Like married couples, business partners sometimes go through divorces. Whether there are allegations of minority oppression, embezzlement, fraud or simply the parties can no longer work together, as attorneys, we must quickly identify the pertinent legal issues at hand in order to guide our clients through this confusing and often complicated process. The following is a list of practice tips for attorneys representing aggrieved clients in a business divorce proceedings:
- Review the company or partnership’s corporate governance documents. When meeting with your client, it is important to review the company’s corporate governance documents (i.e. shareholder agreement, operating agreement, corporate by-laws etc.) to determine whether there are procedures in place regarding buyouts, termination of officers and corporate dissolution. There are often strict noticing procedures that need to be followed to trigger these events. If there are no procedures in place, attorneys should refer to New Jersey’s Revised Uniform Limited Liability Company Act, N.J.S.A. 42:2C-1 et. seq., Business Corporation Act, N.J.S.A. 14A:1-1 et seq., and the Uniform Partnership Act, N.J.S.A. 42:1A-1 et seq., for guidance.
- Identify the relief your client is seeking. There are numerous remedies available to clients in business divorce actions. Accordingly, it is important to identify the relief being sought in your initial client meeting so that you can determine (1) how quickly you need to act, and (2) which court is appropriate to hear the case. For example, is the client seeking to commence a direct or derivative action (N.J.S.A. 14A:3-6.1-6.3; N.J.S.A. 42:2C-68)? Is the client seeking a buyout of their shares or membership interest in the company due to minority oppression (N.J.S.A. 14A:12-7; N.J.S.A. 42:2C-48)? Does the client want to force a dissolution of the corporation, LLC or partnership (N.J.S.A. 14A:12-7; N.J.S.A. 42:1A-25, 39; N.J.S.A. 42:2C-48)? In situations where there are allegations of corporate embezzlement and fraud, is the client seeking to expel the officer/partner from the company and to compel a buyout of their interest? Does the client require emergent injunctive relief to enjoin the offending member from destroying the business and converting its assets? These are all questions that must be asked during the initial client meeting and will determine where the lawsuit should be filed and whether you need to file an Order to Show Cause for emergent relief.
- Determine the venue the case should be filed in. In business divorce cases where temporary and preliminary injunctive relief is sought, the County and Court that you file your client’s case in often has a profound impact on your client’s chances of obtaining such relief. Because each Chancery Judge has certain tendencies regarding the frequency in which they grant injunctive relief, it is important to select the most advantageous venue to your client. Pursuant to N.J. Ct. R. 4:3-2(b), a case involving a corporation may be venued in the county in which its registered office is located or in any county in which it is actually doing business. When correctly used, R. 4:3-2(b) provides attorneys with wide latitude to strategically select venues that are appropriate for the relief being sought. However, if the crux of the relief in your client’s complaint is the appointment of a receiver, venue must be laid in the county where the principal place of business or the partnership is located. See R. 4:53-2. Therefore, the appointment of a receiver should not be listed as a separate cause of action in your client’s complaint if it will negatively impact your choice of venue, and instead should merely be listed as part of the relief being sought.
- When filing an application for a TRO, attach documentary evidence to your client’s Verified Complaint to establish a probability of success on the merits of the claims asserted therein. To obtain temporary injunctive relief against a corporate officer or business partner, your client must establish, among other factors, a probability of success on the merits of the claims asserted in the Verified Complaint filed. See Crowe v. De Gioia, 90 J. 126 (1982). In order to do that, an attorney should not simply rely on a client affidavit and should instead, to the extent possible, provide the Court with documentary evidence to prove the claims underlying the need for injunctive relief. You only have one shot to convince a Judge enter a TRO, so it is imperative that your initial pleading is detailed enough to win the case on day one.