This is exactly what I was talking about in this recent post:
A day after I posted my blog on LLC breakups, the Massachusetts Supreme Judicial Court (“SJC”) issued a ruling regarding the break up of Prime Motor Group partners, Automile Holdings, LLC v. McGovern, __ Mass. __ (Jan. 14, 2020).
While not the main focus of the case, the SJC described the tactics that the majority used to force the minority owner to sell his shares in the company, as found by the trial judge.
First, they amended Prime’s operating agreement to remove a provision that allowed for the distribution of profits sufficient to cover the owners’ tax liabilities. Such provisions are commonplace, and without it, McGovern faced a tax liability of between $500,000 and $600,000 for the 2015 tax year. Additionally, Abrams and Rosenberg [collectively, the majority interest] denied McGovern access to Prime’s financial information, leaving McGovern unable to calculate his expected tax obligation for the 2016 tax year. Abrams and Rosenberg also demanded that McGovern and his wife return the company vehicles that they had been using and threatened to report McGovern to the authorities as being in possession of stolen automobiles. As the trial judge remarked, these tactics amounted to Rosenberg and Abrams applying “as much pressure as they could manage to put on [McGovern] to take the best deal they could get” in purchasing McGovern’s minority stake before the company’s anticipated liquidity event.
Slip Opinion at p. 6.
The SJC was less than impressed by these tactics. It indicated that:
the sale of McGovern’s business interest did not resemble a prototypical arm’s-length transaction with a third-party purchaser. Rather, Rosenberg and Abrams pressured McGovern to sell his interest to them, despite the fact that Abram’s company was the majority shareholder in a closely held corporation and owed a fiduciary duty of utmost good faith and loyalty in its dealings with minority shareholders.
Slip Opinion at 25.
This statement about “a fiduciary duty of utmost good faith and loyalty” to minority shareholders creates a powerful weapon for minority shareholders. To be sure, this is not new. The courts of Massachusetts have ruled on this duty for decades. And keep in mind that the duty applies to minority shareholders as well. But the fact that the SJC seemed to go out of its way to suggest a breach of this duty by high-pressure tactics bodes well for minority shareholders who will be litigating these claims in Massachusetts. One other takeaway here, McGovern was a sophisticated and experienced business person, but he was still subject to majority pressure tactics. Abrams got quality legal help and apparently sold his interest for full value. What will you do?
The decision also made some statements about restrictive covenants in employment agreements that should make Massachusetts employers very nervous. More on that later.
Adam P. Whitney
Fine print: the above is not legal advice, but general information. I cannot provide legal advice without a written fee agreement and a full review of your legal matter.