BUSINESS FORMATION & SALES BLOG

Will a Court Enforce a “Put” Offering Buy Out Clause in an LLC Operating Agreement?

In Martin Heller v. Lauren Gardner Trust, No. A-0914-11T2 (N.J. Super. Ct. App. Div. June 27, 2012), the court considered the enforceability of a “put offering notice, by which one or more members could require the other members to buyout their shares.”  The mechanism was straightforward.  It involved the following:

Under the terms of the Agreement, ‘upon receipt of the Put Offering Notice, the responding member shall be obligated to purchase the Membership Interest of the Initiating Member at the purchase price set forth in subsection (b) of this Section 6.03.’

Id. at 3.

In that case, the issue was whether an April 27, 2010 letter from one of the members to the other was enough to invoke the put option.  The letter stated, in part, “as per page 19 paragraph 6.03-Put Option, this letter should be construed as a put offering notice.”  The court determined that the letter was clearly sufficient to invoke the Put.

Comments/Questions: gdn@gdnlaw.com

© 2012 Nissenbaum Law Group, LLC

Will a Court Enforce a “Put” Offering Buy Out Clause in a LLC Operating Agreement

In Martin Heller v. Lauren Gardner Trust, No. A-0914-11T2 (N.J. Super. Ct. App. Div. June 27, 2012), the court considered the enforceability of a “put offering notice, by which one or more members could require the other members to buyout their shares.”  The mechanism was straightforward.  It involved the following:

Under the terms of the Agreement, ‘upon receipt of the Put Offering Notice, the responding member shall be obligated to purchase the Membership Interest of the Initiating Member at the purchase price set forth in subsection (b) of this Section 6.03.’

Id. at 3.

In that case, the issue was whether an April 27, 2010 letter from one of the members to the other was enough to invoke the put option.  The letter stated, in part, “as per page 19 paragraph 6.03-Put Option, this letter should be construed as a put offering notice.”  The court determined that the letter was clearly sufficient to invoke the Put.

Comments/Questions: gdn@gdnlaw.com

© 2012 Nissenbaum Law Group, LLC

How Does a Nonprofit Corporation Commence Its Legal Existence in New York?

New York has a statute that anyone starting a nonprofit should read.  It is located at NY. NPC. Law Section 405.

The statute states, among other things, that a certificate of incorporation must be filed with the New York Department of State.  Thereafter, the non-profit corporation must hold an organizational meeting to elect directors, adopt by-laws and transact other business, such as authorizing a bank account to be opened; the execution of agreements; and appointing officers.  Under certain circumstances, there may also be a requirement to register with the office of the Attorney General, Charities Bureau.

It is important to note that in addition to all this, the corporation must also apply to the federal (as opposed to state) government for 501(c)(3) status.  This is done through a 1023 form supplied by the Internal Revenue Service (IRS).  See http://www.irs.gov/charities/article/0,,id=96109,00.html.  This is important to allow donors to deduct their donations.

Comments/Questions: gdn@gdnlaw.com

© 2012 Nissenbaum Law Group, LLC

What is a Commercially Reasonable Way for a Creditor to Sell Collateral?

In The Provident Bank v. Charles Bonnici, No. A-1586-11T1 (N.J. Super. Ct. App. Div. 2012), the Appellate Division of the Superior Court of New Jersey considered the issue of what is a reasonable manner to sell collateral to satisfy a debt.

In that case, the debtor had purchased a boat and taken out a loan to fund the purchase price. He defaulted on the loan, and the creditor decided to sell the boat to offset what was owed. The issue was whether the creditor had done so in a commercially reasonable way.

The Court started its analysis “with the premise that, upon default, a secured party may sell collateral pursuant to the terms and conditions of N.J.S.A. 12A:9-610(b). The disposition may be public or private. N.J.S.A. 12A:9-610(b). ‘Every aspect of a disposition of collateral, including the method, manner, time, place, and other terms, must be commercially reasonable.” Id .  at 4.

Commercial reasonableness is determined if the sale is made:

(1)   in the usual manner on any recognized market;

(2)   at the price current in any recognized market at the time of the disposition; or

(3)   otherwise in conformity with reasonable commercial practices among dealers in the type of property that was the subject of the disposition.

N.J.S.A. 12A:9-627(b).

In the Bonnici case, the Court determined that the sale had been conducted reasonably. The plaintiff used a “business dedicated to that service” to sell it; valued the boat by using the NADA authoritative guide; and took into account the condition of the boat.

Comments/Questions: gdn@gdnlaw.com

© 2012 Nissenbaum Law Group, LLC

What is the Standard for Allowing a Company That Was Incorporated Outside of New Jersey to Use the New Jersey Minority Oppression Statute?

Do corporations with business operations in New Jersey that were incorporated in other states have the right to avail themselves of the protections of the New Jersey Oppressed Shareholder Statute, N.J.S.A. 14A:12-7(1) (c) (“Shareholder Oppression Law”)?

