June 2012 Archives

Selling Shareholders' $900 Million Fraud Claim Dismissed for Failing to Investigate

June 18, 2012

A few months ago, the Court of Appeals highlighted the pitfall of a not uncommon scenario, that of experienced and sophisticated business people relying on the representations of others but which are later found to be less than truthful. In Centro Empresarial Cempresa S.A. v. America Movil, S.A.B. de C.V., the court dismissed the fraud claims of former shareholders of a Latin American mobile telephone company because those shareholders ignored obvious concerns that arose in the course of the sale of their shares that should have put them on notice of potential problems. Not only were those issues not addressed, but those shareholders released the company and remaining shareholders from liability in connection with the sale. The outcome of this case underlines the fact that experienced and sophisticated parties must do their own due diligence no matter what they are told.

The facts are somewhat complicated but can be summarized as follows: Plaintiffs held a majority interest in an Ecuadorian company which sought funding from a Mexican company, Telemex Mexico, controlled by billionaire Carlos Slim. The funding was provided and a new entity was formed which was owned by the plaintiffs and Telemex. The parties agreed that in the event that there were additional transfers to different entities, plaintiffs could swap their interest from the old entity to the new entity on terms to be agreed. Following a subsequent transfer, plaintiffs tried to negotiate the terms for the transfer of their ownership interest into the new entity. Encountering resistance from Telemex, plaintiffs opted to just sell their interest outright and did not receive any interest in the new entity.

Eight years later, plaintiffs sued claiming to have been defrauded. Plaintiffs claimed that they were given incomplete and bogus information of the new entity's value. Had they known the true state of affairs, they alleged, they would have forced a transfer or sold their interests at a far higher price. Under the agreement by which plaintiffs sold their interests, they agreed to release the other shareholders and the new entity from any claims in connection with the agreement. The remaining shareholders and their entities also provided plaintiff with no warranties related to the business' state of affairs.

In dismissing plaintiffs' claims, the Court of Appeals faulted the plaintiffs for agreeing to broad release language while not pursuing the information they acknowledged not receiving. The court refused to give any credence to the plaintiff' arguments that they were mislead and could not have known the true value of what they gave up. The court determined that plaintiffs were sophisticated entities engaged in complex businesses and transactions who made conscious decisions not to investigate the information they were provided. That plaintiffs were aware that they were given incomplete information from a partner they no longer trusted further highlighted the need for plaintiffs to undertake their own due diligence, which they did not do. Only if the release was itself procured by some fraud would plaintiffs be able to proceed, and that was something that the plaintiffs could not establish.

Not long ago, we successfully represented a company in defending against the claims of a shareholder who alleged similar claims. The issues are always complex and a thorough investigation of the underlying facts and arguments must be examined prior to deciding on a litigation process.

Wrongful Conduct Does Not Allow for Retaliation

June 15, 2012

A recent decision by Suffolk County Commercial Division Judge Emily Pines highlights how critical it is for a party in a dispute to keep his hands clean, even in the face of the other side's wrongful conduct.

The extensive factual and legal discussions raised over the 11 day trial are nicely explained by Peter A. Mahler, Esq. I reference this case for the limited purpose of highlighting the fact that while nasty conduct and table-banging litigation make for a good movie script, playing by the rules usually carries the day.

This case involved a dispute within a 12 member medical practice. One doctor alleged that the other doctors were not conducting themselves properly while running the practice, engaging in conduct that did not benefit the entire practice. He also complained that they caused the practice to borrow money without proper consent. And finally, that his partners expelled him from the practice without cause. The other doctors claimed that the complaining doctor went behind the others' collective back and told the prospective lender that the practice did not have proper authorization to borrow the funds. It turned out that the practice did have the authority to borrow money, as the other doctors had properly voted to obtain the loan, but the complaining doctor's notice to the bank caused it to cancel the practice's loan, to the detriment of the other doctors.

Judge Pines found that while the other doctors did not completely operate the practice properly, and withheld certain compensation from the complaining doctor, the fact that this doctor wrongfully contacted the bank, causing it to pull the loan application, precluded him from recovering a substantial portion of the amount he was demanding from the practice.

The lesson here is clear: In real life, the claim that your adversary may be robbing you blind does not necessarily give you the right to destroy the business or take unfettered, unilateral steps to defeat what your adversary is trying to accomplish. Not surprisingly, in this setting, an intensive review of the facts is necessary before any action is taken. Don't undertake that process alone. Team up with experienced counsel before you take action that you might later regret.