If you are a minority shareholder of a corporation or a minority member of a limited liability company and you are thinking about bringing a lawsuit against the majority shareholder(s)/member(s), it is important to determine whether the lawsuit would be: (1) a direct action; or (2) a derivative action. This determination is critical because the two types of claims have different elements of proof and different procedural prerequisites.

To maintain a direct action, the plaintiff must allege facts sufficient to establish that he/she has suffered a “special injury” resulting from the alleged misconduct. This “special injury” must be unique from any damages suffered by the other shareholders. In contrast, claims redressing harm to the company as a whole (and not just the individual shareholder/member) are derivative.

When a plaintiff brings a derivative lawsuit, the plaintiff must meet a heightened pleading standard. The reason for this requirement is the recognition that derivative lawsuits are an infringement on the right of a company to govern its own affairs. A derivative cause of action actually belongs to the company, but an individual is permitted to bring the action on the company’s behalf where the company has failed to take action for itself. Because derivative actions could be ripe for abuse, New Jersey law requires as a prerequisite for bringing a derivative action that a demand to redress the harm must first be made to the company’s board. As explained by the New Jersey Supreme Court:

The demand requirement serves at least two purposes. First, it provides corporate managers with the opportunity to address a shareholder’s claims. Along those lines, if the board determines that the allegations are meritorious it may choose to remedy the situation internally or embrace the litigation. Second, if managers disagree with the shareholder’s concerns, the demand requirement provides the board with an opportunity to reject the demand and, if necessary, seek early dismissal of the suit.

In re PSE&G S’holder Litig., 173 N.J. 258, 278 (2002) (internal quotations omitted).

Pursuant to New Jersey law, if the lawsuit you seek to file is a derivative action, you must file a verified complaint asserting with particularity: (1) that a demand was made on the board before instituting the action; or (2) that such a demand would have been futile (for example, the board is controlled by people who you believe were involved in the misconduct).

Spector & Ehrenworth, P.C. has extensive experience representing clients in minority shareholder and LLC member disputes. Attorneys at the firm would be happy to help you to determine whether your claims are direct or derivative and advise you regarding the steps that need to be taken before you file a lawsuit. To schedule an appointment to speak with a business attorney, call (973) 845-6525 or e-mail info@selawfirm.com

In New Jersey, the Uniform Partnership Act defines “partnership property” as property in the name of:

1. the partnership; or
2. one or more partners with an indication in the instrument transferring title to the property of the person’s capacity as a partner or of the existence of a partnership but without an indication of the name of the partnership.

Additionally, property is presumed to be partnership property if it is purchased with partnership assets. For example, assume that a partnership has two partners and a bank account in its name. The money in that bank account would be considered partnership property. If one of the partners buys a house with the funds from the partnership bank account, the house would be considered partnership property. That would be true even if the partner took title of the house in his own name (without any indication in title of the partner’s capacity as a partner of the partnership or the existence of the partnership).

The analysis of what is considered partnership property can become complicated when there are numerous transactions that have taken place over a long period of time, using multiple bank accounts, and involving the commingling of partnership and personal assets.

Spector & Ehrenworth, P.C. has extensive experience analyzing and advising on issues relating to partnership property. If you are involved in a partnership dispute, attorneys at the firm would be happy to discuss with you the specifics of your case and advise you with respect to your legal options. To schedule an appointment to speak with a business attorney, call (973) 845-6525 or e-mail info@selawfirm.com.

In the age of the internet, it is incredible easy to find out information about the people and companies that we do business with. It has become common for businesses to conduct background checks on potential employees, but it is not necessarily common practice for a business to conduct routine background research on landlords, customers, and vendors. Employing such a practice could save you significant time and money down the road.

For example, even if you run a small business (with limited resources), if you are planning on signing a contract with a landlord to lease commercial office space, it may be worthwhile to run a public records search on the landlord before you sign on the dotted line. Public records searches are not overly costly or time consuming but they could reveal useful facts that may impact whether you enter into the lease. The search could reveal that your future landlord has been sued by other tenants for failing to maintain the building or that the landlord is currently being foreclosed upon by its bank.

