II. INTRODUCTION - THE PROBLEM
III. LEGISLATIVE AND JUDICIAL SOLUTIONS
A. Michigan Business Corporation Act
B. Michigan Cases - When All Else Fails and Matters End up in Court
C. Delaware General Corporation Law
D. Revised Model Business Corporation Act 1
IV. PLANNING AHEAD - NEGOTIATED SOLUTIONS
B. Points of Concern
C. When, Where, and How to Agree
D. Planned Dissolution Rights
E. Additional Directors
F. Purchase or Sale Provisions
V. NEGOTIATED SOLUTIONS - WHEN THE PROBLEM APPEARS
VI. SECURITIES LAW CONSIDERATIONS
VII. ROLE OF COUNSEL
VIII. MICHIGAN STATUTORY REFORM
The authors would like to recognize the valuable assistance of James L. Scott and Michael K. Molitor, also of Warner Norcross & Judd LLP, on this Article.
Nearly "ninety-five percent of all U.S. business are family-owned. These family-owned businesses provide almost fifty percent of the jobs in the American business workforce."1 It is not surprising that with the growth of the number of businesses, there has been a corresponding increase in shareholder dissension and oppression cases in recent years.2
Bitter conflict can arise from voting deadlock in a business structure. Siblings quarrel over power and supremacy after being vested with joint control over a family-owned corporation; rivals who concurrently come into equal ownership fight for supremacy and employee and customer loyalty; incompatible owners start a business and then spar for domination; philosophical differences in management divide a once harmonious arrangement; one individual does little to enhance the jointly-owned business, while another devotes all of life's energies to its success; and greed turns friends into enemies.
The consequences of a fight in an equally divided corporate ownership setting extend far beyond the business of the corporation. Family relationships disintegrate beyond repair, friendships are destroyed, and the emotional impact can devastate the lives of not only the participants but those around them. The business within the corporation suffers from inattention, divided strategies, customer and supplier slights, lack of a coherent business plan, missed opportunities, and other predictable consequences of internal conflict.
For an attorney caught in the middle of these situations, the escalation into warfare can turn into a nightmare. Who is the client - the corporation, one or more of the individual warring parties, or some amorphous combination of the above? How does one react in this setting to provide fair services to the clients and not become a victim of the battle?
This article addresses drafting strategies to avoid or defuse some of these situations, dispute resolution mechanisms, the impact of and trends in litigation, and the applicability of provisions of the Michigan Business Corporation Act (the Act) as it affects strategic decisions.
II. INTRODUCTION -- THE PROBLEM
Shareholder disputes in close corporations can have devastating results on the corporation, the shareholders, and all who come into contact with them. Dissension can lead to deadlock, corporate paralysis, and eventually the attempted "squeeze-out" of one or both parties.3 The results of this conflict include:
- Frustrated expectations of long-term employment and a meaningful management role by shareholders who would otherwise intend to play an active part in the business.4
- A breakdown of close working relationships that had originally been based on mutual respect and good faith.5
- Policy differences between active and inactive shareholders.6
- Deterioration of service to customers.
- An untenable working environment for employees.
- Loss of attention to business and focus on "one-upmanship" in power and ego battles.
- Losses from operations or dramatic diminution of profit.
- Increased temptation to divert or use assets for personal benefit, e.g., "I'm working every day, 12 hours a day, and my co-owner comes in for six hours and then goes golfing. I am clearly entitled to more!"
- Customer dissatisfaction.
- Loss of the opportunity to engage in a public offering.
- Distraction from business development activity.
- Creation of an environment hostile to new ideas, or the fight for credit at the expense of development or enhancement of the product. ("If it's his idea, it can't be good.")
Courts and articles have described the extent of the problem. Levant v. Kowal7 illustrates the problem well. In Levant, a dispute between rival shareholder factions of Barium Hotel, Inc. prevented the directors and shareholders from reaching a quorum at any meeting for over four years.8 In addition, the corporation lost money the year prior to the lawsuit, failed to withdraw profits for six years, and neglected necessary repairs.9 The dispute affected the day-to-day operation of the business. The hotel manager in Levant summarized these shareholder disputes as follows:
They [the rival factions] . . . used to argue and quarrel quite a bit. I tried to keep out of them if I could. It didn't concern me directly. I would ask them to please go upstairs and don't annoy the guests. I thought it was bad public relations for us to have these arguments around the lobby floor . . . . I asked them to fight it out upstairs where the public couldn't hear.10
When consensus among the participants breaks down, the predictable consequence is that one faction will seek a strategic advantage over the other.11 This breakdown results in deadlock - a situation where "each of two equal shareholders or factions wish to be the buyer and neither wish to be the seller."12 It has also been described as corporate paralysis to such a degree that a corporation cannot function and, as a result, faces imminent disaster.13
Many owners with divergent views recognize that even an inferior decision or course of action is usually better than no decision at all. The potential harm of the paralysis brought by deadlock usually motivates business owners to find a mutually acceptable course of action, even at the cost of compromise. When the parties cannot find common ground, stagnation and inaction follow. Without prompt action, a corporation mired in dead lock can quickly flounder.
The controversy might be resolved amicably by a division of the business, a buyout of a shareholder by the other (or the corporation), or if the two shareholders are able to agree, selection of an independent board of directors. The unhappy shareholder may elect to subordinate his or her views and desires to the acts and practices of the other. The unhappy shareholder could also walk out, leaving the daily activity of the business, but continuing to own the shares as an asset over which he or she has no practical control and as to which there will be little or no current return. The shareholder may select a surrogate more acceptable to the other party or an "independent director"14 can be added to the board.
When owners fail to act rationally, or at least in their own economic self-interest, these solutions are no longer viable. Instead, the relationships deteriorate. Enmity turns to animosity and then to hatred. Winning or scoring points against the other party can become more important than finding a resolution. Alternatively, one owner may bully or intimidate the other. The desire for power, appearance of prestige, greed, and others factors may motivate attempts at domination.
Deadlock can arise from the different but well-intended views of two owners. Deadlock does not necessarily include or follow from attempted oppression of a shareholder by another. It can, and frequently does, however, lead to oppression. Shareholder oppression has received a great deal of attention in the literature and in the courts. The focus here will be on deadlock or stalemate, rather than oppression.
III. LEGISLATIVE AND JUDICIAL SOLUTIONS
A. Michigan Business Corporation Act
The Act15 provides for liberal construction and gives "special recognition to the legitimate needs of close corporations."16 Under the Act, internal dissension may be rectified by dissolution, which may occur voluntarily or by court order. Voluntary dissolution can occur when stated conditions in the articles of incorporation are met.17 Thus, shareholders in a close corporation may agree in advance as to certain dissolution-causing events.
