An injunction is a court order that requires someone to do something or to refrain from doing something, either temporarily or permanently.  Interlocutory (temporary) injunctions are often utilized to maintain the status quo between parties to a lawsuit until a final determination can be made at trial ...]]> by William J. Piercy

An injunction is a court order that requires someone to do something or to refrain from doing something, either temporarily or permanently.  Interlocutory (temporary) injunctions are often utilized to maintain the status quo between parties to a lawsuit until a final determination can be made at trial by a judge or jury.  They can be powerful remedies in hotly contested business disputes where there is a real and severe threat to a company’s operations.  A recent Georgia Appeals decision provides some insight into the application of a temporary injunction to a business dispute in this e-commerce era.

In Grossi Consulting, LLC v. Sterling Currency Group, LLC, Sterling hired Grossi to build a website, dinarbanker.com, through which Sterling could market and sell Iraqi dinars (currency).  Sterling’s business volume was impressive right out of the gate.  Internet traffic far exceeded that which the website could handle.  At Sterling’s request, Grossi upgraded the website and established a call center.  Despite these enhancements, the site crashed several times, severely disrupting Sterling’s business. Around this time, disputes arose between Sterling and Grossi concerning Grossi’s unpaid invoices and the manner in which Grossi would be compensated.  Grossi’s principal threatened to take over or destroy the website unless Grossi’s outstanding invoices (totaling in excess of one million dollars) were paid.  Although Sterling paid the invoices the next day, Grossi intimidated that it would seek a new “fulfillment company” to service Sterling’s customers unless Grossi was paid on the terms it dictated going forward.

Sterling filed suit against Grossi, seeking an injunction to prevent Grossi from disabling the website or otherwise interfering with Sterling’s business operations. For its part, Grossi countered that Grossi and Sterling were joint venturers (basically partners) and that Grossi owned an interest in the dinarbanker.com website.  Grossi argued that a preliminary injunction would not maintain the status quo, but would instead provide an unfair advantage to Sterling with respect to the hotly contested issue of ownership and control of the website.  After a series of expedited hearings, the trial court entered an interlocutory injunction that required:  (a) Grossi to immediately transfer to Sterling all assets and information relating to dinarbanker.com; (b) Grossi to refrain from manipulating or interfering with any information associated with or generated by the website; and (c) Sterling to pay Grossi monthly for maintaining the website while the injunction was in place.  By its terms, the Order was to remain in place until final disposition of the case or further order of the court.

Grossi appealed, arguing that the injunction went beyond the mere maintenance of the status quo and effectively amounted to a final resolution on the merits.  In analyzing the appeal, the Court of Appeals outlined the following factors for determining whether injunctive relief was appropriate:

1. There is a substantial threat of irreparable injury if an injunction is  not granted.
2. The potential harm from not entering the injunction is outweighed by the potential harm from issuing it.
3. The party seeking the injunction (here Sterling) has a substantial likelihood of prevailing on the merits.
4. Issuing the injunction will not disserve the public interest.

Because of the discretionary nature of these factors, the Court of Appeals typically gives wide deference to a trial judge’s decision absent a “manifest abuse of discretion”.  After reviewing these factors and finding no abuse by the trial court, the Court of Appeals affirmed the trial court’s ruling, finding that the injunctive relief was an appropriate remedy.

What we can learn from this case?  The outcome of a preliminary injunction hearing can have lasting implications that may be determinative at trial.  Litigants would do well to prepare for a preliminary injunction hearing as if it were the final trial in the case.  In practical effect, it may well be.

Tags: injunction, injunction and trial, injunctive relief, interlocutory injuction, maintain status quo, permanent injunction, preliminary injunction hearing, status quo

What can a burned out Ferrari teach us about Georgia contract law and the limits of the third party beneficiary doctrine? You might be surprised. In Dominic v. Eurocar Classics, Mr. Dominic bought a used Ferrari. Unsurprisingly, the 2000 Modena 360 soon developed a propensity to overheat. ...]]> by William J. Piercy

What can a burned out Ferrari teach us about Georgia contract law and the limits of the third party beneficiary doctrine? You might be surprised. In Dominic v. Eurocar Classics, Mr. Dominic bought a used Ferrari. Unsurprisingly, the 2000 Modena 360 soon developed a propensity to overheat. Therefore, Mr. Dominic took the car to Eurocar Classics for repair. During the course of its work, Eurocar Classics brought the car to Ferrari of Atlanta so that the dealership could “bleed” the cooling system (i.e., extract all air pockets to ensure a continuous flow). When the work was complete, Mr. Dominic retrieved his car from Eurocar Classic.

