out, the Defendants implemented a plan to virtually eliminate the Plaintiffs' ownership interest.  Here's what happened as the Court described it:

  • Defendants voted themselves "unrealistic" and "inflated" salaries (most of them had not had any salary at all before this) or salary increases.  The Company did not have the financial ability to pay these salaries.
  • The Defendants then agreed to defer a substantial portion of their new salaries.
  • None of this information regarding salaries and deferral was disclosed to Plaintiffs.
  • Next, the Directors voted to convert a portion of the deferred salary into Company stock at a penny per share, much less than they had been offered by Plaintiffs.
  • Defendants, in their capacities as Board members, then recommended to the shareholders that the number of outstanding shares be increased from 1 million shares to 15 million shares to permit the deferred salary conversion.
  • The Defendants informed the Plaintiffs that the reason for the new shares was to raise additional capital and pay certain obligations.  They did not disclose their plan to exchange their deferred salaries for some of the new stock.
  • The share issuance resolution was approved by the shareholders, over Plaintiffs' objections.
  • The Defendants then each forgave $15,000 of deferred salary (an essentially worthless claim, given the financial state of the Company) in exchange for 1,500,000 shares of Company stock.
  • The effect of the transfer was to immediately reduce each Plaintiff's ownership interest in the Company from 20.2% to 2.4%.

Plaintiffs sued, asserting that their "reasonable expectations" as shareholders to continued employment and continued ownership of their stock had been frustrated.  They lost on the first point, but won on the second.

There Were No Reasonable Expectations To Continued Employment

The Court rejected the argument that the Plaintiffs had a reasonable expectation of continued employment with TriboFilm, at least once they became at odds with their fellow shareholders.  It held:

While shareholders may hold reasonable expectations as a result of their ownership of a small, closely held company, those expectations may be subverted to the overall business interest of the company or may become unsustainable under certain circumstances. At the outset of their involvement, Vernon and Williams had a reasonable expectation that they would continue to work with TriboFilm. That expectation ceased to be reasonable when the Company and the relationships among the shareholders became dysfunctional. It is undisputed on this record that by fall 2005, all trust among the parties had disappeared. The Company could not operate and fulfill its function. There was no communication or cooperation among the small group of researchers who were required to work closely together. A company is not required to fulfill once-reasonable expectations of continued employment where that employment may be detrimental to the ongoing survival of the business. Something had to be done to keep the Company alive and functioning. A majority of shareholders agreed on how to accomplish that goal. The majority was within its rights to terminate the employment of Vernon and Williams, and it did not breach a fiduciary duty by doing so under the circumstances that existed in this case.

Op. ¶78.

There Were Reasonable Expectations Of Undiluted Stock Ownership

The reasonable expectations of the Plaintiffs regarding their continued stock ownership were different.   The Court observed that while startup companies "often have to issue new stock to angel investors," Vernon and Williams "had reasonable expectations that their ownership percentage in TriboFilm in relation to the Individual Defendants' ownership percentage would not be changed without their consent,"  at least not "purely to benefit other shareholders."  Op. ¶72. 

The Court held that the Defendants had been engaged in self-dealing through the transactions which diluted the ownership interest of the Plaintiffs.  It rejected the argument that the Defendants were entitled to the protection of N.C. Gen. Stat. §55-8-31(a), which allows for conflict of interest transactions under certain defined circumstances.

Given the receipt by the directors of a personal financial benefit from the transaction, the Court held that the directors were not entitled to the benefit of the Business Judgment Rule.  And in light of the self-dealing nature of the transaction, the burden of proof fell on the Defendant to prove that the transactions were fair, just, and reasonable. They were unable to carry that burden.

The remedy ordered by the Court was to rescind the issuance of additional shares to the Defendants, restoring the Plaintiffs to their previous ownership percentages.  The Court also held that the actions taken by the Defendants showed "the majority is not operating, and will not operate, the Company in the best interest of all the shareholders."  Op. ¶91.  It therefore ordered the dissolution of the Company, subject to the right of the Company to purchase the Plaintiffs' shares at fair value.

 

Walters & Zimmerman, PLLC v. Zimmerman,, January 7, 2009 (Tennille)(unpublished)

The Court appointed a receiver to conduct the winding up of a dissolved professional corporation.  One of the reasons given by the Court was that the Member-Manager of the dissolved entity, a law firm, had a conflict due to her individual interests and the interests of her new professional corporation.

Full Opinion

Reid Pointe, LLC v. Stevens, 2008 NCBC 15 (N.C. Super. Ct. August 18, 2008)

The Business Court dismissed on a Motion for Judgment on the Pleadings an unfair and deceptive practices claim stemming from a dispute between members of a limited liability company.