In the absence of any advance planning, a director or shareholder can seek dissolution by court order. Section 82318 of the Act permits a circuit court to dissolve a corporation upon proof of the following requirements:
(a) The directors of the corporation, or its shareholders . . . are unable to agree by the requisite vote on material matters respecting management of the corporation's affairs, or the shareholders of the corporation are so divided in voting power that they have failed to elect successors to any director whose term has expired or would have expired upon the election and qualification of his or her successor.
(b) As a result of a condition stated in subdivision (a), the corporation is unable to function effectively in the best interest of its creditors and shareholders.19
The drafters of section 823 did not include some of the limitations contained in statutes of some other states. For example, some state statutes require that an action for dissolution be brought by the holders of some minimum percentage of the shares of the corporation.20 Thus, the Michigan provision permits dissolution at the request of a single shareholder, based upon the best interests of shareholders and creditors, even if the corporation is operating profitably. Section 823 has remained essentially unchanged since its enactment.21
Section 823 was added to the Michigan Act as a part of the Business Corporation Act revisions enacted in 1972, effective January 1, 1973. Prior to 1972, there was no procedure in the corporation statute for dealing with deadlock situations.22 As discussed below, however, Michigan courts had developed a common law right of dissolution for deadlocked shareholders.
B. Michigan Cases - When All Else Fails and Matters End up in Court
Michigan has scant case law dealing with deadlocks; however, it was the first state in the country to recognize that a court had the equitable power to order a dissolution of a company.2323 Courts began applying the remedy of dissolution in the context of oppression and later found it an appropriate remedy in the context of a deadlock.
Historically, courts have been highly reluctant to intervene in intra-corporate disputes. The Michigan Supreme Court issued the first appellate decision on this subject in 1892 in Miner v. Belle Isle Ice Co.24 In Miner, one individual so dominated and controlled a board of directors that the court viewed the directors as mere puppets of the dominating shareholder. The court determined that "[w]here the chief shareholder, who is president, induces the directors, his dummies, to vote a large salary to him, the corporation may defeat the officer's action at law to recover it."25The court held that where one family holds the majority of a corporation's stock and votes away the company's profits for salaries, a court of equity may remedy the fraud.26 Regarding the remedy, the court ruled that:
[W]hen it turns out that the purposes for which a corporation was formed cannot be attained, it is the duty of the company to wind up its affairs. . . . [T]he ultimate object of every ordinary trading corporation is the pecuniary gain of its stockholders. . . . [I]t is for this purpose, and no other, that the capital has been advanced; and if circumstances have rendered it impossible to continue to carry out the purpose for which it was formed with profit to its stockholders, it is the duty of its managing agents to wind up its affairs.27
The court continued, "[t]he law requires of the majority the utmost good faith in the control and management of the corporation as to the minority."28
This theme was advanced by the Michigan Supreme Court in Town v. Duplex-Power Car Co.29 Confirming Miner, the court stated that courts have the statutory power to entertain shareholders’ petitions regarding a variety of situations.30 Courts can compel a corporation's officers to account for their conduct in management and the disbursement of corporate funds, to remove and suspend officers, to order the election of new directors, to restrain and set aside the alienation of a corporation's assets, to sequestrate property, and to appoint a receiver.31
In Flemming v. Heffner & Flemming,32 the court determined that an individual who holds half the stock of a corporation cannot exclude the holders of the other half from control. An effort to freeze out the other party by holding a meeting without him, removing him as an officer, and then departing with the corporate books and records failed. Citing Miner, the court stated that "when it turns out that the purposes for which a corporation was formed cannot be attained, it is the duty of the company to wind up its affairs."33
The Michigan Supreme Court did not take up this issue again until the case of Levant v. Kowal34 in 1957. In Levant, the previously described case concerning the Barium Hotel, the court faced the problem above and dealt with deadlock for the first time.35 The court determined that dissolution of a corporation by a court acting in equity is not limited to cases of abuse of trust, fraudulent mismanagement, or misappropriation of corporate funds.36
The court asserted its equity powers on the basis that "[i]t is the historic function of equity to give such relief as justice and good conscience require and the fact that a corporation is involved works no diminution of the chancellor's powers."37 The court avoided the appellant's argument that the court lacked authority to dissolve a corporation solely on the basis of deadlock by stating that:
[A] careful review of the cases cited to us by both of the parties hereto reveal [sic] that when the stockholders of a corporation become so engrossed in their personal enmities that they will not speak to each other, that they refuse to cooperate in the management of the business, and ignore the statutory requirements for doing business in the corporate form, such dissension rarely, if ever, stands alone. It is usually accompanied by circumstances of financial loss, corporate paralysis, mismanagement, and deterioration of property, all of which we have here.38
It is probable that Michigan courts will continue the approach noted above in deadlock situations if the parties fail to provide guidance. It is also probable that the Michigan courts will follow the trend in other states and disregard the "business judgment rule"39 when faced with an equal division of control.
To the extent that one party has engaged in illegal or oppressive conduct to the detriment of the other, courts will be more likely to grant relief to the victim than the transgressor.40 Courts will also be inclined to consider partnership law in determining the most equitable approach in the event of dissolution.41
C. Delaware General Corporation Law
Delaware's General Corporation Law,42 in section 226, provides that a Court of Chancery, upon the application by any stockholder43 and the existence of proper grounds, may appoint a custodian who has the power44 to continue the corporation's business.45 If the corporation is insolvent, the court may appoint a receiver.46
The Delaware Act also addresses deadlock in the special provisions governing "close corporations"47 found in a separate subchapter of the Delaware Act.4848 The general corporation law applies to close corporations governed by the subchapter, unless the subchapter provides otherwise.49 The close corporation subchapter extends the powers given to the Court of Chancery under section 226 to two more situations: (i) when the stockholders are managing the affairs of the corporation (pursuant to section 351) and they are divided50 or where (ii) a right to dissolve has been included in the certificate of incorporation pursuant to section 355.51 Further, the close corporation provisions allow a Court of Chancery to select a provisional director on the petition of one-half of the board, the holders of one-third of the voting shares, or two-thirds of any class when there is more than one voting class of stock.52
The Delaware subchapter on close corporations also provides that the certificate of incorporation may include a provision that grants to any stockholder or to holders of a "specified number or percentage of shares of any class of stock, an option to have the corporation dissolved at will or upon the occurrence of a specified event or contingency."53
D. Revised Model Business Corporation Act
The Committee on Corporate Laws of the American Bar Association Section of Business Law approved a Statutory Close Corporation Supplement to the Model Business Corporation Act (the Model Act).54 The Close Corporation Supplement (the Supplement) is a separate statute that replaces the general law with regard to certain aspects of a statutory close corporation's affairs. The Model Act applies to statutory close corporations only to the extent it is not inconsistent with the provisions of the Supplement.55
Sections 40 through 43 of the Supplement give a shareholder some relief through judicial supervision.56 These sections are "derived from similar provisions in the California, Michigan, Minnesota, New Jersey, and South Carolina statutes."57 The Supplement differs, however, in that it offers a court more flexibility by spelling out forms of relief in greater detail.58 Under the Supplement, dissolution is only one of the forms of relief available to a court, and it should only be considered after other dispute resolution methods have failed.59
Section 40(a)(2) allows a shareholder in a deadlock situation60 to petition a court for any relief available under sections 41, 42, or 43.61 If a court finds that grounds for relief under section 40(a)(2) exist, it may order one or more types of "ordinary" relief listed in section 41.62 If the ordinary relief described in section 41(a) is, or would be, inadequate or inappropriate, a court may order the corporation dissolved under section 43, unless the corporation or one or more of its shareholders purchases all the shares of the shareholder for fair value and on terms determined under section 42(b).63 By listing available forms of relief, the Supplement aims to address some courts' reluctance to order "anything other than dissolution, or possibly a buyout."64 Although the Supplement provides several options for a court, it does so without detailed standards to avoid unduly restricting a court's discretion.65
IV. PLANNING AHEAD - NEGOTIATED SOLUTIONS
In light of the less than satisfactory solutions offered by the corporate statutes and the courts, business owners are well advised to plan ahead for deadlock resolution. A number of approaches are possible. These include drafting provisions in a corporation's articles of incorporation or bylaws, or creating separate agreements among shareholders.
