A Bad Business Break-Up Can Cost You Big Bucks!
November 4, 2018
A case that recently came from the Pennsylvania Superior Court had several lessons for persons that are business owners with partners. The recent case of Saltzer v. Rolka involved an LLC that was owned by three persons. The LLC was a firm that provides consulting services to state public utility commissions and the federal government. The plaintiff Saltzer was a co-owner with two other individuals that were the Defendants.
Saltzer was fired from the company and his co-owners bought out his shares for approximately $63,000.00. Saltzer sued claiming that the Defendants failed to comply with the organizational documents and severely undervalued his interest. The Defendants, upon Saltzer’s firing, amended the operating agreement of the company to provide a buyout formula without Saltzer’s consent because they owned a majority of shares. The operating agreement did not state that a majority interest may do this and so the Court found that it defaulted to the general rule that all parties must agree. The operating agreement governing the entity also did not address separation which the parties testified that they meant to address and never got around to it.
The Court found that the amendment by the majority owners was not appropriate because the organizational documents did not specifically provide for it and valued Saltzer’s interest at around $300,000.00 awarding Saltzer damages in that amount. The Court, however, refused to award punitive damages to Saltzer and Saltzer appealed that determination. The Defendants’ also appealed the Court’s other determinations.
The Superior Court upheld the trial court’s rulings about the LLC and the punitive damages. The trial court stated that its decision not to award punitive damages was a “very close call.” While it found that Defendants had acted with “reckless indifference to the interests of Saltzer,” it was also “satisfied that they subjectively believed they were acting within the law.” It therefore determined an award of punitive damages would not “advance societal interests or deter future outrageous conduct.” The Superior Court found no reason to disturb this ruling. The Superior Court also found that the Trial Court was correct in finding that the parties’ operating agreement did not allow a majority to amend the agreement and it therefore required all parties’ consent.
Two important lessons are to be gleaned from this case. First, if you do not write down how you wish to govern a Company prior to a dispute arising and ensure that it is clear, you are inviting potential problems at a later date. Two, even though the majority shareholders acted heavy-handedly to the Plaintiff, the Court found that punitive damages were not appropriate because while the Defendants’ conduct was not desirable, it was done with the good faith belief that they were acting within the law. Business disputes can get very contentious, very fast and it is important to get counsel involved and the earlier the better. The lawyers at Conway Schadler have experience that can make the difference in these types of situations. Please contact our offices for a free consultation so we can discuss how this substantial experience can be used to your benefit.