A few weeks later, the Ferrari again overheated while Mr. Dominic was cruising along I-20. Mr. Dominic pulled over, got out of the car and phoned Eurocar Classics. While Mr. Dominic was voicing his displeasure to his mechanic, the Ferrari burst into flames and was completely destroyed.

Mr. Dominic later sued both Eurocar Classics and Ferrari of Atlanta for breach of contract. Although he had no direct contractual relationship with Ferrari of Atlanta, Mr. Dominic alleged that he was a third party beneficiary of the contract between Eurocar Classics and Ferrari of Atlanta because it was for work performed on his car.

As a general rule, one who is not a party to a contract lacks “standing” to sue for the breach of the contract. The third party beneficiary doctrine provides an exception to this rule whereby a third party may have standing to enforce a contract if it is clear that the contract was intended for the third party’s benefit.

Ferrari of Atlanta moved to be dismissed from the lawsuit, arguing that its contract was with Eurocar Classics, not with Mr. Dominic and, therefore, it owed no duties to him, contractual or otherwise. In support of its motion, Ferrari of Atlanta introduced its repair invoice to Eurocar Classics, which identified only the work to be done and not the owner of the car. With this evidence, Ferrari of Atlanta demonstrated that it had no idea Mr. Dominic owned the Modena 360; only that it had been asked to bleed the cooling system. Convinced by this argument, the Georgia Court of Appeals dismissed Ferrari of Atlanta from the lawsuit. The Court found that any benefit that may have flowed to Mr. Dominic from the agreement between Eurocar Classics and Ferrari of Atlanta was merely incidental and not intentional. Therefore, Mr. Dominic did not have standing to sue Ferrari of Atlanta.

What are the takeaways? First, think twice before buying a second hand Ferrari. Second, the mere fact that someone may ultimately benefit from the performance of a contract between others, in and of itself, is insufficient to grant that third party standing to sue for breach of contract. To take advantage of the third party beneficiary doctrine, the express terms of the contract must clearly identify any non-party who is expected to benefit from the performance of the contract.

The business judgment rule is a policy of judicial restraint born of the recognition that corporate officers and managers are generally more qualified to make business decisions than are judges and juries. While the business judgment rule has long been accepted in many states, until recently, it ...]]> by William J. Piercy

The business judgment rule is a policy of judicial restraint born of the recognition that corporate officers and managers are generally more qualified to make business decisions than are judges and juries. While the business judgment rule has long been accepted in many states, until recently, it did not get much attention in Georgia. In Brock Built, LLC v. Blake, the Georgia Court of Appeals recently recognized the applicability of the doctrine to the management of limited liability companies.

Henry Blake was employed as the president of Brock Built, a residential construction firm. Blake’s employment agreement afforded him a base salary as well as incentive compensation amounting to a certain percentage of Brock Built’s “profit margin.” Blake’s employment agreement further provided that if he was terminated without “cause”, he would be entitled to a full year’s severance. However, if he resigned or was terminated for cause, he would get nothing.

In the midst of the contract term, Blake’s employment was terminated. Brock Built claimed that it fired Blake for cause or, alternatively, that he resigned, and that no severance was due. For his part, Blake said that he was fired without cause and that he was entitled to a year of severance pay.

Blake filed suit against Brock Built for breach of contract, among other claims. In response, Brock Built asserted counterclaims alleging that Blake breached his fiduciary duties to the company by: (A) attempting to maximize Brock Built’s profit, with the improper motive of increasing his incentive compensation, by accelerating the construction of houses that were not scheduled to close until the following year and by delaying the payment of invoices and other employees bonuses; and (B) failing to adequately manage the purchase order system, failing to budget engineering features into the sales price of certain homes, and failing to use proper building materials for noise abatement in other specific homes.

The Court ruled in Blake’s favor. In summarily dismissing Brock Built’s counterclaim for breach of fiduciary duty, the Court held that the business judgment rule protects corporate officers and managers from liability when they make good faith business decisions in an informed and deliberate manner. The presumption is that corporate officers have acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company. Unless this presumption is rebutted, corporate officers cannot be held personally liable for their managerial decisions. Corporate officers may be still held liable where they engage in fraud, bad faith, or abuse of discretion. However, unless the alleged conduct rises to the level of fraud or bad faith, Georgia Courts will generally defer to the corporate officers when it comes to business decisions.