Similarly, if you land a new client, it may be helpful to conduct some brief research on the client to ensure that you know who you are doing business with. Such research could reveal whether the client is being sued by other companies for non-payment, whether the company even exists (and, if so, whether it is registered to conduct business in your state), and whether the company (or the principal of the company) has recently declared bankruptcy.

The failure to perform basic, inexpensive background research on your company’s landlords, customers, vendors and employees could result in your company being dragged into a lawsuit that could have been completely avoided from the outset.

Spector & Ehrenworth, P.C. has extensive experience advising businesses how respond to (and potentially avoid) business disputes. Attorneys at the firm would be happy to discuss with you the specifics of your company and/or business dispute. To schedule an appointment to speak with a business attorney, call (973) 845-6525 or e-mail info@selawfirm.com.

If you own a small limited liability company or closely held corporation, it may seem burdensome to comply with all of the requirements in your company’s governing documents (such as an operating agreement). For example, it may be inconvenient to hold annual shareholder meetings or to maintain all corporate records at a specific location. It may also seem unnecessary to maintain a separate bank account for the company (and to never commingle the funds between your company and individual bank accounts). However, adhering to such corporate formalities may be far more important than you think.

Generally, when a limited liability company or corporation is sued, the plaintiff cannot reach the assets of the underlying members or shareholders. This is one of the main reasons why individuals choose to form limited liability companies and corporations. In New Jersey, under a doctrine called “piercing the corporate veil,” a court may disregard the corporate structure (and allow a plaintiff to collect against the assets of the underlying members, shareholders, officers and/or directors) if the court determines that the corporate entity is being used to defeat the ends of justice, to perpetrate fraud, to accomplish a crime, or otherwise evade the law.

The main factors that courts look to in determining whether to pierce a corporate veil are as follows:

1. Undercapitalization of the company;
2. Failure to observe corporate formalities;
3. Siphoning of funds of the company by the dominant member/shareholder;
4. Absence of corporate records;
5. Pervasive commingling of company assets and identities;
6. The company is being used as a facade for the operations of the dominant member/shareholder;
7. The company is insolvent at the time it enters into particular debts; and
8. Two such companies have identical owners.

If you wish to ensure that your corporate structure will be protected, it is essential that you adhere to all corporate formalities, maintain a separate bank account for the business, and never commingle company and personal assets.

Spector & Ehrenworth, P.C. has extensive experience advising members, shareholders, directors, and officers regarding their obligations as set forth in governing documents and as required under New Jersey law. Attorneys at the firm would be happy to discuss with you the specifics of your company and help you to determine whether you are satisfying all such obligations. To schedule an appointment to speak with a business attorney, call (973) 845-6525 or e-mail info@selawfirm.com.

A large number of business disputes involve an alleged breach of an agreement between the parties. The first question the courts will consider when presented with such a dispute is whether there is legally recognizable contract between the parties. To establish that a contract exists, a plaintiff must prove that:

1. there was a “meeting of the minds”: (in others words, an actual agreement was reached);
2. one party offered to enter into the agreement and the other party gave some outward indication that they accepted the offer;
3. the parties each promised to exchange something of value; and
4. the terms of the agreement were reasonably certain.

In most instances, a contract does not need to be written to be valid and enforceable. However, the failure to memorialize an agreement in writing leaves both parties vulnerable to a prolonged lawsuit regarding whether a contract was formed and, if so, what were the terms of the contract. Generally, when an agreement is in writing, the court does not need to look any further than the written agreement itself to determine whether a contract was formed and evaluate the contractual rights and obligations of the parties. In contrast, when there is no written agreement, the parties may be forced to engage in extensive and costly discovery with respect to these issues.

Although it may seem burdensome to always put your agreements in writing, it could save you and your business significant litigation costs down the line. Additionally, a written contract – especially one drafted by an attorney – can be tailored to protect you in the future (by, for example, including a provision that if you need to bring a lawsuit against the other party due to that party’s breach of the contract, you will be permitted to recoup your legal fees).

Spector & Ehrenworth, P.C. has extensive experience representing clients in drafting business contracts and litigating contractual disputes. Attorneys at the firm would be happy to discuss with you the specifics of your case and help you to determine how best to proceed. To schedule an appointment to speak with a business attorney, call (973) 845-6525 or e-mail info@selawfirm.com.