December 9, 2019

Interim Distributions: Tree and Fruit

Holland & Knight Shareholder Rights Blog
Michael J. Zdeb
Shareholder Rights Blog

Shareholder and partnership interest disputes can often result in litigation spanning a number of years. A case filed in 2003 may not be tried and given a judgment for ten years (personal experience). The Wisniewski case in New Jersey lasted nearly as long. The litigation involving a  family owning a significant business was just settled and  may have set a Guinness World record.

The time between the actions that provoked the disputes, the filing of any actions in court and the final resolution of the issues, present a number of interesting questions.

If the actions result in a buy-out of one of the parties, what date for the valuation should be used by the court?  Is it the date of the actions that produced the cause of action or appraisal in an oppression action?  Is it the date of the filing of a petition or complaint?  Is it the date of judgment or any other date during the pendency?

If it is the date of the "bad acts," in the time between filing and resolution, the value of the subject business can fluctuate. This will raise a number of questions about the conduct of the parties in the interim period and the reasons for any changes in value.

In oppression actions, the date of valuation is frequently the date of the complaint, in particular if the defendant elects to buy the interest.

Note: many jurisdictions have a dissolution statute allowing for an action to be bought for "oppression" or unfair prejudice conduct. Such statutes allow for an election by the defendant to purchase the interests and avoid litigation over the acts about which the plaintiff complained as well as avoid the potential for the court to order dissolution of the company. The statutory date in such cases is the date before the filing of the petition However, in most of those matters the court can order a different date in the exercise of its equitable authority.

Regardless of the nature of the action or any elections, long delays in litigation also will present challenging issues about the date of value the court should consider. Events that are both under the control and not of the parties, market and economy based changes, technological impact, etc. can occur.

In addition to the challenging topic of date of valuation, questions arise regarding any interim distributions by the business to the owners. If the company makes interim distributions to all its owners, the plaintiff may have received a proportionate amount. Is this amount part of its valuation based award and it reduced what may be awarded by the court? Or is it an addition?

The nature of the distribution may have to be considered. Was it ‘ordinary’ in the sense that it came from current earnings of the business? Was it extraordinary, such as the result of a disposition of all or part of the business? Was during the resulting dissolution of the business due to the dispute or litigation?

A recent case decided by the Supreme Court of North Dakota provides some insight and guidance. The case involved the dissolution of a business and pending and post-litigation dividends and distributions. In what seems metaphorically like a ‘tree and fruit’ decision, the Court found that because the ownership interest (the tree) remained during the litigation and the subsequent dissolution actions, the right to the distributions (the fruit) continued until the purchase or dissolution was concluded. Puklich v. Puklich,, 2019 ND 154, June 27, 2019.  Consequently, those distributions did not reduce the award based on the valuation of the interests or resulting from the subsequent dissolution. 

How the distributions would have been treated if such were the proceeds of a disposition of all or part of the business or solely the proceeds from liquidation was not specifically addressed.

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