In establishing an entity that faces potential deadlock by virtue of present or anticipated voting control, the challenge to counsel lies in drafting provisions that will help prevent or at least manage the kind of disputes that can lead to deadlock. Equally significant is ongoing counseling, to the extent the client seeks or is receptive to it, regarding the need to change or adapt those provisions as circumstances change in the corporation.
B. Points of Concern
A pre-dispute arrangement between shareholders can provide procedures for addressing deadlocks that could arise from unforeseen issues or even foreseeable issues on which the parties have not presently reached an agreement. Procedures such as adding one or more additional directors or engaging in some form of alternative dispute resolution are discussed in more detail below.
A shareholder agreement can head off many of the issues potentially leading to deadlock by simply defining and agreeing on those matters initially. The agreement or arrangement might address the composition of the board of directors, the identity of or a procedure to determine officers of the corporation, compensation, dividend policies, any special procedures or requirements for issuing additional shares, policies for transfers of shares, admission of additional shareholders, problems arising from death, disabilities, or termination of employment, and similar matters. Where the agreement does not dictate the specific outcome, it can provide a procedure to facilitate agreement between the shareholders, or resolve deadlock if the shareholders are simply unable to agree.
Obviously it is easier for internal management to obtain compensation through salary, bonuses, perquisites, and even the opportunity to divert assets, than it is for a passive investor or one with only a limited role in the corporation. Further, the ability to control the books and records of the corporation offers the potential for abuse. For the passive investor in an S corporation or a limited liability company, mandatory dividend distributions based on levels of performance may be appropriate. Further, in a venture type investment, it will not be unusual for the party providing capital to require that certain standards be met, and if those standards are not met, then that party has the right to obtain additional shares or seats on the board of directors, thus throwing the voting scales into imbalance and opening the way to control for the passive investor.
C. When, Where, and How to Agree
It is simplest to deal with issues before they arise. At that time, however, the parties are not contemplating problems, and may feel that to address them is to forecast their arrival. While some clients will pay little attention to the organizational documents and agreements, despite attempts by counsel to focus them on the issues, others will show deep concern about adding provisions in anticipation of events which do not occur. Further, the published forms for close corporations from publishers generally do not provide good models of the provisions designed to prevent or manage deadlock situations, since most close corporations are not "balanced" entities.
An agreement or arrangement between shareholders to address these issues can be set forth in a written agreement signed by the shareholders, or it can be set forth in the articles of incorporation or bylaws.
Articles of incorporation can contain any provision that is not inconsistent with the Act.66 Specifically, the articles may include provisions for "management of the business and the conduct of the affairs of the corporation or creating, defining, limiting, or regulating the powers of the corporation, its directors and shareholders, or a class of shareholders."67 A provision in the articles of incorporation may give greater comfort than a bylaw provision because it may be amended or deleted only upon a vote of the shareholders.68 In contrast, bylaws typically provide for amendment by the board of directors.69 Provisions in the articles of incorporation also become a matter of public record.70 This makes the restrictions or requirements readily available to all shareholders, but may disclose too much corporate information. Generally, a third party has no legal right to access arrangements that may be contained in the bylaws or in a separate written agreement.
The bylaws may also be a suitable place to set forth the terms of an arrangement or agreement among shareholders. The shareholders will likely require that these provisions be amended only by a vote, and perhaps a supermajority or even unanimous shareholder vote. The Act specifically permits a company's articles of incorporation to restrict a board of directors in the management of the corporation's business, or to delegate authority to one or more shareholders or other persons to perform any facet of management functions that would otherwise be within the board's authority.71 To do so, either all incorporators must have authorized the articles' provisions, or "the holders of record of all outstanding shares [must] have authorized the provisions in an amendment to the articles."72 To safely implement such a provision, it is necessary to give notice of the existence of the provision on the back or face of the stock certificate of each owner and each subsequent transferee.73 Such provisions "relieve the directors and impose upon the shareholders the liability for managerial acts or omissions that is imposed on directors by law to the extent that, and as long as, the discretion or powers of the directors in the management of corporate affairs are controlled by the provision."74 There is no statutory limitation on the duration or specific terms of such an arrangement.75
The Act specifically authorizes a voting agreement among two or more of a corporation's shareholders requiring that shares be "voted as provided in the agreement" or as determined under a mutually agreed upon procedure.76 While the Act does not require unanimity for this kind of an agreement, it is probably best to establish total shareholder support for the concept. Such an agreement is specifically enforceable under the Act. These agreements are distinct from agreements imposing restrictions on transfers of shares, as authorized under section 472 of the Act.77 Voting trusts78 generally have limited applicability in the close corporation, equally divided management setting.