Applying this standard to the facts of the case, the Court basically found that Brock Built’s allegations against Blake were not nefarious or egregious enough to give rise to his liability. Allegations amounting to mere negligence, carelessness or lackadaisical performance do not amount to a breach of fiduciary duty.

What can we learn from this? The business judgment rule is a powerful shield available to corporate officers charged with breaching their fiduciary duties. In the absence of fraud or similar conduct, Georgia Courts generally will not second guess the well- intentioned business decisions of corporate management.

A recent Order out of the Northern District of Georgia casts doubt on the notion that a deal is not done until you sign on the dotted line. In White v. Bank of America, John White got a home loan with Bank of America. Mr. White quickly ...]]> by William J. Piercy

A recent Order out of the Northern District of Georgia casts doubt on the notion that a deal is not done until you sign on the dotted line. In White v. Bank of America, John White got a home loan with Bank of America. Mr. White quickly fell behind on his payments and received several default notices from the bank. Mr. White asked to modify his loan and in July 2009, BoA sent Mr. White an offer letter and a proposed Loan Modification Agreement. The offer letter, printed on BoA letterhead and closing with the salutation “THE HOPE TEAM”, congratulated Mr. White on being approved for modification. To take advantage of his offer, all Mr. White had to do was complete and return the Loan Mod Agreement within 30 days.

Mr. White signed the Agreement before a notary public and timely returned it. However, the notary who took Mr. White’s signature dated the document in a space intended for her printed name. On receipt, BoA notified Mr. White that it was “unable to process the modification” due to an “Incorrect or Incomplete Notary Signature”. Thereafter, BoA sold Mr. White’s home on the courthouse steps.

Mr. White sued BoA for breach of contract and wrongful foreclosure. Believing the facts and law squarely on his side, Mr. White asked for a summary judgment in his favor without the necessity of a trial. For its part, BoA asked the Court to dismiss Mr. White’s case, arguing that it never “signed” the offer letter, or “countersigned” the Agreement. Therefore, no binding contract was formed.

The trial court found for Mr. White, holding that the offer letter and Agreement to contained all the necessary elements of an enforceable contract. The Judge then cited long standing precedent for the proposition that a contract is “signed” when it is affixed with “any symbol executed or adopted with present intention to adopt or accept a writing.”

Applying this precedent, the Judge noted that BoA’s name and corporate logo were prominently displayed, along with the salutation, “THANK YOU FOR YOUR BUSINESS … The HOPE Team” on the offer letter. The Court concluded that these symbols constituted “an authentic writing prepared by” the bank, and effectively constituted BoA’s ‘signature’ on the offer letter and the accompanying Agreement.

What can we learn from this? A signature is but one manifestation of an intent to be bound to the terms of a writing. Other indicia can include the use of company letterhead, an email signature block, or even a voicemail. At the end of the day, it’s not so much the signature, but the intent to be bound, coupled with all the elements of an enforceable contract (a blog post for another day), that matters.

A recent business dispute that wound its way through the trial and appellate courts in Georgia casts doubt on the notion that a signature automatically binds the signor to the contents of the signed document. In Thompson v. Floyd, George Floyd owned Healthlogic, a back office support ...]]> by William J. Piercy

A recent business dispute that wound its way through the trial and appellate courts in Georgia casts doubt on the notion that a signature automatically binds the signor to the contents of the signed document. In Thompson v. Floyd, George Floyd owned Healthlogic, a back office support company servicing the health care industry. A bank expressed an interest in purchasing Mr. Floyd’s company. Around this time, Mr. Floyd was in negotiations to hire Scott Thompson as Healthlogic’s Chief Financial Officer.

At some point, Floyd advised the bank that Thompson would be the primary point person for Healthlogic in connection with the anticipated deal. Thereafter, Thompson participated heavily in the negotiations and due diligence, even though he had not yet been hired by Healthlogic.

Later, Thompson began working as Healthlogic’s CFO. The next day, Thompson met with Floyd to discuss the specifics of his duties and compensation. After much discussion, Floyd wrote out basic terms of compensation, deal participation and goals on the back of an envelope. He then signed the envelope “George Floyd, CEO”, and gave it to Thompson. Thompson left believing he had a deal. Before and after this meeting, Floyd and Thompson exchanged several emails relating to the anticipated sale of the company, Thompson’s compensation, and related issues.