CDC, a minority member of the LLCs, argued that the member owning a 70% interest, Grimmer, had removed CDC as a manager and had made unnecessary capital calls in order to force CDC out of the LLC.  CDC also alleged that it had been defamed by Grimmer, that Grimmer had taken steps to cause banks to freeze the accounts of the LLCs, favored his son on a contract with the LLCs, and caused an improper $100,000 payment to be made by the LLCs.  CDC claimed these facts made out a claim under Chapter 75. 

The Business Court held that the conduct involving removal and capital calls were "primarily matters of internal corporate governance that do not relate to the day-to-day business activities of the LLCs.  Accordingly, these matters are not sufficiently 'in or affecting commerce' to sustain an UDTPA claim."  Op. at 16.

A defamation claim met with dismissal because Judge Diaz found it had not been described with sufficient particularity, and the other claims were dismissed because they belonged to the LLCs, not to the members.

Claims seeking judicial dissolution of the LLCs survived.  Judge Diaz found that Plaintiffs' allegations of waste and mismanagement were insufficient because they "fail to allege any specific action or conduct on the part of Grimmer that constitutes waste or demonstrates the misapplication of the LLC's assets."  Op. at 11. He ruled, however, that allegations Grimmer was refusing to pay CDC for services provided, badmouthing CDC to vendors and banks, making capital calls, and refusing to provide information regarding the operation of the LLCs might make out a claim for dissolution.  The Court held:

Applying an indulgent standard to Defendants' pleading, these allegations relating to the deteriorating relationship between Grimmer and CDC are sufficient to allow Defendants to pursue their claim that liquidation is reasonably necessary to protect Defendants' rights and interests in the LLCs.

Op. at 12.

The Court also held that CDC's claim for breach of a construction contract could proceed even though CDC was not licensed as a general contractor.  CDC's contract called for some work that required a general contractor's license, and some that didn't.  Judge Diaz held that:

Although the Court's research has not disclosed any binding precedent on point, there is persuasive authority suggesting that the denial of contract remedies to unlicensed general contractors or construction managers should properly be restricted to circumstances where the contractor seeks compensation for work falling within the statutory definition of general contracting or construction management.

Op. at 13.  The contract extended to matters for which a license wasn't necessary, like selling lots in the development, hiring sales managers, developing budgets and implementing marketing plans.

Full Opinion

Brief in Support of Motion for Judgment on the Pleadings

Brief in Opposition to Motion for Judgment on the Pleadings

Reply Brief in Support of Motion for Judgment on the Pleadings

 

No Unfair And Deceptive Practices Claim In Dispute Between LLC Members

Reid Pointe, LLC v. Stevens, 2008 NCBC 15 (N.C. Super. Ct. August 18, 2008).

The Business Court today threw out, on a Motion for Judgment on the Pleadings, an unfair and deceptive practices claim stemming from a dispute between members of a limited liability company. The Reid Pointe, LLC v. Stevens case also addresses a question of first impression involving an unlicensed general contractor.  There was a judicial dissolution issue as well.

CDC, a minority member of the LLCs, argued that the member owning a 70% interest, Grimmer, had removed CDC as a manager and had made unnecessary capital calls in order to force CDC out of the LLC.  CDC also alleged that it had been defamed by Grimmer, that Grimmer had taken steps to cause banks to freeze the accounts of the LLCs, favored his son on a contract with the LLCs, and caused an improper $100,000 payment to be made by the LLCs.  CDC claimed these facts made out a claim under Chapter 75. 

Judge Diaz granted the Motion on the unfair and deceptive practices claim, holding that the actions involving removal and capital calls were "primarily matters of internal corporate governance that do not relate to the day-to-day business activities of the LLCs.  Accordingly, these matters are not sufficiently 'in or affecting commerce' to sustain an UDTPA claim."  Op. at 16. (There have been a series of cases from the Business Court reaching similar conclusions in cases involving disputes between members of LLCs or between corporate shareholders.  Those cases are Kaplan, Walters & Zimmerman, Schlieper, and Slickedit.)

The defamation claim met with dismissal because Judge Diaz found it had not been described with sufficient particularity, and the other claims were dismissed because they belonged to the LLCs, not to the members.

Plaintiff's claims seeking judicial dissolution of the LLCs survived, but barely. Judge Diaz found that Plaintiffs' allegations of waste and mismanagement were insufficient because they "fail to allege any specific action or conduct on the part of Grimmer that constitutes waste or demonstrates the misapplication of the LLC's assets."  Op. at 11.He ruled, however, that allegations Grimmer was refusing to pay CDC for services provided, badmouthing CDC to vendors and banks, making capital calls, and refusing to provide information regarding the operation of the LLCs might make out a claim for dissolution.  The Court held:

Applying an indulgent standard to Defendants' pleading, these allegations relating to the deteriorating relationship between Grimmer and CDC are sufficient to allow Defendants to pursue their claim that liquidation is reasonably necessary to protect Defendants' rights and interests in the LLCs.