If one 50% shareholder wants to dissolve a corporation, he or she must normally seek a court order. One solution to the problem of compelling a working relationship is to provide in the articles that either holder of the one-half stock interest has the right to dissolve the corporation.79 This is an extreme approach, but might be used as the last resort if counsel opted to include a series o steps escalating the eventual dissolution. Dissolution pursuant to a provision in the articles is discussed further below.80
Even parties who have not planned in advance and who find themselves “in the soup” may wish to use one of the procedures described above. However, those parties still face the issue of agreeing upon the appropriate procedure, and depending upon how badly the relationship has deteriorated, this may be difficult, if not impossible. It is much easier to deal with buyout procedures in the abstract then when faced with the need for immediate action.81
D. Planned Dissolution Rights
Section 805 of the Michigan Act permits a company to include a provision for dissolution in its articles of incorporation.82 Such a provision may state that a shareholder or the holders of a specified proportion of shares “may require dissolution of the corporation at will or upon the occurrence of a specified event.”83 The provision must be included in the articles of incorporation by the incorporators or by an amendment that has been unanimously approved by the shareholders.84 Dissolution under this section is effected by “the execution and filing of a certificate of dissolution” in accordance with the article’s provision.85 As with the provision concerning management by shareholders under section 463, the existence of the dissolution provision should be noted conspicuously on the face or back of stock certificates.86
Any time after a corporation has been dissolved, a shareholder may apply to the circuit court in the county of either the corporation’s principal place of business or the corporation’s registered location for a judgment “that the affairs of the corporation and the liquidation of its assets continue under supervision of the court.”87 Further, this section provides that the court shall:
make orders and judgments as may be required, including, but not limited to, continuance of liquidation of the corporation’s assets by its officers and directors under the supervision of the court, or the appointment of a receiver of the corporation to be vested with powers as the court designates to liquidate the affairs of the corporation.88
Note that the court’s authority to appoint a third party of otherwise deal specifically with the resolution of the affairs of the corporation occurs once the corporation has been dissolved. In the absence of oppression or other misconduct within the scope of section 489 of the Act, the court has no express authority to fashion remedies to help with the deadlock prior to the corporation’s dissolution.
E. Additional Directors
Additional directors can play a variety of roles, depending upon the timing of their arrival on the board and the relationship of the parties. Under the best of circumstances, they arrive early in the proves and encourage favorable relationships, bring perspective to board and management meetings, provide sage counsel to management and individual shareholders which avoids future crises leading the deadlock, and contribute in the customary roles of directors.
At the other end of the spectrum, an additional directory may be brought in to attempt to break deadlock long enough for the business to be sold to a third party or for one or the other of the shareholders to accomplish a buyout. Under these circumstances, the environment may be hostile, and therefore the additional director's role is really that of an interim caretaker rather than customary director. The independent director concept89 may be particularly valuable under these circumstances. It is probable that anyone assuming this position would require amendments to the articles to provide for sufficient control in order to motivate the parties to vie strongly for the independent director's support.
Usually the additional director will be brought in somewhere in the development of a potentially difficult situation, as the parties recognize the need for greater strength on the board if the business is to prosper. In such situations, each party may select one or more individuals who represent their respective views but who also bring additional strengths to the board. If uncertainty prevails and a strong desire to head off problems exists, those new directors may then be given the opportunity to select a fifth director whose independence and skills may better blend the parties and positively redirect efforts.
The parties can attempt to improve a bad situation by adding a director who plays more the role of referee than that of traditional director. If both parties can agree upon the selection, they can jointly select such an individual. Obviously, if the matter has reached a point of deadlock, there is little reason to consider this approach.
F. Purchase or Sale Provisions
The most obvious solution to deadlock is a buyout. Hypothetically, it terminates dissension, removes one party from the scene, and restores peace. In reality it's not that easy.
One threshold issue in drafting corporate agreements is determining an appropriate trigger mechanism. Conditions which may trigger a mandatory buyout provision may include deadlock, failure to elect directors, or an inability to agree on material matters. However, by including conditions to the right to trigger the buyout mechanism, the parties frequently create additional issues. Are they in fact deadlocked? If they are, is the deadlock having materially adverse effects?
On the other hand, a right to trigger a buyout without any conditions to its use may make it too easy to trigger. It may cause the buyout mechanism to be implemented in haste or may also give each party additional opportunity to control the timing of a buyout to his or her strategic advantage.
A buyout mechanism can be helpful if it becomes necessary for owners to part company. The costs of maintaining the status quo or resolving differences through litigation can be significant, making even a less than perfect buyout mechanism still the lesser of several evils. Additionally, the presence of the buyout mechanism frequently can motivate the parties to resolve their differences. The buyout mechanism can be an effective lever, even if it is not implemented.
There are several types of buyout arrangements to consider, including a "put," "redeemable stock," or right to trigger a mutual buyout procedure.90
A put option provides one party the right to present all of their shares for payment at any time, or under an agreed set of circumstances that the corporation is required to honor. This option can have devastating financial impact upon the corporation, can disrupt business at the most disadvantageous time, and may be restricted or prohibited by law if the corporation is designated to make the repurchase. While terms of the buyout can vary, it is impossible at the onset of drafting corporate documents to anticipate the problems that may exist when deadlock occurs many years later.
Use of “redeemable” stock is the flip side of the “put” coin. This option permits the corporation to repurchase with a “call” all or a portion of the outstanding stock, depending upon the terms of the stock. Again, triggering events (e.g., death of one founder with passage of the stock to a spouse or children who will not be active in the business), timing requirements, and other restrictions can be imposed. Redeemable stock may solve some deadlock problems, but it raises other difficulties. Generally, a buy-sell agreement is the better device, since the terms are likely to be far more detailed. Further, redemption by the corporation, which may not be possible in light of the deadlock.
A put and the use of redeemable stock are usually unilateral approaches. Practically, a more interactive buy and sell arrangement often will be easier to agree upon and will lead to more satisfactory results, assuming comparable financial strength of the parties. One common approach to a buyout is for one party to set down a dollar amount (and perhaps terms) for a purchase. The other owner then elects whether to buy or sell on that basis. The most common alternative is an arrangement under which each shareholder submits a bid, and the highest bidder becomes the buyer at either the high or the low price. The bidding process is simplified if the buy and sell arrangement includes all of the details of the purchase other than the price. The parties may even wish to include deferred payment terms, so as to neutralize or ameliorate the impact of a party’s superior financial status.
In crafting such a buyout provision, it is helpful to try to anticipate the various scenarios under which the buyout mechanism might be implemented. Frequently, one party has greater access to information and therefore is the “insider” at the time the mechanism is triggered. For that reason the buyout mechanism should be designed to assure that each party will have adequate access to information to make an appropriate bid, or to react to a bid from another party. Giving one or both parties a right to dissolve the company after the bidding process may made the buyout mechanisms more flexible. Flexibility may be enhanced by a mechanism to permit one or both parties an opportunity to market the company to other purchasers.
It is undesirable for the buy and sell arrangement to create an incentive to race to be the first bidder, as this may make the corporation simply too fragile.
Dissolution is not always an acceptable remedy for deadlock in a closely held corporation, especially if the corporation is (or will likely be) profitable or successful. Arbitration provides a method of resolving disputes and to render a binding decision resolving problems that the shareholders cannot resolve on their own.
The typical form of arbitration clause involves an agreement under which two shareholders agree that, in the event that they fail to agree concerning the voting of their shares, they will submit the disagreement for arbitration to a named arbitrator, whose decision will be binding on all parties. Each party agrees to vote his or her shares in accordance with the arbitrator’s decision. This arrangement is often referred to as the “golden share” because it gives the arbitrator the necessary vote to break the deadlock.