Months later, the bank purchased Healthlogic for $40,000,000. Thompson demanded a success fee of $300,000. Floyd refused to pay, claiming that he and Thompson had never reached a meeting of the minds.

Thomson filed suit. Floyd argued that no contract was ever formed and the trial court agreed, dismissing the case. Thompson appealed and the Georgia Court of Appeals reversed, finding sufficient questions of fact exist to for a jury to determine whether Floyd and Thompson had a deal. The case was tried before a jury in November, 2011.

At trial, Thompson introduced the envelope and argued that it memorialized his deal with Floyd. He pointed to Floyd’s signature as evidence of a binding contract. Floyd countered that the envelope was merely one of many communications in a drawn out negotiation, and introduced several emails that – Floyd argued – showed that negotiations remained ongoing and that no deal was ever reached. Ultimately, the jury rejected Thompson’s claim and sided with Floyd.

What can we learn from this? While a signature can be evidence of an intent to be bound by the terms of a contract, a signature in itself is not enough. There must be an acceptance of those precise terms by another party to create an enforceable contract. Without a meeting of the minds, a signature’s just an autograph.

A common misconception held by many entrepreneurs is that their ownership interests in a Georgia business entity can simply be revoked by the business or taken by other owners.  Under Georgia law, an ownership interests in a business entity cannot be so easily lost.

All too often, disputes ...]]> by William J. Piercy

A common misconception held by many entrepreneurs is that their ownership interests in a Georgia business entity can simply be revoked by the business or taken by other owners.  Under Georgia law, an ownership interests in a business entity cannot be so easily lost.

All too often, disputes between and among the various owners of a business entity arise because one believes that another is not doing enough to contribute to the success of the business.  As a result, one owner (often with a controlling interest) will attempt to revoke, take, or simply ignore the ownership interests of others with whom he disagrees.  Often, a call is made to the company’s CPA or bookkeeper with instructions that one owner’s interest in the business is to be deleted from the corporate records, or perhaps transferred to another owner.  The disfavored (and unsuspecting) owner often first learns of his purported divesture when he receives his K-1 from the accountant the following year.

Yet without some pre-agreed upon procedure, an ownership interest in a Georgia business entity generally cannot be forfeited as a result of action or inaction on the part of the owner or the business.  Instead, a recent Georgia Court of Appeals decision Monterrey Mexican Restaurant of Wise, Inc. v. Leon, 282 Ga. App. 439 (2006), makes clear that once a business interest is granted, it generally cannot be revoked.  An attempt to do so can give rise to substantial liability for tortious deprivation of corporate interest among other causes of action.

In Monterrey, Raul Leon owned more than 50 business entities which in turn owned Mexican restaurants in several states along the eastern seaboard.  All were known as Monterrey, or some derivation of that name.  In 1995, Raul formed a new Georgia corporation, Monterrey Mexican Restaurant of Wise, Inc. (the “Corporation”), along with Hector Leon and Jose Onate for the purpose of opening and operating a new restaurant in Wise, Virginia (the “Restaurant”).  According to various corporate records, each of the three were (or were to be) issued 1,000 shares of stock in the Corporation, and each contributed $1,000 to the Corporation for those shares.  Although these corporate records, including stock certificates, were created, they were never signed or executed by any officer of the Corporation.  During the first few years of the Restaurant’s operation, Hector, Raul and Leon infused additional capital into the Corporation “pretty often.”  However, these transactions were rarely documented as equity infusions or loans and receipts were not maintained.

In addition to his own capital infusions, Raul also granted (albeit informally) the Corporation and the Restaurant the rights to the name Monterrey.  Raul owned the wholesale supply company from which the Restaurant obtained food and supplies.  Raul also signed the lease for the premises and Raul made all the substantial business decisions.  Hector and Jose called Raul “uncle”, considered him to be the boss, and took direction from him as to all issues concerning the operation of the Restaurant and the Corporation.  While Raul made strategic business decisions concerning the operation of the Corporation and his other businesses, it was Hector and Jose who worked in the Restaurant day to day from the beginning.