The Shareholder Oppression Law provides a remedy for shareholders of a closed corporation that feel that the majority shareholder(s) took action that oppressed them. Of course, any business decision might have unintended consequences to the minority shareholders, and that is the nature of running a business. Therefore, in order to obtain relief under the Shareholder Oppression Law, the minority shareholder generally has to show that

“In the case of a corporation having 25 or less shareholders, the directors or those in control have acted fraudulently or illegally, mismanaged the corporation, or abused their authority as officers or directors or have acted oppressively or unfairly toward one or more minority shareholders in their capacities as shareholders, directors, officers,  or employees.”

Id.

Under prevailing New Jersey case law, a corporation that has little or no connection to New Jersey generally cannot avail itself of the Shareholder Oppression Law. Krzastek v. Global Resource Indus. and Power, Inc., 2008 WL 4161662 (N.J. Super. Ct. App. Div. Sept. 11, 2008).

Some of the factors the Court will consider are:

  • Whether the operating agreement or shareholders agreement had a New Jersey choice of law section;
  • Whether either of those agreements had a choice of New Jersey jurisdiction section; and
  • Where the entity conducts its business;

Hopkins v. Duckett, 2012 N.J. Super. LEXIS 93 (N.J. Super. Ct. App. Div. Jan. 17, 2012)

Comments/Questions: gdn@gdnlaw.com

© 2012 Nissenbaum Law Group, LLC

How Far Does the Jurisdiction of the New York Franchise Act Reach?

Courts have traditionally interpreted a wide-ranging jurisdiction for the New York Franchise Sales Act (“NYSFA”). New York-based franchisors that offer and sell franchises anywhere in the world from their New York offices are required to comply with the statute’s provisions. N.Y. Gen. Bus. Law § 683. However, that scope could be getting smaller.

A recent case held that the NYFSA did not apply to an out of state franchisee. JM Vidal, Inc. v. Texdis USA Inc., 746 F.Supp.2d. 599 (S.D.N.Y. 2011).  In that case, the plaintiff, franchisee JM Vidal (“JMV”), purchased and operated an MNG by Mango (“Mango”) franchise store in Bellevue, Washington. After the retail store failed, JMV sued the defendant, franchisor Texdis USA (“Texdis”), under the NYFSA as well as the relevant Washington state statute, claiming they had violated the pertinent Franchise Agreement. JMV asserted six claims under each state’s statute, including claims that Texdis offered to sell a franchise without having registered the offer with the state; fraudulently misrepresented the likely sales of JMV’s prospective franchise; and breached its duty of dealing with JMV in good faith.

Among other defenses, Texdis argued that JMV’s claims under the NYSFA should fail because the New York statute did not apply to the sale of the franchise. The United States District Court for the Southern District of New York considered the language of the statute and determined that it only applied when a person offered to sell or sells a franchise in the state of New York. N.Y. Gen. Bus. Law § 683(1). An offer or sale is made in New York when:

1) an offer to sell is made in this state, or an offer to buy is accepted in this state, or, if the franchisee is domiciled in this state, the franchised business is or will be operated in this state; or

 2) the offer either originated from this state or is directed by the offeror to this state and received at the place to which it is directed. An offer to sell is accepted in this state when acceptance is communicated to the offeror from this state.

Id. at § 681(12).

The Court determined that there was no evidence suggesting that the offer or sale of the Mango franchise occurred anywhere other than Washington. More importantly, the Court found that no part of the transaction between JMV and the Mango franchise occurred in New York. Thus, the Court held that NYSFA was not applicable since a New York statute “cannot have any effect whatsoever on the nationwide marketing of franchises if the franchisor elects to conduct his activities outside of this State and with non-residents.” Id. at 617 (citing Mon-Shore Mgmt., Inc. v. Family Media, Inc., 584 F.Supp. 186, 191 (S.D.N.Y. 1984).

JMV’s lone argument for the application of the NYSFA was that the Franchise Agreement contained a choice-of-law provision that stated it would be “interpreted and construed under the laws of the State of New York.” Id. JMV argued that because the Agreement stated that it would take effect upon “execution by [Texdis],” which has its principal place of business in New York, the Agreement must have been signed in New York and thus should have been “deemed” to have been made in New York. Id. The Court rejected this argument, holding that to accept such an argument would allow the NYSFA to apply to every instance when the franchisor is a New York corporation. “But the NYSFA could easily have said as much, and it conspicuously does not,” the Court stated. Id.  “Instead, only the franchisee’s domicile matters for purposes of determining whether the statute applies.” Id. The Court granted Texdis summary judgment on all of the NYSFA claims.

The Court’s decision is slightly surprising. An article by David Kaufmann, former New York special deputy attorney general, in the October 25, 2011 edition of the “New York Law Journal” said the Court’s decision “appears to conflict with both the express language of the New York Franchise Act itself and with the constitutional precedent…advanced in the Mon-Shore decision.” Kaufmann, who wrote the NYSFA while serving as special deputy attorney general, said “the state of incorporation of a franchisor is entirely irrelevant to New York Franchise Act coverage.” It will be interesting to see if the other courts interpret the statute in a manner similar to the JM Vidal Court.

Comments/Questions: gdn@gdnlaw.com

© 2012 Nissenbaum Law Group, LLC

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