I’ve written about the importance of closely observing, and following, buyout provisions in your LLC’s, company’s or partnership’s governing agreement. Many times partnership or shareholder disputes go to litigation where there is some ambiguity in communications between the parties over partnership or shareholder issues, and whether a buyout has been triggered. Today, we want to talk about the importance of being strategic and clearly thinking through written communications with your partner/co-shareholder or co-member about being bought out. A real life case example from the law books is illustrative. It shows the risk when communicating with shareholders, members and partners.
The case is Heller v. Lauren J. Gardner Trust, 2012 WL 2401675 (App. Div. 2012). In this case, the LLC agreement contained a “put offering notice” provision. The provision allowed any member of the LLC to initiate a buyout of their member interest. Accordingly, when the initiating member gives written notice, the receiving member must buyout the initiating member. The buyout must take place within a specified period of time. Also, the determination of the buyout price is through a specified appraisal process.
The lawsuit erupted after a letter was sent by a representative for minority members of the LLC who wrote to the representative for the majority member and laid out some ideas for resolving a buyout, and stated that the minority members did not prefer to use the procedure in the LLC agreement. In the view of the minority members, this was in the nature of a written letter just trying to get a dialogue going. Unfortunately for the minority members, the letter stated that it should be considered a “put offering notice,” while at the same time it definitely stated that they wished not to comply with certain valuation procedures.
When the majority/receiving members received it, they jumped on the opportunity, and triggered the valuation process. The initiating members then tried to withdraw the letter claiming it wasn’t an official offer. Next was the commencement of litigation.
The minority members lost the case, big time. The Court refused to accept the notion that the letter was not a formal notice. Further, the Court tagged them with legal fees. Lastly, they also imposed the value from the valuation process where the minority members refused participation.
Heller is a real life lesson. The lesson is the importance of closely consulting with legal counsel before sending communications to your co-shareholder, co-member or partner. Failure to do so can have unintended consequences. You must be careful when communicating with shareholders, members and partners.
Please call me with any questions about this blog or with other shareholder issues.