PRELIMINARY ISSUES FOR INTEREST HOLDER CLAIMS AND REMEDIES IN NEW YORK
It is a common tale. A company is formed or interests within an existing company are purchased with the intention of the interest holders working swimmingly together forever – until they do not.
Whether a member or manager managed limited liability company or a corporation, often times, for practical purposes or other reasons, a group of interest holders maintain managerial and operational control over the company, often times with very little oversight. Sometimes, depending upon the terms of the company’s applicable agreements, such as the operating agreement, membership agreement, hypothecation agreement and promissory notes, managing interest holders have the ability to cause harm to non-managing interest holders, including a ‘freeze out’. Some common ‘freeze out’ actions taken include employment termination in the absence of an employment contract, refusal by the managing interest holders to issue profit distributions, which is more likely where there exists an imbalance in the financial positions of the managing and non-managing interest holders, diversion of profits, usurping corporate opportunities, and ostracising the non-managing interest holders from the overall operation of the company.
Sometimes these types of actions are taken for legitimate reasons, such as a non-managing interest holders’ ineptitude in performing obligated functions. Often times, however, they are hostile and pre-planned, or at least opportunistic.
Under such circumstances, an interest holder’s primary recourse is litigation. Litigation can be contentious and expensive, and must be well planned for and considered. Of those considerations, two relate to standing and have potential impacts on whether litigation is worthwhile or even possible.
Jul-Sep 2022 issue
Farrell Fritz