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SJC Ruling Provides New Remedies for Shareholders of Deadlocked Corporations

Monday, November 13, 2017

Sam Hoff, Pierce & Mandell, P.C.By Sam Hoff

In its recent ruling in Koshy v. Sachdev, the Massachusetts Supreme Judicial Court issued an early holiday gift to any shareholder of a deadlocked Massachusetts corporation. Thanks to the SJC’s ruling, such shareholders now have available to them several alternative forms of relief which may allow them to regain control of their corporation, as opposed to taking the “extreme” measure of dissolving their corporation.

The facts in Koshy are all too familiar to any shareholder who has experienced the frustration of corporate deadlock before. Two friends, Koshy and Sachdev, co-founded a corporation which provided computer aided design services. They split the corporation’s shares 50/50 and served as its only two directors. After some initial growth and success, Koshy’s and Sachdev’s relationship began to deteriorate. They differed in opinion on a variety of issues including strategic business decisions, the amount and frequency of distributions, and managerial hiring. Their inability to compromise with one another on these issues eventually caused business to grind to a halt. Koshy and Sachdev each attempted to buy the other out and, as a last resort to get out of business with Sachdev, Koshy brought suit claiming that the corporation was deadlocked and must be dissolved. A Superior Court judge found that no deadlock existed, and Koshy appealed the finding.

Koshy is the first case in which the SJC has been called to interpret Section 14.30 of the Massachusetts Business Act (the “Act”). The Act allows any shareholder who holds 40% of the combined voting power of a corporation’s outstanding stock to petition the Superior Court to dissolve the corporation in the event that its directors are deadlocked. The SJC determined that the Act applies only in cases of “true deadlock” and set forth four factors which are relevant in determining whether true deadlock exists:

(1)Whether irreconcilable differences have resulted in a “corporate paralysis,” which is defined as a stalemate between the directors concerning a primary function of management (e.g., payroll, client services, hiring and retention of employees, and/or corporate strategy).

(2)The size of the corporation at issue, with deadlock more likely to occur in a small or closely held corporation, particularly one where ownership is divided on an even basis between two shareholder-directors.

(3)Any indication that a party to a lawsuit has manufactured a dispute in order to engineer a true deadlock.

(4)The degree and extent of distrust and antipathy between the directors.

Where true deadlock exists, relief is available under the Act so long as the shareholders cannot work around the deadlocked directors and irreparable injury is threatened to or being suffered by the corporation as a result of the true deadlock. The SJC found this to be the case in Koshy. Further, the SJC found that the relief available to shareholders of a deadlocked corporation is not limited to the “extreme” measure of dissolution, but includes alternative remedies such as a court-ordered buyout of one shareholder by another or the sale of the corporation to a third-party buyer. The appropriate remedy must be determined by the Superior Court on a case-by-case basis.

From a legal standpoint, the SJC’s ruling in Koshy is a major break from the prior understanding of the Act, as it opens the door for alternative equitable forms of relief. The key takeaway for shareholders of Massachusetts corporations is that they need not resign themselves to the dissolution of their corporation should it become truly deadlocked. This is especially good news for shareholders of small or closely-held Massachusetts corporations, many of whom have built their business from scratch and are personally invested in the goodwill and future success of the corporation. It is understandable that any such shareholder may be reluctant to dissolve his or her corporation. In light of the SJC’s ruling in Koshy, they may now bring suit and argue before the Superior Court that they should be allowed to regain control of their corporation and continue business by buying out their fellow shareholder(s).

Being a shareholder of a deadlocked corporation can be stressful and harmful to your bottom-line. If you find yourself in this situation, please contact the experienced business litigation attorneys at Pierce & Mandell to learn more about your rights and secure the future of your corporation.

Tom Kenney Comments on the Supreme Court’s Recent Decision to Trim Remedies for Copyright Owners

Friday, August 26, 2016

by Thomas E. Kenney

For copyright owners, a copyright registration provides substantial benefits.  A copyright registration grants the owner the right to collect “statutory damages” against the infringer – ranging from $750 to $30,000 per violation.  Additionally, a registrant may recover from the infringer the attorneys fees it incurred in prosecuting litigation against the infringer.  Traditionally, copyright owners have been able to use the threat of statutory damages and attorneys fees to quickly and efficiently stop infringers and effectuate beneficial settlements.