Op. at 12.

Last but not least, one of CDC's claim was for breach of a construction contract.  CDC, however, wasn't licensed as a general contractor in North Carolina, and our law is pretty clear that an unlicensed general contractor can't recover for its work.  The twist here was that CDC's contract called for some work that required a general contractor's license, and some that didn't.

Grimmer argued that CDC was barred from recovering anything at all on the contract, but Judge Diaz held that:

Although the Court's research has not disclosed any binding precedent on point, there is persuasive authority suggesting that the denial of contract remedies to unlicensed general contractors or construction managers should properly be restricted to circumstances where the contractor seeks compensation for work falling within the statutory definition of general contracting or construction management.

Op. at 13.  Given the "indulgent standard" of inquiry required on a Motion for Judgment on the Pleadings, the Court denied the Motion because the contract extended to matters for which a license wasn't necessary, like selling lots in the development, hiring sales managers, developing budgets and implementing marketing plans.

Brief in Support of Motion for Judgment on the Pleadings

Brief in Opposition to Motion for Judgment on the Pleadings

Reply Brief in Support of Motion for Judgment on the Pleadings

 

Vernon v. Cuomo, July 9, 2008 (Tennille)(unpublished)

The Court allowed a motion to bifurcate in this shareholder dispute.  Shortly before trial, the Court agreed to try first Plaintiffs' claims for reasonable expectations, mismanagement, and breach of fiduciary duty; and after determination of those issues to try, if necessary, the issues of valuation and dissolution.  The Order allowing bifurcation was entered with the consent of the parties.

Full Opinion

Motion to Bifurcate

Walters & Zimmerman, PLLC v. Zimmerman, June 2, 2008 (Tennille)(unpublished)

A party making claims out of the dissolution of a law firm PLLC was not entitled to proceed on its unfair and deceptive practices.  Judge Tennille held that the claims between the lawyers involved an "internal dispute," and that such disputes did not "affect commerce" as required by the statute. 

There was also an issue of standing.  The Court referenced the Court of Appeals' decision in Crouse v. Mineo, 2008 N.C. App. LEXIS 546, 658 S.E.2d 33 (N.C. Ct. App. 2008).  That Court of Appeals held there that a manager of an LLC does not have the authority to bring suit on behalf of the LLC because such an action is not within the powers of a manager, which are limited to things necessary to "carry[] on in the usual way the business of the limited liability company."  Bringing a lawsuit against the LLC, the Court of Appeals held, was not within the course of usual business.  

The Business Court also summarized when the moving party on a Motion to Dismiss can rely on documents outside of the pleadings:

the Court may not consider “extraneous matter” outside the complaint, or else the Rule 12(b)(6) motion will be converted into a Rule 56 motion for summary judgment. See, e.g., Fowler v. Williamson, 39 N.C. App. 715, 717, 251 S.E.2d 889, 891 (1979). However, the Court may consider documents the moving party attaches to a 12(b)(6) motion which are the subject of the challenged pleading and specifically referred to in that pleading, even though they are presented to the Court by the moving party. See Oberlin Capital, L.P. v. Slavin, 147 N.C. App. 52, 60, 554 S.E.2d 840, 847 (2001) (considering a contract on a 12(b)(6) motion even though the contract was presented by the movant). The Court is not required to accept as true “any conclusions of law or unwarranted deductions of fact.” Id. at 56, 554 S.E.2d at 844. Thus the Court can reject allegations that are contradicted by the supplementary documents presented to it. See E. Shore Mkts., Inc. v. J.D. Assocs. Ltd. P’ship, 213 F.3d 175, 180 (4th Cir. 2000) (stating that the court “need not accept as true unwarranted inferences, unreasonable conclusions, or arguments”).

Full Opinion

Brief in Support of Motion to Dismiss

Brief in Opposition to Motion to Dismiss

Reply Brief in Support of Motion to Dismiss

Mitchell, Brewer, Richards, Adams, Burge & Boughman, PLLC v. Brewer, April 8, 2008 (Jolly)(unpublished)

The Court denied the entry of a preliminary injunction in a case involving the dissolution of a law firm.  The injunction would have prevented the defendants from distributing to themselves the proceeds from contingent fees cases in which the plaintiffs claimed an interest. 

