Monthly Archives: May 2015

The Court Determines Fair Value 

The court shall take evidence and determine fair value but has a right to assess expenses and attorney fees. The expenses assessed may also include the cost of experts. The court may find against the corporation in favor of the dissenter if it finds the corporation did not comply with procedural requirements, against the dissenter if the fair value does not materially exceed” the amount offered by the company; or against either the company or dissenter if it finds that the party against whom the fees and expenses assessed acted “arbitrarily, vexatiously, or not in good faith with respect to the rights provided …” by the dissenters’ rights process.

The term “fair value” is defined in the dissenters’ rights statutes to mean the value of shares immediately before the effectuation of the corporate action to which the dissenter objects excluding any appreciation or depreciation in anticipation of the corporate action unless such exclusion is inequitable. The statutory definition does not deal with the issue of discounts for either a minority interest or lack of marketability, discounts commonly given for fair market value calculations. However, in Arizona, case law states that fair value is not the same as fair market value and does not include discounts for marketability or minority interest.

The practitioner should be alert to any of the possible triggering events during an owner dispute as the existence of any such triggering device may conclude a business divorce. The parties must carefully calculate their estimations and demands of fair value since the entire cost of the proceeding, including expert fees is at risk of being awarded to a successful party. The statutes were designed to deter an actual court proceeding by increasing the risk of loss. The court proceeding should probably only be one day with the evidence likely limited to the expert reports and perhaps some other related matters.

The dissenters’ rights statutes present an admirable, limited procedure to allow a shareholder, under key circumstances, to remove themselves from their business partners and hopefully terminate a dispute receiving fair value for their interest in the company.

Dissenters’ rights is a little known and little used statutory procedure that can be invoked under particular circumstances which may solve disputed issues in a business divorce. The basic concept of dissenters’ rights is to allow a shareholder to be bought out at fair value when a substantial change in corporate structure is about to take place. Arizona statutes provide a detailed procedure for the exercise of dissenters’ rights. No comparable provision exists in the Arizona limited liability company statutes.

Triggers for Dissenters’ Rights 

A number of corporate actions trigger the right of a shareholder to dissent and obtain fair value for the shares. First, if the corporation is a party to a plan of merger, including where a subsidiary is merging into a parent company, dissenters’ rights apply. If the corporation is a party to a share exchange and the shareholders are entitled to vote on the plan dissenters’ rights are triggered. Next is when a sale or exchange of all or substantially all of the property of the company occurs, unless the sale is pursuant to a court order or a sale for cash payable one year from the date of the sale. Dissenters’ rights exist if there is going to be an amendment to the Articles of Incorporation that materially and adversely affects a dissenters’ preferred rights in shares, creates or alters a right of redemption, alters a preemptive right, or excludes the right of the shares to vote on any matter including cumulative voting for directors. If a shareholder elects to dissent from any of these actions, a shareholder may not object or challenge the corporate action unless such action is fraudulent. Finally, the right to dissent is not applied to shares traded on a national exchange.

Dissenters’ Rights Procedures

If any of these proposed actions will be submitted to a vote at a shareholder meeting, the meeting notice must state that the shareholders may assert dissenters’ rights. Even if there is no meeting, a notice still must be given in writing to shareholders about their right to dissent to the corporate action. Once the notice is received, any shareholder who may want to dissent must deliver in writing their intent to demand payment for their shares and dissent. It is incumbent upon the corporation to send a writing to all shareholders not later than ten days after the triggering corporate action is taken and advise the shareholders where payment demand must be sent and where share certificates may be deposited. That same notice will advise the dissenting shareholder when the corporation must receive the shareholder’s demand for payment of their shares. The shareholder must comply and send a demand for payment consistent with that notice. If no demand for payment is received the rights are waived. Upon receipt of the payment demand, the corporation shall pay the dissenter what the corporation estimates to be the “fair value” of the shares and shall send to the shareholder the Company balance sheet together with an explanation as to how the fair value estimate was calculated.

If the shareholder is dissatisfied with the corporation’s estimate of the fair value, the dissenter may notify the corporation in writing of their estimate, less any payment tendered or otherwise reject the offer and demand full payment of fair value. Thereafter, if the matter is not resolved, the corporation is required to commence a court proceeding within sixty days and ask the court to determine the fair value of the shares, or otherwise pay the amount the dissenter estimates to be the fair value. All disputing dissenters must be a part of this action. There is no right to a trial by jury and the court may appoint a master or others to assist it in determining fair value. Each dissenter is entitled to obtain a judgment for the amount which the court finds is the fair value of the shares exceeding the amount offered by the corporation, if any. This is often called an “appraisal proceeding.”

Continue Reading Part 2

Public Policy
Following Delaware’s lead, and examining Arizona’s legislative intent as well as the appellate holding in Sports Imaging, it appears that some fiduciary duties exist in LLCs despite the Arizona Act’s silence on the matter.