However, the copyright landscape is changing.  Recently, in Kirtsaeng v. John Wiley & Sons, Inc., the United States Supreme Court made it more difficult for copyright owners to recover their attorneys fees from infringers.  Previously, many courts awarded attorneys fees to the prevailing party in copyright cases as a matter of course – declining to award attorneys fees in only the rarest of cases.  The Kirtsaeng Court rejected that practice, ruling that a Court should award attorneys fees to the prevailing party only where the losing party’s position was “objectively unreasonable” – meaning that the party did not have a good faith basis to deny that it infringed or to vigorously defend against the lawsuit.

The impact of this shift is unclear.  Will infringers resist monetary settlements – knowing that copyright owners are less likely to recover attorneys fees and thus less likely to pursue litigation once the infringer ceases its infringing activities?  Will copyright owners need to consider accepting a prompt cessation of infringing activities and forego insistence on a monetary recovery?  Only time and experience will tell.

A company’s brand and goodwill, represented by its intellectual property, often are its most valuable assets. Pierce & Mandell counsels clients on all aspects of intellectual property law, including registration of copyrights and trademarks, as well as intellectual property disputes and litigation.Contact Tom Kenney at 617-720-2444 or tom@piercemandell.com to discuss protection of these vital business assets.

Tom Kenney quoted in Boston Globe article regarding Commonwealth School trademark litigation

Friday, June 17, 2016

Pierce & Mandell partner Tom Kenney, who chairs our Trademark and Copyright Practice Area, was recently quoted in a Boston Globe article on pending litigation between Boston’s The Commonwealth School and Springfield’s Commonwealth Academy. Tom discussed one of the cardinal principles of trademark protection and trademark litigation: who prevails is often determined by the extent to which the parties market to the same or a similar customer base. Read Tom’s comments and the full article here.

Redskins’ Trademark Registrations May Survive

Tuesday, January 19, 2016
By Thomas E. Kenney

There is an old adage in sports that sometimes a team wins even when it doesn't play. While the Redskins lost in the opening round of the playoffs, they recently scored a victory in their fight to retain their REDSKINS registered trademarks - in a court case in which they are not even a party.

In late December, the Federal Circuit Court of Appeals ruled on the trademark application filed by "The Slants" - a rock band whose members are Asian-Americans. The United States Patent and Trademark Office (“USPTO”) refused to register THE SLANTS trademark because it determined that the mark was disparaging to a substantial composite of Asian-Americans.  

However, the appeals court overruled the USPTO, holding that the statutory provision prohibiting registration of disparaging trademarks was an unconstitutional infringement of the applicants' first amendment rights.

Although the Redskins were not a party to The Slants' appeal, the decision could greatly assist the Redskins in their quest to salvage their own eponymous trademark registrations. The Redskins' marks were canceled by the USPTO pursuant to the same statutory provision invalidated by the appeals court in The Slants' case. Even though the Redskins' appeal is pending in a different appeals court - The Fourth Circuit - that court may well follow the ruling of Federal Circuit and determine that the USPTO’s cancellation of the REDSKINS trademark registrations was unconstitutional. Unquestionably the issue ultimately will be decided by the United States Supreme Court.  We will blog further updates when developments warrant.

The lawyers at Pierce & Mandell routinely represent clients seeking to secure trademark registration for themselves or to deny such protection to their competitors and potential competitors. We offer a free consultation to anyone interested in learning more about their trademark rights.

The Trademark Owner’s Dilemma - Vigorous Enforcement of Rights or Bullying by Thomas E. Kenney

Wednesday, May 27, 2015

An article entitled “The Trademark Owner’s Dilemma - Vigorous Enforcement of Rights or Bullying” by Thomas E. Kenney recently appeared in the Spring 2015 edition of Massachusetts Bar Association’s Complex Commercial Litigation Section Newsletter.

 

 

 

 


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