Deferred Bond Principles: Business Judgment Rule and Exception Clauses | Farrell Fritz, computer

Adam Max, the son of world-renowned visual artist Peter Max, and Adam’s sister, Libra, ALP, Inc., have filed lawsuits in New York City over the past five years over control and management of the family business. Peter Corporation was founded in 2000 to produce, maintain, market, license and market a rich catalog of his artwork.

One of those cases ended in a recent decision by the Manhattan-based Appeals Division – First Division. Max v ALP, Inc.203 AD3d 580 [1st Dept 2022]The court ended the alleged shareholder lawsuit against Adam Libra in 2019, which was completely dismissed by Judge Bannon, and the appellate court upheld it in its entirety.

Adam’s accusations

The shares of ALP are Adam (40%), Libra (40%) and Peter (20%). Page 27 of Adam modified complaint Libra and Flynn denounced a “hostile takeover” on behalf of Peter’s shares, both of which collectively controlled 60% of the ALP’s voting shares, “to completely eliminate Adam from the family business.”

Adam complained that Flynn, the swing vote, “has so far given no valid business, legal or other reason in favor of the Book against Adam.” Adam complained that once he was removed as an officer, Libra and Michael Anderson, his co-directors, had made decisions that Adam did not agree with, such as “taking steps to reduce his tenure, not to pay expenses, and to continue with his dignity and success. At the end of several days, Adam would have preferred to continue working for the ALP, and interfering with other lawsuits in the ALP, allegedly using corporate funds to pay legal fees, and allegedly participated in the spread of a scandalous New York.

Violation of (i) breach of fiduciary duty arising out of Adam’s amended complaint, (ii) appointment of the recipient, (iii) declaration of cancellation of the previous shareholders ’meeting, (iv) attorneys’ fees, (v) removal of Libra and Anderson as directors. and as an official Libra, (vi) accounting and (vii) irresponsibility.

Motion for dismissal

Libra firmly denied the allegations, quickly dismissing the altered complaint. The front and center of the pound movement was that of the ALP certificate of incorporation which contains the following exceptional provision:

This removes personal liability for compensation of directors to the corporation or its shareholders, such as breach of duties. . . If a judgment or firm judgment against such director indicates that his or her acts or omissions were in bad faith or that he or she committed misconduct or willful misconduct or that he or she personally obtained an economic gain or other advantage. violation of the law or its acts Section 719 of the Companies Act.

The ALP’s exception clause was an almost literal copy of the language Section 402 (b) (1) of the Companies Actand a double exception clause in an LLC’s operating agreement John v Varughese194 AD2d 799 [2d Dept 2021]a case in point we wrote recently.

Libra also argued that Adam’s amended complaint, seen in its entirety, was merely a mere disagreement over the right direction of the ALP’s business, a decision backed by the rules of common law business law.

Release Decision

In the lower court, Judge Bannon he accepted the release in defense of the two trustees.

With regard to the exemption agreement, the Court has ruled as follows:

Even Adam said, in a final way, “Libra and Anderson committed these acts in bad faith and deliberately knowing that the violation of the law was misconduct and with the improper purpose of personally gaining and obtaining financial advantages. they have no right, ”Adam does not claim. Libra and Anderson’s decisions to move away from ALP Adam’s previous business, even if those decisions were less profitable for ALP, do not constitute bad faith or intentional misconduct.

“In summary,” the Court ruled, “since the amended complaint does not allege bad faith or misconduct on the part of Libra or Anderson, the plaintiff prohibits claims against them from exception clauses.”

As regards the rule of business judgment, the Court has written:

The cause of action for breach of fiduciary duty does not lie in the fact that the complaint merely alleges that a course of action other than that taken by a board of directors would be more beneficial. . . . On the contrary, the complaint must sufficiently allege that the corporate decisions of the board of directors did not serve a legitimate business purpose or were tainted by a conflict of interest, bad faith or fraud (excluding citations).

Applying this principle, the Court held that Adam’s claims “do not prove the dissatisfaction of the plaintiff and his associates with the direction taken by Libra and Anderson ALP.” The court also dismissed Adam’s allegation, alleging that Libra had breached his fiduciary duties by allegedly “misappropriating.”[ing] A New York Times reporter with false information about an alleged plan to sell fake works of Peter Max’s artwork “because” the New York Times issue is included in the defendants’ submissions and is publicly available, in complete contradiction with Adam’s claims “and” the author of the article he says his work was based on his own research, including an examination of public court records and discussions with Adam himself.

Decision on the appeal

Adam appealed to Judge Bannon to dismiss his altered complaint. You can read the summaries of the appeal here, hereand here. The Department of Appeal agreed with Judge Bannon and “unanimously upheld” his decision.

With regard to the exemption provision, the Court stated:

These are the claims made by the defendants against the defendants as directors. . . Prohibition of exception clauses in the ALP founding document. In New York, the right of shareholders to sue for breach of duty is expressly “subject to any provisions of the corporate certificate” (Business Corporation Law § 402 (b)) (b) (Business Corporations Act § 720 [a] [1]). Attempts to sue the plaintiffs in connection with the language of exception are crucial and are not sufficient to overcome the protections in the company’s governing bodies.

The court also ruled that Adam did not exceed the rule of business judgment:

The motion court duly dismissed the plaintiffs’ action lawsuits, alleging breach of fiduciary duty and negligence. It is well established by law that the rules of business judgment prohibit the judicial investigation into the actions of corporate directors in good faith and with honest judgment in the development of legal and lawful purposes. While the plaintiffs may disagree with the decisions of the ALP Board of Directors, there will be no cause of action, as here, only to allege that the complaint would have been more beneficial than an action taken by the Board of Directors. . . . (citations and citations excluded).

The court also dismissed Adam’s book as “insufficient” because he had acted in “bad faith” in paying the ALP its legal fees and allegedly giving “false information to a New York Times journalist” because Adam’s first allegation was “consequential.” the latter was lacking in “quite peculiarity” in that it did not “expressly state the content of the alleged false information” provided by Adam. Times.

Comments Max

The basic policy behind the Company Judgment Rule and the contractual exemption provisions is the same: it is very beneficial for business companies, owners and the general public to encourage people with skills and abilities to act as a fiduciary corporation. If every decision made by a fiduciary corporation were subject to litigation or post-hoc examination by the dissidents through litigation, they would otherwise recommend that the qualified person serve on behalf of the companies. Corporate judgment rules and exemption clauses have the same purpose: to promote fiduciary service in the private sector and to prohibit liability claims based on mere disagreements over day-to-day business decisions. For whistleblowers, Max it is a reminder of a breach of fiduciary duty, negligence, or the like to file a viable shareholder claim against a member of the board, being prepared with specific allegations to protect one’s claims that the actions of the director have no legitimate business purpose or are tainted. conflict of interest, bad faith or fraud. A mere disagreement about the direction of the company will not work.

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