Arbitration is usually quicker and cheaper than litigation. While court dockets are crowded in most jurisdictions, arbitration can be available on relatively short notice. Arbitration’s privacy is another important advantage, especially for companies for which public disclosure is disputes could have deleterious effects. Finally, arbitration may result in more mutually satisfactory decisions than would litigation, which usually results in a “win” for one side and a “loss” for the other. This is especially true if the chosen arbitrators possess some degree of expertise in the company’s line of business.
While there are many arguments against arbitration,91 it is gaining popularity as a planning device in the close corporation context.
The first issue that must be confronted at the drafting stage is the scope of arbitration agreements. The parties may wish to limit the list of arbitrable subjects to specified issues, such as the dissolution of the corporation, removal of persons from positions within the corporation, setting salaries, or setting valuation of stock in the case where one party offers to buy out the other. On the other hand, a shareholders' agreement may provide that all disputes arising from the agreement are subject to arbitration.
An arbitration agreement can be very specific, describing triggering events, the subject matter(s) of arbitration, limitations on the arbitrators' authority, and "cooling off' periods before arbitration may begin. Other issues to consider include the site of the arbitration, who will bear the costs involved, procedural and evidentiary rules, the means of selecting the arbitrators, and the types of relief that can be granted.
While at common law arbitration agreements were not specifically enforceable,92 section 5001(2) of the Michigan Revised judicature Act93 provides that arbitration agreements are enforceable.94 Despite this statute, however, the corporate lawyer should be aware of decisions in other states that have refused to enforce arbitration agreements in the close corporation context. Some of the more common reasons for these decisions are that (1) using arbitration to make policy decisions impermissibly infringes upon the board's statutory right to manage the business and affairs of the corporation;95 (2) the delegation of decision-making power to arbitrators is an unlawful separation of ownership of stock from the power to vote it; and (3) the exclusive method for resolving shareholder or director disputes in a close corporation is the dissolution-upon-deadlock procedure set forth in the applicable corporation statute.96
Another matter that must be considered is the possibility that arbitration could be circumvented by instituting dissolution proceedings under section 823 of the Act.97 Cases in other jurisdictions have held that, despite the fact that the shareholders had an arbitration agreement in place, a group of shareholders could nonetheless institute dissolution proceedings under the statute.98 While some states limit a shareholder's ability to waive the right to dissolution upon deadlock, it may be advisable in Michigan to specifically provide in the arbitration agreement that the parties agree to waive their right to pursue judicial dissolution under the Act. Furthermore, a similar provision regarding litigation should be included in the arbitration agreement, although this may be a mere precaution in light of section 5001(2) of the Revised Judicature Act.99
To ensure enforceability, the arbitration agreement should be signed by all of the shareholders.100 Also, because the arbitrators' decisions will often affect the corporation itself (as opposed to the shareholders), it is wise to include the corporation as a party to the agreement, although some indicate a willingness of courts to consider the corporation as the mere alter ego of the shareholders.101 Counsel should also consider adding the spouses of shareholders or other family members, especially if those persons serve as directors or officers of the corporation or have the potential to become shareholders through stock transfers.102
The arbitration agreement obviously should specify the method in which arbitrators are chosen.103 If a controversy arises, and one party will benefit by delaying arbitration, the last thing that one would want to happen would be to allow that party a chance to stall.104 One common method is to allow each party to select an arbitrator and then have the two chosen arbitrators designate a third arbitrator.105 One should be careful in this situation, however, to ensure that in the event that a party refuses to appoint an arbitrator, one may be appointed by a predetermined third party.106 Parties tend to appoint "advocates" rather than impartial arbitrators, so the arbitrators may be unable to agree upon the third.107 Some arbitration agreements specify a single arbitrator in advance.108 This person is often a lawyer, who must be prepared to alienate one of the parties to the dispute.109 A third alternative is to refer the selection of arbitrators to the American Arbitration Association, or similar service, which will be able to provide a panel of impartial arbitrators.110
Within all of these three types of selection methods, the agreement can further specify that the chosen persons will have some specified level of experience and expertise in the corporation's line of business or other matters.111 Obviously, the more technical the problem being submitted to arbitration, the greater the need for qualified, experienced arbitrators. Also, it may be wise to specifically exclude certain persons, such as those associated with competing businesses.112 Alternative dispute resolution mechanisms are gaining popularity because they tend to be more cost-effective, and also because they are faster, confidential, and with the right panel, likely to bring a much higher level of expertise to the problem.
V. NEGOTIATED SOLUTIONS - WHEN THE PROBLEM APPEARS
When advanced planning has not occurred and a crisis arises, other solutions may exist.
Professional counselors, directors with personal contacts to both parties, and others may identify and define an emerging problem and suggest means of resolution.
Bringing in an independent manager to assume a significant role in corporate decision-making may help resolve differences by removing some of the day-to-day tensions. Such a person can also help guide the parties to mutually acceptable solutions to their disputes. For disputes among older clients, this may be an especially attractive approach if there is no other viable market for the entity, or if the parties desire to keep the entity intact.113 If the parties both desire to remain active in the business and cannot afford or do not desire a third party, they may be urged to examine their individual strengths and to divide their responsibilities in such a way as to reduce disputes.
Of course, the parties will be the farthest ahead if they can negotiate a resolution or a mutually agreeable sale. Unfortunately, if the relationship between the co-owners has seriously deteriorated, it can be difficult or impossible to agree on the terms of sale to a third party or a sale between the co-owners. Determining the terms includes issues of the time period over which the business's purchase price should be paid, security for deferred payments, warranties and representations, non-competition covenants, "provisions designed to minimize tax burdens, conditions precedent to closing, alternative remedies for default, detailed terms concerning installment payments," and similar matters.114
VI. SECURITIES LAW CONSIDERATIONS
In Landreth Timber v. Landreth,115 the U.S. Supreme Court determined generally that the sale of stock involves the sale of a security.116 Normally, unless one party is actively engaged in deception, both sides will have access to the type of information that would be contained in a registration statement filed with the SEC. Thus, anti-fraud problems under section 10(b) and Rule 10b-5 under the Securities Exchange Act of 1934,117 and under section 410 of the Michigan Uniform Securities Act118 usually don't arise. Federal securities registration exemptions can often be claimed using the "Rule 4(1-1/2)" transactions exemption.119 The selling shareholder should be able to rely on the exemption for sales by a person other than the issuer found in section 402(b)(9)(D)(4) of the Michigan Uniform Securities Act.120
VII. ROLE OF COUNSEL
Generally, dual representation of a corporation and its shareholders is a common practice, yet it is one fraught with problems. Counsel should least disclose the conflict, and any prior representation of an individual shareholder, to all other parties in writing. Having arrived in the quagmire, counsel must now deal with the thornier issues surrounding the handling of the conflict when it arrives. Whom will counsel represent? Can counsel continue? If so, should the parties be encouraged or required to obtain outside counsel to represent them? Does counsel have information from one party that would benefit the other party, but which counsel believes that law or ethical requirements prevents disclosure? Does the dual client relationship compel disclosure? What happens if counsel is called upon to be a witness to corporate matters or to the fights among the parties?