In 1996, Hector stopped working at the Restaurant and moved away.  At Raul’s request, Hector worked at another restaurant owned by Raul in Suwanee, Georgia for a time, but left that position in 1998 and did no further work for any restaurant or business entity in which he or Raul held any interest thereafter.  Although Hector apparently received distributions from the Corporation in 1995 and 1996 as though he were a one-third member, he did not receive any distributions for 1997 or any time thereafter.

In 1998, Raul instructed the Corporation’s bookkeeper that Hector no longer owned any interest in the Corporation and further directed the bookkeeper to transfer the 1,000 shares previously assigned to Hector, to Raul.  The Corporation’s records were amended in 1999 to reflect that Raul owned 2,000 shares, that Jose owned 1,000 and that Hector owned zero shares.  It was in April 1999 that Hector first learned that he was no longer considered a shareholder of the Corporation.  Thereafter, he filed suit and won, but not as much as he wanted.  Both sides appealed the trial court’s ruling.

On appeal, the Georgia Court of Appeals affirmed the trial court’s finding of liability on the part of Raul and the Corporation, but for reasons different than those relied upon by the trial court.  The trial court found Raul and the Corporation liable for ‘conversion’ of Hector’s corporate ownership interest.  The Court of Appeals determined that “[c]onversion is not available as a cause of action with respect to intangible property representing an interest in a business.”  Instead, the Court essentially created a new cause of action:  tortious deprivation of a corporate interest.

In so ruling, the Court of Appeals relied on the facts that both Raul and the Corporation held Hector out to the public as being a shareholder; Hector believed he was a shareholder; Hector convinced the trial court that he was a shareholder; and Hector was deprived of the benefits of his ownership interest in the Corporation from 1997 forward.  As a result, the Court of Appeals determined that Hector was entitled to recover damages in an amount equal to the distributions he should have received from 1997 on, plus a substantial award of attorney’s fees.

As should be clear from Monterrey, ignoring the business entity ownership interests of Georgia entrepreneurs is ill advised.

When disputes arise between and among the various owners of a business entity, a prudent first step is to engage experienced counsel to review the corporate documents so as to determine the rights and responsibilities of the entity and its owners with respect to each other.  Do those documents set out specific roles and responsibilities for each owner?  Are they required to perform certain tasks or work full time toward the success of the business?  If such provisions exist, and if those duties are not being fulfilled, the offending owner may be liable for breach of contract and/or for fiduciary duty.  Do the documents provide for a mandatory buy/sell provision that would compel one party to buy out the interests of the other under certain circumstances?  Even where corporate documents are silent on these issues (or where such documents do not exist), tort-based claims such as breach of fiduciary duty, misappropriation of corporate assets and tortious deprivation of corporate interest may provide an avenue for relief.

In South Point Retail Partners, LLC v. North American Properties Atlanta, 2010 WL 2331437, the Georgia Court of Appeals determined the scope of an arbitration provision. In 2005, investors created South Point for the purpose of developing a shopping center in McDonough, Georgia. Toward that end, South ...]]> by William J. Piercy

In South Point Retail Partners, LLC v. North American Properties Atlanta, 2010 WL 2331437, the Georgia Court of Appeals determined the scope of an arbitration provision. In 2005, investors created South Point for the purpose of developing a shopping center in McDonough, Georgia. Toward that end, South Point entered into a contract (the “Pre-Development Agreement”) with North American Properties, (“NAP”) for assistance in applying for rezoning and negotiating with potential anchor tenants.

In 2006, South Point and NAP expressly terminated the Pre-Development Agreement, and entered into a new agreement (the “Consulting Agreement”). Pursuant to the Consulting Agreement, NAP would provide consulting services in return for payment at a set hourly rate. Further NAP would receive a commission for any buyer or tenant NAP procured. The Consulting Agreement further provided that South Point would reimburse NAP for $1,031,089 in pre-development costs that NAP had incurred pursuant to its work under the Pre-Development Agreement. These pre-development costs were to be repaid in installments “if, as and when” South point received installment payments from anchor tenants.

In the event of an early termination, the Consulting Agreement provided that if “parties involved are unable to agree on the total compensation owed to NAP, the matter shall be submitted to binding arbitration in accordance with the rules of the American Arbitration Association.”

Although South Point apparently received significant installment payments from anchor tenants, it paid only $106,441.65 to NAP as pre-development costs. NAP filed a demand for arbitration against South Point with the American Arbitration Association, seeking an award of the remaining $924,647.65 in unreimbursed pre-development costs.