If fiduciary duties exist or are statutorily adopted, a number of related issues need to be considered. For example:

  • May fiduciary duties be limited by an Operating Agreement, and if so, in what material aspects?
  • Should limitations on liability be set similar to Arizona statutes permitting limitations of liability on directors and officers of a corporation?
  • Should a statutory standard of conduct be enacted similar to the Arizona statutes of conduct for directors and officers of a corporation?
  • Should a business judgment rule apply to managers of LLCs, and should other assumptions regarding fiduciary conduct also apply to managers of LLCs?

These are just a sample of the questions presented by the issue addressed herein.

Developments in Arizona’s Act
A committee of Arizona attorneys is working to provide comprehensive proposed changes to the Arizona Act for consideration by the Arizona Legislature. One proposed change is to expressly define the fiduciary duties that exist for those who have a management role in the operation of the LLCs.

For more information about this committee, or this subject, please feel free contact the authors at or

In light of the Arizona Act’s explicit flexibility, a litigant or court must first look to the LLC’s operating agreement and any specific terms creating, defining or limiting fiduciary duties to determine if any fiduciary duties exist. If defined in the operating agreement, then those duties are enforceable.

If the operating agreement is silent on the subject of fiduciary duties, the likely scenario is that Arizona courts would examine the fiduciary duty concept based on the legislative intent, Arizona statutory and common law, and by examining trends in other jurisdictions. The weight of these combined authorities suggests that fiduciary duties will be implied to exist, especially where a manager or member undertakes “to act for or to give advice for the benefit of another.”

ROBERT A. ROYAL chairs and TRACY S. MOREHOUSE is a member of a committee examining and considering proposed changes to provisions of the Arizona LLC Act, which committee is being supported by the Business Law Section of the State Bar of Arizona. The authors thank Matthew McKinney, Esq. for his contributions to this article.

The ULLCA and Operating Agreements
Only a handful of states have adopted most or all of the provisions of the ULLCA or RULLCA. These uniform laws establish fiduciary duties among members and/or managers of LLCs. Many states that do not follow the ULLCA or RULLCA nevertheless look to either their partnership or corporate statutes and case law to define the duties that exist between LLC members and managers. Other states’ acts look solely to the operating agreement for the LLC to define what duties exist, if any. At one time, only six states, including Arizona, did not specifically address fiduciary duties in LLCs by statute.

The ULLCA and RULLCA establish the fiduciary duty of due care and the fiduciary duty of loyalty. The duties are owed both by managers in manager-managed, and members in member-managed companies to the entity and its members. However, no duty is owed by a member to the company or other members “solely by reason of being a member“. The operating agreement cannot waive or eliminate these duties. However, the operating agreement may limit the scope of the duties to the extent the limitations are not “manifestly unreasonable“.

Many states allow the operating agreement to define any duties. For example, Delaware’s statute permits that the operating agreement may provide for fiduciary duties for managers and members. “Accordingly, business people may draft, define, expand or limit duties. The Arizona Act confers express authority to incorporate any term or provision into the operating agreement that does not conflict with the Arizona Act“. Because the Arizona Act is silent about duties, presumably it would permit the operating agreement to similarly allow business people to draft, define, expand or limit fiduciary duties.

Delaware Guidance
However, all of this does not answer a very important question: Do fiduciary duties exist where not specified, or where limited by the operating agreement? If the operating agreement does not define duties, will duties be implied?

Under the Delaware Act, the answer appears to be yes. And Delaware law may be the best reference point for an answer because of the prominence and extent of its business law that is followed by many states when a state does not have its own controlling precedent.

In a 2009 Delaware opinion, the Delaware Court of Chancery held, “[I]n the absence of a contrary provision in the LLC agreement, the manager of an LLC owes the traditional fiduciary duties of loyalty and care to the members of the LLC“. The Court of Chancery revisited the issue in 2010 and reaffirmed its 2009 holding and further held that “controlling members in a manager-managed LLC owe minority members the traditional fiduciary duties’ that controlling shareholders owe minority shareholders“.

Again, on July 23, 2010, the Delaware Court of Chancery issued an unpublished opinion providing insight on fiduciary duties in LLCs. In Related Westpac, LLC, et al. v. JER Snowmass, LLC, et al., the Court of Chancery refused to apply fiduciary duties among members in an LLC when application of the fiduciary duties would undermine the LLC’s operating agreement. Put another way, if applying fiduciary duties would nullify the partie’s express bargain (terms, promises, etc.) outlined in the LLC’s operating agreement, the Delaware Court will not impose fiduciary duties among the members. In this case, the court found that the defendant could act in a manner that served its own interests and not be liable for breach of fiduciary duties because the LLC’s operating agreement permitted defendant to act in such a manner.

In sum, where the use of default fiduciary duties would intrude upon the contractual rights or expectations of the parties, as typically outlined in an LLC operating agreement, the court will eschew fiduciary concepts and focus on a purely contractual analysis of the dispute.