Metaphorical Hygiene Has Value: The Unclean Hands Equitable Defense

In Defenses, Equity, Litigation Processby Joseph PullLeave a Comment

In 2016, the pharmaceutical company Merck won a $200 million jury verdict against its competitor Gilead, based on Merck’s claim that Gilead infringed Merck’s drug patents. But three months later the judge completely barred Merck from enforcing its patents against Gilead, after concluding that Merck had “unclean hands” as a result of a “pervasive pattern of misconduct” that included “lying,” unethical business conduct,” and “litigation misconduct.” The $200 million verdict vanished in a puff of smoke. That result was affirmed by a federal circuit court of appeals in April 2018, and in January 2019 the United States Supreme Court declined to review the circuit court’s decision, leaving Merck out in the cold with its unclean hands and without its money. What are unclean hands? And how can they cost $200 million?

A Shareholder Agreement Trap for Shareholder Employees

In Corporate Law, Shareholder Agreements, Shareholder Strategiesby Joseph PullLeave a Comment

Shareholder agreements are common among owners of closely held corporations or LLCs. These agreements are generally enforceable under Minnesota law.[1] Frequently, such agreements include provisions governing the transfer of ownership interests. The interaction of certain combinations of common provisions governing the transfer of ownership interests can create unfortunate incentives that minority shareholder employees should be aware of. Specifically, many shareholder agreements require that an individual must remain employed by the company to remain a shareholder. Such a provision may appear to be an innocuous safeguard against absentee ownership. But these provisions can create perverse incentives when coupled with another provision that requires a departing shareholder to sell his interest at a buyout price determined by a fixed formula – book value or perhaps even a fixed, nominal price.

When Evergreens Get Chopped

In Legal Interpretation, Minnesota Appellate Decisionsby Joseph PullLeave a Comment

An “evergreen” contract is a contract which automatically renews at periodic intervals. Evergreen contracts are useful but can lead to problems if the parties become complacent. Imagine Ingmar & Ingrid, Inc. enters into a contract for one year to receive a weekly delivery[1] from Antony & Cleopatra, LLC.  The contract includes an evergreen provision that each year the contract will automatically be extended for another twelve months unless Ingmar & Ingrid before December 1 sends a written notice of termination to Antony & Cleopatra. The contract is convenient because it allows the parties to continue their relationship without the hassle of renegotiating every year. If Ingmar & Ingrid likes its weekly deliveries, it can continue receiving them without ever doing anything more than paying for each week’s installment, secure in the knowledge that it will get at least a month’s notice (and perhaps much more than a month) before the deliveries stop. Antony & Cleopatra gets the same assurance about its weekly sale. However, an evergreen contract can also lull the parties into dangerous complacency. After five years of weekly deliveries, Ingmar & Ingrid may forget that its contract can only be terminated before December 1 each year. Ingrid & Ingmar may decide on December 2 that it no longer wants the weekly delivery – only to discover that it is bound by its contract to pay for another year of services it no longer wants. On the other side, Antony & Cleopatra may discover on December 2 that it can no longer make money on the weekly delivery, but it will be bound to continue making the deliveries for another year and losing money on each delivery, because it missed the deadline to terminate the contract. Evergreen contracts are useful but can lead to problems if the parties become …

The End of the Appellate Road for Lund

In Litigation Process, Minnesota Appellate Decisions, Trustsby Joseph PullLeave a Comment

My previous discussion of the Minnesota Court of Appeals’s opinion in the Lund litigation (here, here, and here) noted that on February 12, 2019, the Lund defendants filed a petition asking the Minnesota Supreme Court to review the decision of the Court of Appeals. On March 27, 2019, the Supreme Court declined to do so. Accordingly, the Court of Appeals’s opinion will remain the final word on the issues it addresses, at least as far as Lund goes.  Only time will tell whether, and how, the appellate courts will develop or modify Lund‘s answers concerning the questions Lund addressed about shareholder oppression, the reasonable expectations of shareholders in closely-held businesses, business fair value, and claims against trustees.

Claims Against Trustees: Lund Again

In Litigation Process, Minnesota Appellate Decisions, Trustsby Joseph PullLeave a Comment

In December 2014, Kim Lund, one of four siblings who shared beneficial ownership of Minnesota’s Lund grocery empire, filed a lawsuit against her brother Tres Lund (the CEO of the business entities), the entities themselves, two directors, and a co-trustee of one of Kim’s trusts. In the action Kim sought to divest her Lund business entity interests, and the court decided it would order a buyout. After a trial in February 2017, the district judge entered an order valuing Kim’s business interests and resolving Kim’s request for the removal of certain trustees from her trusts. The district judge’s decision was appealed. On January 14, 2019, the Minnesota Court of Appeals decided the appeal.[1] The Lund appellate opinion touches numerous issues of interest in Minnesota minority shareholder and trust litigation. This post considers the appellate fate of Kim’s claims against the trustees of her trusts. *    *     *     *     * Along with her shareholder oppression claims, Kim also asked the Hennepin County court to grant her relief concerning co-trustees who managed trusts that owned Kim’s beneficial shares of the Lund business entities. Kim alleged two co-trustees, attorney Stanley Rein and her brother Tres Lund, had breached their fiduciary duties, and she wanted the court to remove Tres and Rein as trustees. No harm, no foul. The trial court rejected Kim’s claims against Tres and Rein for breach of fiduciary duty. The Court of Appeals, without even discussing the wrongdoing that Kim alleged, agreed. Kim had failed to challenge the trial court’s determination that she offered no evidence of damages, and damages are an essential element of a breach of fiduciary duty claim.[2] Without showing damages, a plaintiff cannot prevail on a breach of fiduciary duty claim, no matter what bad acts the defendant did or did not …