South Point immediately filed a lawsuit in Fulton County Superior Court seeking (1) a declaratory judgment that the arbitration provision in the Consulting Agreement did not apply to the issue of whether predevelopment costs had properly been paid; and (2) an injunction preventing the arbitration from going forward until the scope of the arbitration clause was determined by the trial court. The trial court dismissed South Point’s lawsuit, finding that “the parties had agreed to arbitrate all disputes between them as to the total compensation owed to NAP …”

South Point appealed, arguing that the “total compensation owed to NAP” stated in the Consulting Agreement’s arbitration provision related only to compensation earned by NAP for consulting and marketing services pursuant to the Consulting Agreement, and did not relate to the reimbursement of pre-development costs that accrued under the Pre-Development Agreement. Alternatively, NAP argued that the concept of “compensation” can include “reimbursement” and that, as used in the Consulting Agreement, the phrase “the total compensation owed to NAP” includes reimbursement for pre-development costs.

The trial court determined that NAP’s claim for unpaid pre-development was subject to arbitration and entered an order compelling the parties to adjudicate that issue in the arbitration forum.

South Point appealed that ruling and the Court of Appeals reversed. In reaching this conclusion, the Court noted first that:

arbitration is a matter of contract, and a party cannot be required to submit o arbitration any dispute which he has not agreed to submit. Therefore, the question of arbitrability, i.e., whether an agreement creates a duty for the parties to arbitrate the particular grievance, is undeniably an issue for judicial determination.

From there, the Court reasoned that the primary purpose of the Consulting Agreement was to establish NAP’s prospective compensation for consulting and marketing services. Secondarily, the Court found that the Consulting Agreement also stipulated the balance of South Point’s remaining indebtedness to NAP for pre-development costs. Because the Consulting Agreement’s arbitration provision’s purpose was to resolve compensation issues as to which the parties were “unable to agree” and because the pre-development reimbursement costs were already fixed and specified in the Consulting Agreement, the Court determined that the amount or propriety of the pre-development costs was not subject to the Consulting Agreement’s arbitration clause. This holding did not leave NAP without a remedy. While it was unable to bring a claim for unreimbursed pre-development costs in arbitration, the Court’s ruling did not preclude NAP from filing a lawsuit to collect these sums.

“You want to see my what?!” might be management’s first reaction to a request from a non-managing co-owner to inspect the financial or organizational records of a closely-held business.  Management may also question why the records are being requested, perhaps wondering if the ...]]> by William J. Piercy

“You want to see my what?!” might be management’s first reaction to a request from a non-managing co-owner to inspect the financial or organizational records of a closely-held business.  Management may also question why the records are being requested, perhaps wondering if the non-managing co-owner making the request is either calling into question management’s decision-making or if that co-owner is seeking to use internal information for some improper purpose.  Therefore, management may be reluctant to comply with such a request.  While this reaction is not uncommon, it is rarely supported by Georgia law.

Closely-held businesses, by definition, are owned by a small group of individuals or entities.  Often, one or a few of these owners manage the day-to-day operations of the business while the other owners take a more hands-off role.  A natural tension exists in these situations between the right of the more passive investor owner to keep informed regarding the status of his investment and the interests of the business (and often its management) in maintaining the confidentiality of its activities and inner workings.  Unless these tensions are timely and properly addressed, acrimonious disputes can develop between co-owners over access to the books and records of the business, particularly where there are suspicions or allegations of mismanagement among the co-owners.

Georgia law strikes a balance between the competing interests of co-owners by generally affording those with an ownership interest in a business entity a right to inspect its books and records for legitimate purposes while also allowing the business to impose reasonable limits on how that information may be used.  Typically, this means an owner has the right to know what is going on in the business, but may be precluded from using that information for a competitive venture.

Generally, a business entity (through its management) maintains certain records and must make them available to the owners upon a reasonable request.  These business records can be divided into the following three categories:

1. Organizational records.  Organizational records are those that reveal the type of legal entity that the business is as well as the identity and voting rights of its owners and management. By-laws, articles of incorporation or organization, operating agreements, shareholder agreements, and partnership agreements generally fall into this category as would meeting minutes, resolutions, and any amendments to operating agreements or by-laws.
2. Transactional records.  Transactional records are those which relate to the entity’s business activities and relationships with third parties. This might include the entity’s office space lease, its vendor and customer contracts, and titles to real property or to equipment.
3. Financial records.  Financial and accounting records are those which reflect the financial affairs of the entity, including tax returns, balance sheets, profit and loss statements, bank statements, and other documents demonstrating the financial condition of the business.

