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

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

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

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.


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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

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