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Saving Shareholders from a Shareholder Agreement Buyout Price that Would Bankrupt Company

Attorneys Involved: Neal A. Jacobs and Matthew A. Cole

The death of a founder is a sad and even traumatic event for any company. It should not, however, throw the company into chaos. When that happened to a Jacobs Law Group client, our corporate lawyers were able to save the company and the remaining shareholders’ value from oblivion.

The two founders of our client company had tried to plan for what would happen if one of them died. What they didn’t envision was that both of them would die within 11 months of each other.

Jacobs Law Group’s commercial lawyers determined that the deaths of both founders would bankrupt the company and wipe out the value of the remaining partners’ shares -- if the existing shareholder agreement were followed. That agreement was written around the assumption that the life insurance proceeds from the death of one founder would suffice to cover the costs of any resulting buyout. A Jacobs Law Group investigation determined that not only had the life insurance policies been improperly maintained – in insufficient amounts and with inappropriate policyholders – but that the company’s valuation had been exaggerated at the time of the shareholder agreement in order to justify the coverage amounts the founders wanted.

Presented with these findings, all but one of the shareholders agreed to treat the original shareholder agreement as invalid and to sell the company, distributing the proceeds and any other assets on a pro-rated basis.

The holdout against this reasonable solution was the estate of the first founder to die. In the estate’s view, the shareholder agreement amounted to a “first to die” lottery that should result in the estate receiving the full value of the company.

After months of negotiations and mediation with the estate yielded little progress, Jacobs Law Group and the client reluctantly pursued litigation. Jacobs Law Group successfully argued in court that the original shareholder agreement had been ignored, never enforced, effectively abandoned, and was thus invalid. Jacobs Law Group also persuaded the court to issue an order appointing a limited receiver with the authority to sell the company.

The company was eventually sold and the proceeds distributed equitably to its shareholders, as Jacobs Law Group initially had proposed.

Press Releases

Jacobs Law Group Expands with Two Commercial Litigation Attorneys

Philadelphia business law firm Jacobs Law Group is pleased to announce that Richard “Dick” McElroy and Jeffrey C. McElroy, have joined the firm. With more than 60 years combined experienced, the father and son team have been highly successful at receiving results for leading businesses in litigation. Read More.

Events

Leading PA Business Divorce Attorney Neal A. Jacobs to Act as Faculty for PBI CLE ‘Business Divorce: Startup to Litigation to Resolution’

Jacobs Law Group Founder and Managing Attorney Neal A. Jacobs is acting as course planner and will present as part of a CLE on business divorce for the Pennsylvania Bar Institute. The program, “Business Divorce: Startup to Litigation to Resolution” will be held on Nov. 6 in Mechanicsburg, Nov. 8 in Philadelphia, and Nov. 13 in Pittsburgh. Read more...

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