The extent of the owners’ rights of inspection and the amount of information the entity is obligated to disclose can vary depending on whether the entity is a corporation, a limited liability company (LLC), a

general partnership, or a limited partnership. The right of inspection can also vary if the owners have previously agreed upon access rights or limitations.

A.  Entity-Specific Rules for Document Retention and Access Rights

Corporations – A Georgia corporation is required to maintain at its principal place of business copies of its articles of incorporation, by-laws (and any relevant amendments to those), corporate resolutions, shareholder meeting minutes, a list of the names and business addresses for its current officers and directors, as well as correspondence from the corporation to the shareholders. In addition, a corporation is required to maintain its financial statements for the previous three (3) years.

A shareholder has a right to inspect and copy these organizational records after giving the corporation five (5) days written notice.  Importantly, the corporation’s by-laws or articles of incorporation may not limit the rights of a shareholder owning more than two (2%) percent of the outstanding shares in the company from exercising these inspection rights.

In order to obtain access to additional records, such as the corporation’s accounting records, the shareholder list, and excerpts from the minutes of any board of directors meeting, the shareholder must articulate a proper purpose that is reasonably relevant to his or her legitimate interest as a shareholder.

The right to inspect these records is qualified and not absolute.  That is, the shareholder is not given unfettered access to any corporate records simply by virtue of having an ownership interest in the corporation. Rather, the shareholder must articulate a proper purpose for his or her request.  Essentially, the broader the shareholder’s request and the greater access sought, the more particular the shareholder must be in identifying the purpose for the request.

LLC’s – As with corporations, Georgia law imposes a set of default rules as to what documents an LLC must maintain and make available to its members upon reasonable request.  These default rules are, in one sense, more expansive, yet in another sense, more restrictive than the rules governing corporations.

By default, a member of an LLC is permitted access to all records of the company upon reasonable written demand, regardless of whether the member owns one percent or ninety-nine percent of the entity.  However, the members of an LLC are permitted to impose reasonable limits on the information access rights of certain members, and the Georgia courts will typically enforce that agreement.

Similar to corporations, Georgia law imposes an obligation on an LLC to maintain at its principal place of business a list of the names and addresses of each member and manager; records establishing the relative voting rights of the members; copies of the company’s articles of incorporation and operating agreement; the company’s local, state, and federal income tax returns; as well as its financial statements for the previous three (3) years. This rule may be modified with the unanimous consent of the LLC’s members.

Partnerships – Partners in a general partnership have broad, but relatively vague, obligations to share with each other all information concerning the partnership. These records are to be kept at the partnership’s principal place of business, unless otherwise agreed by all partners. In addition to the duty to maintain and share records, partners are additionally required to share with each other “to the extent the circumstances render it just and reasonable, true and full information of all things affecting the partners.”

Limited Partnerships – The general or managing partner in a limited partnership (LP) has the duty to maintain a current list of each partner’s name and address, a copy of the LP’s current certificate of limited partnership and related amendments, copies of the LP’s federal, state, and local tax returns as well as its annual financial statements for the past four years. Additionally, it must maintain any and all written partnership agreements and documents which identify the property or cash contributed, or to be contributed, by each partner and on what terms the contributions were, or are, to be made.

B.  Resolving Disputes over Access to Business Records

For both legal and practical reasons, the co-owners and management would do well to work together to provide reasonable access to the company’s books while also maintaining the confidentiality of proprietary business information.  Oftentimes, however, discord among the co-owners on other issues relating to the business can morph into a dispute over access to the books and records.

When co-owners cannot achieve some workable parameters, and an owner’s request for records is denied, Georgia law authorizes that owner to file a lawsuit to compel access to the records sought. In a lawsuit of this nature, the Court will typically make the following inquiries:

1. Establishing Ownership.  Often, the first question the Court will seek the answer to is or was whether the individual seeking access is actually an owner. If the business and/or the owner have kept good records, this can be a perfunctory inquiry.  Too often, however, investors and entities fail to properly document their relationships and ownership interests, complicating what should be a simple inquiry.
2.  Reasonableness of Request.  After the owner’s status is confirmed, the Court must then determine whether the owner’s inspection request is proper.  This will depend on what type of entity is involved and whether the owners have a prior written agreement.

