This was a battle over a corporation called Reminderband, Inc. Our clients were the Reminderband venture’s two original founders. They successfully identified, sourced, and marketed a lucrative fad product: customized silicone bracelets. Remember Lance Armstrong's "Livestrong" bracelets? They saw the potential in those bracelets and rode that wave. Subsequently, the same folks had a similar success with accessories for iPods, iPhones, and the like. I genuinely enjoyed getting to know these guys: creative people, risk takers, hard workers, and true entrepreneurs.
Soon after the venture was started, a third individual became involved—the guy who eventually filed the lawsuit. The three of them formed the corporation. Each owned roughly one-third. However, they also entered into a set of agreements governing the company, including a buy-sell agreement providing that: (1) each of them was an at-will employee of the company, and (2) any of them could be forced to sell his shares at book value if the company terminated his at will employment.
For a variety of reasons, the three of them were unable to work together long term. Having exhausted other possible solutions, our clients tried to exercise their rights to buy out their fellow shareholder under the buy-sell agreement. In turn, he sued our clients accusing them of orchestrating an unlawful scheme to deprive him of the rights and benefits associated with his shares.
The type of scheme alleged by the plaintiff goes by several names in cases and statutes: “squeeze outs,” “freeze outs,” “force outs,” and/or “minority shareholder oppression.” A key concept in these cases is “invest-backed expectations,” which arise from significant investments (e.g., capital, in-kind contributions, uncompensated work, etc.). Generally, shareholders with no “investment-backed expectations” don’t have much of a claim if they are forced to sell their shares pursuant to a buy-sell agreement.
This case was hard-fought. The plaintiff did extensive discovery trying to find anything and everything that could be spun as evidence of “minority oppression.” This process is interesting, particularly in these cases, because it usually involves brothers, cousins, college roommates, or neighbors who have gone from best friends to bitter enemies in a relatively short period of time.
After discovery, the parties filed cross-motions for summary judgment. We asked the Court to resolve the dispute by enforcing the buy-sell agreement. The plaintiff asked the Court to grant summary judgment in his favor that our clients had committed minority shareholder oppression.
The court refused to enforce the buy-sell agreement. I do not understand why. To this day, I believe the Court was simply wrong. That happens sometimes. That’s why we have appellate courts. The good news: the Court also denied the plaintiff’s motion for summary judgment. The trial judge who presided over this case (now long retired) famously wrote out his rulings before taking the bench for oral arguments. The attorneys would argue the motion and then he would promptly put his head down and read his pre-written ruling word for word. It made one wonder about the purpose of oral arguments in that particular courtroom. It's not just a show! It shouldn't be anyway. That being said, I was proud of the oral arguments I presented on this motion because I believe the judge intended to rule against us—and that I had actually changed his mind and stopped him from reading his pre-written ruling. He had something there in front of him he looked like he was about to read. Instead, he took the motion under advisement and ultimately ruled in our favor.
Since then, I have handled a series of similar corporate disputes. I like to think I have helped prevent some too. I tell stories from these cases to every business client who will listen. For some, it is too late to avoid going into business with family or friends! But all of them can get a robust buy-sell agreement in place. These don't just address what happens in the event of a "business divorce." They also govern a variety of other circumstances, including what happens to your business partner's stock or LLC interest if he dies, becomes disabled, gets divorced, etc.