Determination of Business Fair Value, Modeled by Lund

In Business Valuation, Minnesota Appellate Decisions, Trustsby Joseph Pull1 Comment

In December 2014, Kim Lund, one of four siblings who shared beneficial ownership of Minnesota’s Lund grocery empire, filed a lawsuit against her brother Tres Lund (the CEO of the business entities), the entities themselves, two directors, and a co-trustee of one of Kim’s trusts. In the action Kim sought to divest her Lund business entity interests, and the court decided it would order a buyout. After a trial in February 2017, the district judge entered an order valuing Kim’s business interests and resolving Kim’s request for the removal of certain trustees from her trusts. The district judge’s decision was appealed. On January 14, 2019, the Minnesota Court of Appeals decided the appeal.[1] The Lund appellate opinion touches numerous issues of interest in Minnesota minority shareholder and trust litigation. This post considers the process of assessing the fair value of a business entity, as illustrated by Lund. *     *     *     *     *

Empty Assurances as Shareholder Oppression

In Minnesota Appellate Decisions, Shareholder Agreements, Shareholder disputes, Trustsby Joseph Pull1 Comment

In December 2014, Kim Lund, one of four siblings who shared beneficial ownership of Minnesota’s Lund grocery empire, filed a lawsuit against her brother Tres Lund (the CEO of the business entities), the entities themselves, two directors, and a co-trustee of one of Kim’s trusts. In the action Kim sought to divest her Lund business entity interests, and the court decided it would order a buyout. After a trial in February 2017, the district judge entered an order valuing Kim’s business interests and resolving Kim’s request for the removal of certain trustees from her trusts. The district judge’s decision was appealed. On January 14, 2019, the Minnesota Court of Appeals decided the appeal.[1] The Lund appellate opinion touches numerous issues of interest in Minnesota minority shareholder and trust litigation. This post considers Lund’s contribution to the definition of oppression through denial of a shareholder’s reasonable expectations. *     *     *     *     *

A Little Contract, a Little Latin, a Little Property

In Legal Interpretation, Minnesota Appellate Decisions, Propertyby Joseph PullLeave a Comment

(Unenforceable Terms, Expressio Unius, and the Right of Redemption) Minnesota courts enforce contracts.  Someone who signs an agreement cannot later escape it by saying he never read it,[1] and or that it is harsh.[2] A little hyperbolically, Minnesota courts occasionally explain that contracts must be enforced or else “chaos would prevail in our business relations.”[3] And yet. In certain circumstances, a Minnesota court will refuse to enforce the plain terms of a contract. One example of particular importance to borrowers and lenders is the statutory right of redemption of foreclosed property. The Minnesota Court of Appeals has decided this right cannot be waived. If the borrower signs an agreement waiving it, the waiver is not enforceable.[4]

Loophole Prevented: Selling a Business During a Divorce

In Marital Dissolution, Minnesota Appellate Decisions, Supreme Courtby Joseph PullLeave a Comment

Stacking together two major life events – a divorce and the sale of a multi-million-dollar business – can be a recipe for major headaches and complex interacting consequences.  In the recent Minnesota Gill case, a business sale during a divorce revealed a potential loophole through which an owner-executive tried to avoid sharing assets with a soon-to-be ex-spouse – but the state supreme court blocked the maneuver. On October 24, 2018, the Minnesota Supreme Court issued a decision requiring an ex-husband to split the proceeds of an “earn-out” provision with his ex-wife, notwithstanding that the contract granting the earn-out was signed after the valuation date in the marital dissolution case. The earn-out was part of the purchase agreement for a valuable company. The case presented a question of the boundary between two fundamental principles of Minnesota marital dissolution law: All property acquired during the marriage is subject to division between the ex-spouses.[1] Property acquired by a spouse after the valuation date in the dissolution is not subject to division between the ex-spouses.[2]

Those Ubiquitous Arbitration Clauses

In Arbitration, Litigation Processby Joseph PullLeave a Comment

How many times have you agreed to “binding arbitration” in case of a dispute over a product you bought or a service you signed up for? Whether you know it (because you conscientiously read contracts before signing them) or not (you don’t), there’s a good chance your answer should be “a lot.” Arbitration provisions now crop up all over the place, from the terms for computer software[1] to cable TV contracts[2] to bank checking and savings accounts agreements[3] to the purchase agreement for a new car. Arbitration clauses commonly appear in commercial contracts and professional services agreements. They might be included in a shareholder agreement for a closely held company. Sometimes they are used in places they aren’t supposed to be used.[4] What does an arbitration agreement accomplish?