What role should the attorney attempt to play when dissension arrives? The normal reaction is to play peacemaker, but if the parties continue to battle, the attorney is often perceived as favoring one party or the other, or being more concerned with preserving the representation than with helping the parties. Neither presumption may have any basis in fact, but the sense of paranoia that pervades deadlock fights knows no bounds.
When problems do arise, counsel should consider spelling out the problems in writing to both sides, advising them of the course of action that counsel feels is appropriate, and making a determination of whether it is advisable to continue if that advice is not followed. New consents may be appropriate or at least advisable under these circumstances. Day-to-day decisions, such as the scope and nature of disclosures in the minutes, may become very important. It is probably better to err on the side of over-disclosure with the later opportunity for either owner to make amendments to the minutes. Additional complications can arise when the lawyer has become a director, where the lawyer has either invested or otherwise acquired an economic interest in the corporation, or where the lawyer has a similar status with an entity owned by one or more of the parties. Counsel may become the object of attack by one or both warring parties, with claims that there was inadequate disclosure or vital omissions, that counsel failed to prevent deadlock or its consequences through malpractice, or that counsel has breached a duty to one or more parties.
VIII. MICHIGAN STATUTORY REFORM
The Corporate Laws Committee of the Business Law Section of the State Bar of Michigan has been working on proposed amendments to the Act. At one point, the Committee was proposing modifications to section 823. The proposed change would give further power to a circuit court judge and include the same list of remedies as section 486 of the Act. Ultimately, at least as of this writing, the Committee decided not to propose amendments to section 823. There is no consensus among the members of the Committee. Several members believe that a broad expansion to section 823 introduces an implied contract between the owners of the company containing a number of remedies which they did not necessarily want or anticipate at the time they decided to set up a company with 50/50 ownership.
We believe, on balance, that it is best to have a clearer path to remedies for the deadlock situation, particularly remedies that would be available without resorting to dissolution of the company. Recognizing that courts have demonstrated a willingness to provide remedies short of dissolution under their general equitable jurisdiction, it would still provide more certainty and direction to owners of companies and to circuit courts if the Business Corporation Act addressed this issue.
In viewing the deadlock issue, several authors and courts have suggested that the best approach is to consider the reasonable expectations of the parties at the time of their investment and over time, rather than focusing on which party is more culpable. Determining what is best for the business, the most advantageous buyout terms, and the wisest choices in ending deadlock demands the wisdom of Solomon. In deadlock, the temptation is to divide the baby in half, but that may be the most damaging solution for both the baby and the warring parents. These individuals may be perfectly willing to cut each other in half, but the baby will probably be held in higher regard.
1. Steven C. Bahis, Resolving Shareholder Dissension: Selection of the Appropriate Equitable Remedy, 15 J. CORP. L. 285, 286 (1990).
2. Harry J. Haynsworth, The Effectiveness of Involuntary Dissolution Suits As a Remedy for Close Corporation Dissension, 35 CLEV. ST. L. REV. 25, 26 (1986-87) [hereinafter Haynsworth I].
3. Harry J. Haynsworth, Special Problems of Closely Held Corporations, DRAFTING ORGANIZATIONAL AND STRUCTURAL DOCUMENTS FOR CLOSELY HELD CORPORATIONS 1(A.L.I. - A.BA. 1991), available in WESTLAW, C688 ALI-ABA 1 [hereinafter Haynsworth II]; James C. Freund, Anatomy of a Split-Up: Mediating the Business Divorce, 52 BUS. LAW. 479 (1997).
4. Id. at 41.
7. 86 N.W.2d 336 (Mich. 1957).
8. Id. at 340.
9. Id. at 339-40.
10. Id. at 339.
11. J.A.C. Hetherington & Michael P. Dooley, Illiquidity and Exploitation: A Proposed Statutory Solution to the Remaining Close Corporation Problem, 63 VA. L. REV. 1, 3 (1977).
12. Stuart L. Pachman, Corporations Evenly Divided- Judicial Remedies for Equal Shareholders, 24 SETON HALL L. REV. 234 (1993).
13. Haynsworth II, supra note 3, at 50.
14. MICH. COMP. LAWS ANN. § 450.1505(3) (West Supp. 1996). See generally SCHULMAN ET AL., MICHIGAN CORPORATION LAW & PRACTICE (1996).
15. MICH. COMP. LAWS ANN. §§ 450.1101-.2099 (West 1990 & Supp. 1996).
16. Id. § 450.1103(c). Section 103 of the Michigan Act provides:
This act shall be liberally construed and applied to promote its underlying purposes and policies which include all of the following:
(a) To simplify, clarify, and modernize the law governing business corporations.
(b) To provide a general corporate form for the conduct or promotion of a lawful business or purpose with variations and modifications from the form as interested parties in any corporation may agree upon, subject only to overriding interests of this state and of third parties.
(c) To give special recognition to the legitimate needs of close corporations.
17. MICH. COMP. LAWS ANN. § 450.1805 (West Supp. 1996).
18. MICH. COMP. LAWS ANN. § 450.1823 (West 1990).
20. See e.g., MASS. ANN. LAWS .ch, 156B, § 99 (Law. Co-op.1996); see also MODEL BUSINESS CORP. ACT ANN. §14.30 at 14-114 (Supp. 1996).
21. As originally enacted, the circuit court action was required to be brought in the county in which the registered office of the corporation was located. Section 823 was amended, effective on October 1, 1989, to permit the action to also be brought in the county in which the principal place of business of the corporation is located. 1989 Mich. Pub. Acts 121, § 1.
22. The legislative history to the 1972 replacement of the Michigan Act indicates that the primary source for the then new section 823 was a similar provision in the business corporation laws of New Jersey. 5TH ANNUAL REPORT OF THE MICHIGAN LAW REVISION COMMISSION, SOURCE NOTES, OFFICIAL COMMENTS 255 (1972).
23. Miner v. Belle Isle Ice Co., 53 N.W. 218 (Mich. 1892). The court noted that "[t]he general rule undoubtedly is that courts of equity have no power to wind up a corporation, in the absence of statutory authority. This rule is, however, subject to qualifications." Id. at 223.
24. 53 N.W. 218 (Mich. 1892). See also Cady v. Knit Goods Mfg. Co., 11 N.W. 839 (Mich. 1882) (petition for voluntary dismissal by all directors).
25. Miner, 53 N.W. at 222.
27. Id. at 223.
28. Id. at 224.
29. 138 N.W. 338 (Mich. 1912).
30. Id. at 341.
31. Id. The bill of complaint, however, invoked the court's general equity jurisdiction. Id.
32. 248 N.W. 900 (Mich. 1933).
