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When Partners Cannot Agree: Dividing a Corporation

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Business partners no doubt enter into a business relationship with the best of intentions; however, sometimes it just doesn’t work out. When one shareholder decides to separate from the others, it can be a messy and complicated process, particularly if no Buy-Sell Agreement was executed.

Here’s a scenario: Two business partners create a company with the agreement that the monies brought in by each will be their own (this is put in a signed letter). One shareholder owns 55% of the stock, the other 45%. After several years in business, one of the partners lacks the desire to expand the company; the other has brought in 80% of the company’s business.

The aggressive partner desires to carry forth the business and separate from the passive partner, but wonders what that partner will be entitled to since he/she is a stockholder who holds 45% of the stock.

What happens if the partner fights the split, or has no desire to separate?

Ultimately, if a partner does not want to sell his/her portion of the business but also has no desire to end his/her involvement, however limited, a lawsuit may be necessary to dissolve the entity (aka, involuntary dissolution). Otherwise, the partners would need to come to an agreement on the value of any assets the business holds, along with the goodwill of the company.

If this was accomplished, a partner could then be bought-out for the agreed to price, even though it may not necessarily be an amount determined based on the partner’s 45% stock holdings.

In these types of situations a Buy-Sell Agreement should be seriously considered. While the terms of Buy-Sell Agreements are often best agreed to prior to issues arising, a Buy-Sell Agreement may be executed at any time and may come in the form of a stock-redemption or entity repurchase, or even a cross-purchase.

Consisting of numerous clauses which are legally binding, Buy-Sell Agreements control specific business decisions including the amount that would be paid for a shareholder’s interest should the partnership dissolve, who may purchase a shareholder’s portion of the business should a partner depart, and specific “triggering” events (such as retirement, death, or disability of an owner) which may necessitate a buyout.

When a meeting of the minds has not been reached an involuntary dissolution of a corporation becomes an option pursuant to the California Corporations Code and can be forced by a partner or shareholder who owns a minimum of one-third of the stock of the company.

Similar to marriages, business partnerships do not always work out and some subsequently require a “divorce.”  And so also similar to a marriage, a business partner can do him or herself a favor, along with the business itself, by entering into the corporate version of a prenuptial agreement – a contract commonly known as a Buy-Sell Agreement or Shareholder Agreement.


California Shoemaker Sues Under Armour for Trademark Infringement

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Pacoima-based, Gravity Defyer, has filed a claim against, Under Armour, Inc., in U.S. District Court alleging trademark infringement.  Gravity Defyer claims that Baltimore-based Under Armour knowingly used Gravity Defyer’s mark and name on its running shoes.

According to the claim filed in the Central District Court of California, the Gravity Defyer federally registered “G Defy” name and trademark have been infringed upon by the “Micro G Defy” running shoes manufactured by Under Armour.

The company goes on in the complaint to say that Under Armour purposely and knowingly used the company’s mark to draw attention to their product, and is asking the court to require that Under Armour not use the phrase “G Defy.”  Gravity Defyer is also seeking monetary damages in the suit, although an amount has not been specified.

Gravity Defyer senior vice present and CFO, Paul Coleman, said in a statement printed in the Baltimore Business Journal that,  “[o]ur brand identities are a reflection of the promises we make to consumers every day.  Trademarks are an extension of that promise.”

In a separate press release, Gravity Defyer claimed that Under Armour purposely created a product name that sounds like Gravity Defyer’s own in an effort to mislead consumers who shop online through the use of social media, search engines, and other outlets.

As is often the case in big business, Under Armour is not only a fairly well-known company but it is also no stranger to lawsuits involving trademark infringement.  In February, Under Armour filed a trademark infringement claim against sportswear giant Nike for allegedly infringing upon its slogan “I Will.”

The company also filed suit against BodyArmor Nutrition, LLC of Beverly Hills in April of 2012, based on the use of the “Protect + Restore” phrase, the company’s name, and an interlocking logo.