Corporations:  The Court must determine whether the request is being made for a “proper purpose” that is “reasonably relevant to his legitimate interest as a shareholder”. Facts or circumstances which tend to establish the reasonableness of a request can include whether the shareholder owns a favored class of shares, if there is evidence of mismanagement, whether the shareholder has previously been unable to obtain corporate records, and whether there has been a dramatic deterioration in the financial status of the corporation or in the value of the corporation’s shares.

If the Court finds the shareholder’s request reasonable, and the corporation’s refusal to produce records unreasonable, it has the power not only to compel the production of the records, but also to require the corporation to pay the shareholder’s attorneys’ fees incurred in bringing suit. In an effort to balance the interests of the corporation with this disclosure, the Court may also impose reasonable restrictions on the shareholder’s use or distribution of the corporate records, as the circumstances may warrant.

LLC’s:  The rules governing the production of records by an LLC to a member are similar to those for a corporation, except that an LLC member need not articulate a “proper purpose” for inspecting the records. That said, a company may impose reasonable limits on how the member can use the records.

If there is an operating agreement for the LLC that either expands or restricts its members’ inspection rights, the Court will likely resolve the lawsuit by enforcing the terms of the operating agreement.

Partnerships:  As shown previously, Georgia law does not specify exactly what types of partnership records must be maintained.  Nor does it provide a specific statutory mechanism for compelling the production of such records. However, this does not leave partners without a remedy.  If a partner is thwarted in his or her efforts to secure access to the records of the partnership, that partner can file suit against the partnership, or against the partner maintaining the records, for breach of fiduciary duty and/or breach of contract. Unlike the law applicable to corporations, there is no statute that contemplates an award of attorneys’ fees in connection with a suit to compel records from a partnership.  Therefore, an award of such fees is unlikely, absent some other compelling reason for the Court to award them.

C.  Conclusion

As a practical matter, owners should ensure that their ownership interest is properly documented at the outset and exercise their rights to review and inspect the books and records of the business on a regular basis to monitor the status of their investment.  It is not advisable to wait until relationships among co-owners turn sour to start taking an interest in how the business is being managed. Also, it is important for entities not only to maintain the books and records of the business in an organized way, but to make them available upon request.  If both ow

ners and entities can cooperate in this effort, each can avoid the significant costs, in the form of legal fees or in the disruption of business, associated with a lawsuit to compel the production of such records.

In Asgharneya v. Hadavi, 298 Ga. App. 693 (2009), Mr. Asgharneya and Mr. Hadavi entered into a business partnership for the purpose of operating an El Exito check cashing stand within a convenience store.  The men had been friends for many years and based their relationship on ...]]> by William J. Piercy

In Asgharneya v. Hadavi, 298 Ga. App. 693 (2009), Mr. Asgharneya and Mr. Hadavi entered into a business partnership for the purpose of operating an El Exito check cashing stand within a convenience store.  The men had been friends for many years and based their relationship on an oral agreement.  They both put up the same amount of money to get the business started.  At first, they split the profits evenly.  Later, Mr. Asgharneya and Mr. Hadavi agreed to alternate months with one operating the business one month and the other operating it for the next month, each keeping 100% of the profits earned during his respective month of operation.  This worked for a period of time.  However, when Mr. Hadavi returned to the store to take over operation at the beginning of a new month, he discovered that Mr. Asgharneya and the owner of the convenience store, in which the El Exito was previously located, had opened a competing check cashing business.   Mr. Asgharneya and his new partner then prevented Mr. Hadavi from accessing or operating El Exito.

Mr. Hadavi filed suit for breach of the partnership agreement, among other claims.  The Court found in favor of Mr. Hadavi, finding that Mr. Asgharneya and the owner of the convenience store conspired together to deprive Mr. Hadavi of his rights under the partnership agreement.  While the Court recognized that Mr. Asgharneya had the right to terminate his oral partnership agreement with Mr. Hadavi, the Court further held that Mr. Asgharneya had deprived Mr. Hadavi of the rights that had vested in him under their partnership agreement up through the point of termination.  In so ruling, the Court held that:

The power of a partner to dissolve the partnership at will, like any other power held by a fiduciary, must be exercised in good faith.  A partner may not “freeze out” a co-partner and appropriate the business to his own use.  A partner may not dissolve a partnership to gain the benefits of the business for himself, unless he fully compensates his co-partner for his share of the prospective business opportunity.