Disputes Between Business Owners

Joint owners of closely held businesses may encounter problems between themselves as their companies develop. They may have different visions for the company or may have different ideas about critical issues such as what type of investments to make, the amount of compensation that should be paid, what expenses are proper, and how profits should be distributed. These disputes take on added importance when the owners are employees of the company and depend on that employment to earn a living. These disputes can be especially problematic when the owners are family members or friends.

At Neschis & Tolitano, we represent owners and managers of closely held businesses in disputes relating to the management of their companies. These disputes often involve claims that controlling (majority) owners or managers acted improperly towards the non-controlling (minority) owners.

In Illinois, those who control closely held companies owe fiduciary duties to their companies and its owners. These fiduciary duties include the duty of loyalty and the duty of care.

The duty of loyalty includes the obligation to refrain from self-dealing, conflicts of interest, competing with the company, and personally taking advantage of opportunities that are within the company’s line of business without the company’s consent.

The duty of care generally prohibits gross negligence, intentional misconduct and knowing violations of law. Illinois law recognizes that directors, officers, and managers must be given latitude to operate their business. Therefore, under the business judgment rule, where directors and officers of corporations have acted in good faith, courts will not second guess their business decisions.

Both the Illinois Business Corporation Act (“BCA”) and the Illinois Limited Liability Company Act (“LLC Act”) also provide remedies to shareholders of corporations and members of limited liability companies where the directors, officers, managers, or controlling shareholders or members have acted oppressively towards them. Whether conduct constitutes oppression is a very fact-intensive inquiry. Conduct that may be considered oppressive in one context will not be deemed to constitute oppression under a different set of circumstances. Actions that are designed to freeze or squeeze out shareholders or members by denying them the rights and benefits of ownership will generally be considered oppressive.

The BCA and the LLC Act authorize courts to impose various remedies for oppressive conduct including the removal of an officer or director, the appointment of a custodian to manage the company, the forced purchase of the complaining shareholder or member’s shares or membership units, and, in extreme cases, dissolution of the company.

Disputes also often also arise when the company is owned equally by two owners or two groups of owners who cannot agree on major issues resulting in deadlock, which prevents the company from moving forward. Both the BCA and LLC Act authorize courts to order remedies in cases of deadlock including the forced purchase of an owner’s interest or dissolution of the company.

Disputes between owners of businesses are often resolved through the buyout by one owner or group of owners of the interest held by the other owner or owners. Buyouts often can be negotiated before litigation is commenced. Buyouts are also often a common way of resolving litigation. A successful buyout requires an understanding of issues involved in valuing businesses. Our understanding of the methodologies used in valuing closely held businesses allows us to successfully represent business owners in buyout negotiations. If a buyout is not the appropriate remedy, we work with our clients to identify the different options and secure the result that allows them to move past the dispute in the most advantageous and productive manner.

At Neschis & Tolitano, we represent both controlling (majority) and non-controlling (minority) owners, directors, and managers in disputes arising out of claims of breach of fiduciary duty, oppression, deadlock, and other issues. Our primary objective in all litigation is to protect our clients’ legal and business interests. Whenever possible, we explore a negotiated resolution or alternative means of dispute resolution. However, we recognize that there are disputes that can only be resolved through litigation. Because we are experienced in litigating business owner disputes, we are able to assert and protect our clients’ interests efficiently and effectively in litigation.