The Court held that "[t]he Plaintiffs have not made a convincing showing that they either are likely to sustain irreparable loss unless the injunction is issued, or that such relief is necessary for the protection of their rights during the course of litigation.  Plaintiffs' contentions in this regard are implausible.  Their claim for an accounting will not be affected by the issuance or denial of the injunction sought; and their claims for money damages are adequately provided for at law, and are weak grounds for the issuance of an injunction."

Full Opinion

Brief In Support Of Motion For Preliminary Injunction

Brief In Opposition To Motion For Preliminary Injunction

Exide Technologies v. Douglas, October 10, 2007 (Tennille)(unpublished)

In what County should a lawsuit seeking the final distribution of the assets of a limited liability company which has already been dissolved be filed? The answer is in the county where the LLC's principal office is or was located. The Court therefore transferred venue in this case from Mecklenburg County to Forsyth County, finding that the change of venue was mandatory pursuant to N.C.G.S. §57C-6-02.1, which deals with "a proceeding to dissolve a limited liability company."

The Court held, in the alternative, that the change of venue was appropriate for the convenience of the witnesses and the ends of justice.

Full Opinion

Classic Coffee Concepts, Inc. v. Anderson, 2006 NCBC 21 (N.C. Super. Ct. Dec. 1, 2006)(Diaz)

Defendant, who was a director, shareholder and former employee of the corporate plaintiff, moved to disqualify the corporate plaintiff's counsel. He argued that he reasonably believed that the law firm had represented him with regard to the agreements at issue and a guaranty agreement. He also argued that disqualification was appropriate because the corporation's lawyers had "responsibilities" to him as a shareholder and director of the company.

The Court denied the motion. It found that although the law firm had represented defendant with regard to the guaranty agreement, the former representation was not substantially related to the claims before the Court so as to warrant disqualification under Rule 1.9 of the Rules of Professional Conduct. The Court also found that the law firm had not obtained any information in the course of that representation that would advance its defense of the corporation in the case before it.

Considering multiple factors, it determined that defendant could not have reasonably believed that the law firm was representing him in his individual capacity. On the argument regarding "responsibilities," the Court held that a corporation can be represented by its regular corporate counsel when the corporation is adverse to one of its constituents.

The Court dismissed the defendant's counterclaim that the Stockholders Agreement requiring him to tender his shares back to the corporation was unconscionable, finding that the claim failed under either North Carolina or Delaware law.

Before reaching this issue, the Court expressed doubt about whether the choice of law provision specifying North Carolina law in the Agreement was enforceable, given that the corporation was a Delaware corporation and in consideration of the internal affairs doctrine.

The Court expressly refused to apply North Carolina law to plaintiff's claim for dissolution, "because a claim for judicial dissolution goes to the very core of a corporation's internal affairs [so] it is properly governed by the law of the state of incorporation." If North Carolina law had been applicable, however, the Court held that dissolution would not be appropriate.

Defendant's claim that he had reasonable expectations of continued employment was belied by the terms of his employment agreement, which provided for termination at any time after twelve months, without cause.

Full Opinion

Garlock v. Hilliard, 2001 NCBC 10 (N.C. Super. Ct. Nov. 14, 2001)(Tennille)

The plaintiffs in this case sought the dissolution of a closely held corporation pursuant to N.C.G.S. §55-14-30(2)(ii) on the ground that the business of the corporation was being conducted to the unfair advantage of the majority shareholder. The Court found that dissolution was appropriate because the reasonable expectations of the majority shareholders were not being met.

Since the dissolution statute gives the corporation the opportunity to avoid dissolution by paying the oppressed shareholders the "fair value" of their shares, the Court moved on to a discussion of that concept. As it had in the Royals case, the Court considered market value, equitable considerations, practical considerations and changes in condition of the company from the market valuation date. It determined that it would be inappropriate to apply discounts for lack of control and lack of marketability. The Court also ruled that the purchase price could be paid over a period of 36 months.

Full Opinion

Royals v. Piedmont Electric Repair Co., 1999 NCBC 1 (N.C. Super. Ct. Mar. 9, 1999)(Tennille), aff'd, 137 N.C.App. 700, 529 S.E.2d 515, cert. denied, 352 N.C. 357, 544 S.E.2d 548 (2000)

Plaintiffs had established their right to involuntary dissolution of the closely held corporation in which they were shareholders because their reasonable expectations had not been met, and the business of the corporation was being conducted to the unfair advantage of the minority.

The corporation was entitled to avoid dissolution by paying the oppressed shareholder the "fair value" of his shares. Fair market value is not the same as "fair value," but is a determinant in that consideration.

Discounts for lack of control and lack of marketability do not apply when minority shareholders are compelled to sell their shares.

Full Opinion