33. Id. at 902. See also Holden v. Lashley-Cox Land Co., 25 N.W.2d 590 (Mich. 1947); Stott Realty Co. v. Orloff, 247 N.W. 698 (Mich. 1933).
34. 86 N.W.2d 336 (Mich. 1957).
35. See supra text accompanying notes 7-10.
36. Levant, 86 N.W.2d at 340.
37. Id. at 341.
38. Id. at 344-45.
39. See DENNIS J. BLOCK ET AL., THE BUSINESS JUDGMENT RULE (1995); 5 WILLIAM FLETCHER, ENCYCLOPEDIA OF PRIVATE CORPORA"IIONS § 2104 (Buday & Solheim eds., 1996); E. Norman Veasey, The Defining Tension in Corporate Governance in America, 52 BUS. LAW. 393, 394 (1997).
40. See generally Arthur D. Spratlin, Modern Remedies For Oppression in the Closely Held Corporation, 60 MISS. L.J. 405 (1990).
41. Caryl B. Welborn, Practical Remedies For Partners' Defaults and Decision Deadlocks, MODERN REAL ESTATE. TRANSACTIONS 549 (A.L.I. - A.B.A. 1992), available in WESTLAW, C761 ALI-ABA 549.
42. DEL. CODE ANN. tit. 8, §§ 101-398 (1991 & Supp. 1996), referred to in this article as the "Delaware Act."
43. The Delaware Act uses the term "stockholder," while the Michigan Act uses the term "shareholder." This Article will generally use the statutory terminology appropriate to the statute being addressed.
44. Section 226(b) provides that:
A custodian appointed under this section shall have all the powers and title of a receiver appointed under § 291 of this title, but the authority of the custodian is to continue the business of the corporation and not to liquidate its affairs and distribute its assets, except when the court shall otherwise order and except in cases arising under paragraph (3) of subsection (a) of this section or paragraph (2) of subsection (a) of § 352 of this title.
DEL. CODE ANN. tit. 8, § 226(b).
45. Id. § 226(a)(1)-(2). Proper grounds exist when:
(1) At any meeting held for the election of directors the stockholders are so divided that they have failed to elect successors to directors whose terms have expired or would have expired upon qualification of their successors; or
(2) The business of the corporation is suffering or is threatened with irreparable injury because the directors are so divided respecting the management of the affairs of the corporation that the required vote for action by the board of directors cannot be obtained and the stockholders are unable to terminate this division; or
(3) The corporation has abandoned its business and has failed within a reasonable time to take steps to dissolve, liquidate or distribute its assets.
46. Id. § 226(a).
47. The definition of a "close corporation" under the Delaware Act is found in § 342 of the Delaware Act.
48. DEL. CODE ANN. tit. 8, §§ 341-56 (1991).
49. Id. § 341(b).
50. Id. § 352(a)(1). The Delaware Act permits the appointment of a custodian, and a receiver if the corporation is insolvent, when:
Pursuant to section 351 of this title the business and affairs of the corporation are managed by the stockholders and they are so divided that the business of the corporation is suffering or is threatened with irreparable injury and any remedy with respect to such deadlock provided in the certificate of incorporation or by-laws or in any written agreement of the stockholders has failed.
51. Id. § 352(a)(2).
52. Id. § 353.
53. Id. § 355.
54. MODEL BUSINESS CORP. ACT (Close Corp. Supp. 1982).
55. Id. § 2(a). The Act is derived from the Report, Proposed Statutory Close Corporation Supplement, 37 BUS. LAW. 269 (1981). Final text and comments were approved June 26, 1982. See Report, Statutory Close Corporation Supplement to the Model Business Corporation Act, 38 BUS. LAW. 1031 (1983).
56. 4 MODEL BUSINESS CORP. ACT ANN. § 40, cmt. intro. (3d ed. Supp. 1996).
57. Id. See MICH. COMP. LAWS ANN. §§ 450.1489, 450.1823 (West 1990). Section 40 also mirrors the involuntary dissolution provisions of the general corporation laws. See REVISED MODEL BUSINESS CORP. ACT § 14.30(2), reprinted in 3 MODEL BUSINESS CORP. ACT ANN. at 14-106 (3d ed. Supp. 1996). Section 14.30(2) gives a court the power to grant dissolution in a proceeding by a shareholder if-
(i) the directors are deadlocked in the management of the corporate affairs, the shareholders are unable to break the deadlock, and irreparable injury to the corporation is threatened or being suffered, or the business and affairs of the corporation can no longer be conducted to the advantage of the shareholders generally, because of the deadlock;
(ii) the directors or those in control of the corporation have acted, are acting, or will act in a manner that is illegal, oppressive, or fraudulent;
(iii) the shareholders are deadlocked in voting power and have failed, for a period that includes at least two consecutive annual meeting dates, to elect successors to directors whose terms have expired; or
(iv) the corporate assets are being misapplied or wasted.
Id. See 3 F. HODGE O'NEAL & ROBERT B. THOMPSON, O'NEAL'S CLOSE CORPORATIONS § 9.28 (1996) for a discussion of dissolution on deadlock statutes.
58. See 4 MODEL BUSINESS CORP. ACT ANN. § 40, cmt. intro. (3d ed. Supp. 1996). Cf. MICH. COMP. LAWS ANN. § 450.1823 (West 1990) which provides for dissolution, conditioned upon on a suit in circuit court and proof of statutory grounds.
59. 4 MODEL BUSINESS CORP. ACT ANN. § 40, cmt. intro. (3d ed. Supp. 1996).
61. Section 40(a)(2) provides:
Subject to satisfying the conditions of subsections (c) and (d), a shareholder of a statutory close corporation may petition the court for any of the relief described in section 41, 42, or 43 if:
. . . .
(2) the directors or those in control of the corporation are deadlocked in the management of the corporation's affairs, the shareholders are unable to break the deadlock, and the corporation is suffering or will suffer irreparable injury or the business and affairs of the corporation can no longer be conducted to the advantage of the shareholders generally because of the deadlock . . .
If a shareholder has agreed in writing to pursue a nonjudicial remedy to resolve disputed matters, he may not commence a proceeding under section 40 unless he has exhausted the nonjudicial remedy. Id. § 40(c).
62. Id. § 41. Such ordinary relief includes:
(1) the performance, prohibition, alteration, or setting aside of any action of the corporation or of its shareholders, directors, or officers of or any other party to the proceeding; (2) the cancellation or alteration of any provision in the corporation's articles of incorporation or bylaws; (3) the removal from office of any director or officer; (4) the appointment of any individual as a director or officer; (5) an accounting with respect to any matter in dispute; (6) the appointment of a custodian to manage the business and affairs of the corporation; (7) the appointment of a provisional director (who has all the rights, powers, and duties of a duly elected director) to serve for the term and under the conditions prescribed by the court; (8) the payment of dividends; (9) the award of damages to any aggrieved party.