The test of any trademark infringement case is the “likelihood of confusion” test and as such, an alleged infringer will be prohibited from using a trademark on a competing product if that use causes or is likely to cause confusion in the mind of a reasonably prudent consumer.

To that end, businesses cannot be careful enough when it comes to their use of intellectual property and each would be wise to know in advance that trademark owners have several remedies if and when infringement is found. First, a trademark owner can obtain a permanent injunction prohibiting the infringer from using the infringing mark or any other mark that is confusingly similar to the trademark owner’s mark.

Second, not only can monetary damages be awarded to the owner to compensate the trademark owner for the infringement but these damages can be increased up to three times if the trademark infringement is deemed to be willful. Third, courts have the discretion to award the trademark owner its attorney’s fees for having to bring the action.

It is worth your time and money to perform the requisite due diligence necessary.
Doing so will surely decrease the likelihood of your involvement in lawsuits similar to that described above.


Breach of Contract: What It Means & Legal Remedies


How pleasant it would be if contracts could be entered into without disputes arising.  Even with the notion of the infamous “iron clad” contract, a total lack of issue just isn’t how it always works out in the real world. In the “ideal” situation, both parties would be satisfied with the outcome and thereby each would receive the benefit of their bargain.

Naturally, this can and does occur more than it does not.  Still, there are many reasons why all contract terms may not be carried out and whereby one or more “breaches” are the consequent result.

What does ‘Breach of Contract’ actually Mean?

When two or more parties enter into an agreement, there are specific obligations which are expected to be met by those parties. However, when one or more of the parties fail to meet any or all of said express obligations, it is known as a ‘breach.’  There are many actions (and sometimes inactions) that can be considered a breach of contract depending on the terms of the agreement.

A breach may occur when one of the parties does not perform according to the agreement’s language, does not perform within the timeframe permitted in the contract, or simply fails to perform at all.

When a contract is breached, or allegations are made that an agreement has been or is going to be breached, the non-breaching party or parties may desire to enforce its terms and/or recover financial or other compensation for losses which were a result of the alleged breach.

This may be approached in a variety of ways including litigation, through mediation, binding arbitration, or other alternative methods of dispute resolution. Oftentimes, the approach pursued is also a term of the subject agreement.

Examples of Remedies or “Relief” for Breach of Contract under the Law

There are several remedies which may be awarded to one or more parties by the breaching party/parties to settle a dispute including, without limitation, specific performance, damages, or cancellation of the contract or agreement and restitution.

Specific performance – when damages are not an option or sometimes, not the only option, the party who did not breach the contract may seek specific performance which means that the breaching party may be ordered by the court to perform a specific duty so that the non-breaching party essentially ends up in the position they were initially intended; typically, to receive the benefit of their bargain. This is usually only a remedy when the terms contained in the contract are unique or rare.

Damages – damages may be compensatory, punitive, nominal or liquidated and are the most common remedy sought when a contract is breached. Essentially, the party who breached the contract will make payment in some form and amount to the non-breaching party.

Cancellation and restitution – the contract or agreement may be cancelled by the non-breaching party; this party may then take action and file a lawsuit for restitution provided that the party who breached the contract has been given a benefit by the non-breaching party.

Cancellation essentially relieves both parties of all further obligation and voids the contract; restitution allows the non-breaching party to reclaim the benefit given to the breaching party, putting the non-breaching party back in the position it was in before the breach occurred.

Breach of contract is such a common legal claim that significance enough cannot be placed on the importance of preparing proper, protective contracts for oneself and one’s business and/or business ventures. This is most definitely not an area where you want to be penny-wise, but ultimately, pound foolish.

DISCLAIMER: The information provided herein is intended to provide general information and does not constitute legal advice. You should not act or rely on such information without seeking the advice of an attorney and receiving counsel based on your particular facts and circumstances. Some of the legal principles mentioned might be subject to exceptions and qualifications which are not necessarily noted. Furthermore, laws are subject to change and vary by jurisdiction. Please see our entire web site disclaimer, available in our menu options and incorporated herein by this reference.