63. Id. § 42(a).
64. 4 MODEL BUSINESS CORP. ACT ANN. §§ 42-43, cmt. (3d ed. Supp. 1996).
66. MICH. COMP. LAWS ANN. § 450.1209 (West Supp. 1996).
67. Id. § 450.1209(a).
68. Id. § 450.1611.
69. Id. § 450.1231.
70. Id. § 450.1131 (1) (West Supp. 1996).
71. Id. § 450.1463 (1990).
72. Id. § 450.1463(1).
73. Id. § 450.1463(2)(a).
74. Id. § 450.1463(3).
75. See generally SCHULMAN ET AL., supra note 14, § 4.16. Section 463 is among the sections targeted for amendment in the current package of amendments of the Act pending in the legislature. It would be replaced by a more comprehensive provision modeled after § 7.32 of the Model Act and would allow not only a § 463 agreement but many other variations.
76. MICH. COMP. LAWS ANN. § 450.1461 (West 1990).
77. Id. § 450.1472 (West Supp. 1996).
78. Id. § 450.1466 (West 1990).
79. Haynesworth II, supra note 3, at 39-40.
80. See infra notes 82-88 and accompanying text.
81. See infra part IV. F.
82. MICH. COMP. LAWS ANN. § 450.1805 (West Supp. 1996).
83. Id. § 450.1805(1).
85. Id. § 450.1805(2).
86. Id. § 450.1805(3).
87. Id. § 450.1851(1).
89. Id. 5 450.1505(3) (West Supp. 1996). This concept is unique to the Michigan Business Corporation Act. An independent director may be appointed for a variety of purposes.
90. LOUIS W. KASISCHKE, MICHIGAN CLOSELY HELD CORPORATIONS § 18.05 (1987).
91. For a discussion of common concerns about arbitration, see O’NEAL & THOMPSON, supra note 57, § 9.11, at 36-39. Arbitration can address "policy" decisions as well as legal issues. Since arbitration will only be available in the situations contemplated by the parties' arbitration agreement and only after the parties have tried but failed to agree, the argument that one cannot run a corporation by arbitration loses much of its force. Arbitration is usually only invoked in limited circumstances, and the parties do not need to constantly refer matters to arbitration. Nonetheless, the downside of arbitration is that an arbitrator may be unable to effectively manage certain day-to-day business decisions regarding personnel management, capital spending, expansion and the like. See generally KASISCHKE, supra note 90, at 424.
92. O'NEAL & THOMPSON, supra note 57, § 9.14, at 44.
93. MICH. COMP. LAWS ANN. § 600.5001(2) (West 1994).
94. The statute provides in part that
[a] provision in a written contract to settle by arbitration under this chapter, a controversy thereafter arising between the parties to the contract, with relation thereto, and in which it is agreed that a judgment of any circuit court may be rendered upon the award made pursuant to such agreement, shall be valid, enforceable and irrevocable, save upon such grounds as exist at law or in equity for the recision or revocation of any contract.
95. Note, however, that § 463(1) of the Act allows a closed corporation's articles to specify that there shall be no board of directors or may delegate to the shareholders all or a portion of the board's normal authority. Id. § 450.1463.
96. For an excellent discussion of these issues, see O'NEAL & THOMPSON, supra note 57, §§ 9.17-9.17A. Also, note that the federal arbitration statute may apply to validate arbitration agreements in the close corporation context, despite the contents of local law, if the corporation's business reaches interstate commerce. Generally speaking, this statute enforces arbitration agreements found in contracts that involve interstate or foreign commerce. See G. Richard Shell, Arbitration and Corporate Governance, 67 N.C. L. REV. 517, 523-34 (1989).
97. MICH. COMP. LAWS ANN. § 450.1823 (West 1990).
98. See, e.g., In re Cohen, 52 N.Y.S.2d 671 (N.Y. Sup. Ct. 1944), affd mem., 53 N.Y.S.2d 467 (N.Y. App. Div. 1945).
99. MICH. COMP. LAWS ANN. § 600.5001(2) (West 1990).
100. Id. § 9.21, at 92.
101. See, e.g., Kolmer-Marcus, Inc. v. Winde, 300 N.Y.S.2d 952 (N.Y. App. Div. 1969), aff'd, 26 N.Y.2d 795 (N.Y. 1970).
102. O'NEAL & THOMPSON, supra note 57, § 9.21, at 93-94.
103. Id. § 9.22, at 95.
105. Id. § 9.22, at 96.
110. Id. § 9.22, at 97.
112. For additional articles concerning arbitration in the close corporation context, see James L. Guilt & Edward A. Slavin, Jr., Rush to Unfairness: The Downside of ADR, 28 JUDGE'S J. 8 (1989); Lewis D. Solomon & Janet Stern Solomon, Using Alternative Dispute Resolution Techniques to Settle Conflicts Among Shareholders of Closely Held Corporations, 22 WAKE FOREST L. REv. 105 (1987); Benjamin Suckewer & Thomas E. Heftler, Disputes Among Shareholders and Directors in Closely Held Corporations, ARBITRATION: COMMERCIAL DISPUTES, INSURANCE AND TORT CLAIMS 11 (1979); Note, Mandatory Arbitration as a Remedy for Intra-Close Corporation Disputes, 56 VA. L. REV. 271 (1970).
113. Such clients may desire to keep an entity intact for a variety of reasons, including loyalty to employees, strong views about continuation of the company name and work, or the ability to keep younger family members involved in the business.
114. Bahls, supra note 1, at 304.
115. 471 U.S. 681 (1985).
116. Id. at 697. "[W]hen an instrument is both called 'stock' and bears stock's usual characteristics, a purchaser justifiably [may] assume that the federal securities laws apply." Id. at 686 (citing United Housing Foundation, Inc. v. Forman, 421 U.S. 837, 850 (1975)).
117. 15 U.S.C. § 78j (1981); see also 17 C.F.R. § 240.3b-6.
118. MICH. COMP. LAWS ANN. § 451.810 (West Supp. 1996).
119. See Alan J. Berkeley, Private Resales of Restricted Securities: The Section "4(1 1/2)" Exemption, REGULATION D OFFERINGS AND PRIVATE PLACEMENTS 275 (A.L.I.-A.B.A. 1994), available in WESTLAW, CA 65 ALI-ABA 275; Christopher Dean Olander & Margaret Stephens Jacks, The Section 4(1 1/2) Exemption – Reading Between the Lines of the Securities Act of 1933, 15 SEC. REG. L.J. 339, 341 (1988); Report, The Section "4(1 1/2)" Phenomenon: Private Resales of “Restricted" Securities, 34 Bus. LAW. 1961 (1979).
120. MICH. COMP. LAWS ANN. § 451.802(b)(9)(D)(2) (West Supp. 1996).
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