When a person dies who owns a company, it’s usually a matter between the personal representative of the estate, the heirs, and perhaps the employees and customers of the company. But what happens when the decedent controlled a company that has outside investors, and the personal representative of the estate refuses to take control of the company? Or what happens if the personal representative does take legal control of the company yet does not actually operate the company, or operates the company in a derelict manner? The investors will typically have several options: take control of the business through the estate, take control of the business using a mechanism set forth in the organizing documents of the company, or asking a court to appoint a receiver or custodian of the business.
Using an Administrator Ad Litem to Take Control of a Business.
The probate courts of most states have a provision to appoint a fiduciary of an estate in addition to a serving personal representative, also known as an executor. If the personal representative refuses to take control of a business owned by the estate, anyone could petition for the appointment of an administrator ad litem, including heirs of the estate, other owners, creditors, or employees. Even the personal representative could petition the probate court for the appointment of the administrator ad litem.
Florida Probate Code Section 733.308 sets forth the rules how an administrator ad litem is appointed in Florida.
733.308 Administrator ad litem.—When an estate must be represented and the personal representative is unable to do so, the court shall appoint an administrator ad litem without bond to represent the estate in that proceeding. The fact that the personal representative is seeking reimbursement for claims against the decedent does not require appointment of an administrator ad litem.
Florida Probate Rule 5.120 gives additional guidance about the purpose and procedures for obtaining an administrator ad litem. That rule provides, in part:
(a) Appointment. When it is necessary that the estate of a decedent or a ward be represented in any probate or guardianship proceeding and there is no personal representative of the estate or guardian of the ward, or the personal representative or guardian is or may be interested adversely to the estate or ward, or is enforcing the personal representative’s or guardian’s own debt or claim against the estate or ward, or the necessity arises otherwise, the court may appoint an administrator ad litem or a guardian ad litem, as the case may be, without bond or notice for that particular proceeding.
Florida courts will treat an administrator ad litem pretty much the same as the personal representative of an estate. In Funchess v. Gulf Stream Apartments of Broward County, 611 So. 2d 43 (4th DCA 1992), a personal representative had brought a wrongful death lawsuit. Under Florida law, only the personal representative may bring a wrongful death action. The estate of the decedent replaced the personal representative with an administrator ad litem. In allowing the wrongful death action to proceed with the administrator ad litem, the court explained:
An administrator ad litem must represent the beneficiaries of the estate with the same degree of neutrality and fidelity as a personal representative and an administrator ad litem is always subject to the supervision of the appointing court. The proceeds of any judgment recovered in the wrongful death action by an administrator ad litem would be protected and distributed as provided by the Probate Code. See In re Estate of Cordiner, 458 So.2d 418 (Fla. 2d DCA 1984); Woolf v. Reed, 389 So.2d 1026 (Fla. 3d DCA 1980). Furthermore, the substitution of an administrator ad litem would not affect appellees’ exposure to multiple claims.
Appellees have not shown how they would suffer prejudice by the continuation of the action by the administrator ad litem nor have they shown any meaningful distinction between the authority of an administrator ad litem and a personal representative to act as a nominal plaintiff in a wrongful death action.
How to Take Control of a Business Using the Organizing Documents of the Company
But the members can agree on whatever they want. The real test is whether the company’s banks will recognize the person voted in as the new manager as the actual, lawful manager of the company. Even if the new manager submits a change in control form to the Secretary of State where the business was formed, a bank is not necessarily required to accept such change. Indeed, there is nothing to stop anyone from submitting a change in control document to a Secretary of State, even though such actions would certainly constitute a crime. Therefore, a bank, especially one with existing large deposits, is certainly going to want an explanation of how the new manager claims to be in control of the company. If the new manager was voted into office, the bank may want to see proof of the vote and proof that the members voting constitute a sufficient majority to appoint the new manager.
Delaware law provides a statutory mechanism for confirming the outcome of a vote on a matter of governance. Should the members wish to take control of a Delaware limited liability company, they could vote a new manager into the position, and then have the vote confirmed, as follows:
§ 18-110. Contested matters relating to managers; contested votes.
(a) Upon application of any member or manager, the Court of Chancery may hear and determine the validity of any admission, election, appointment, removal or resignation of a manager of a limited liability company, and the right of any person to become or continue to be a manager of a limited liability company, and, in case the right to serve as a manager is claimed by more than 1 person, may determine the person or persons entitled to serve as managers; and to that end make such order or decree in any such case as may be just and proper, with power to enforce the production of any books, papers and records of the limited liability company relating to the issue.
A third party such as a bank would then need to abide by the judgment of the Delaware Court of Chancery and treat the newly elected manager as having the authority to bind the limited liability company.
How to Take Control of a Business With a Receiver or Custodian
It is quite common for corporations and limited liability companies to be formed under Delaware law, yet be operated in another state. When it comes to litigation over matters of corporate governance, such disputes might have to be brought in Delaware, and in most cases, even if brought in another state initially, can be forced to move there.
But litigating in Delaware, even doing the vote confirmation process in Delaware as described in Section 18-110, as described above, can be expensive and inconvenient, especially when the company’s business is in another state, and none of the owners has any connection to Delaware.
Some states have laws allowing a receiver to be appointed over a business if the business has operations in that state. But the concept of a receivership connotes the wind down of the business, which might not be desirable. Many states, in their business codes, also allow for the appointment of a custodian.
The Florida Limited Liability Company Act, at Section 605.0704, allows for the appointment of a receiver or custodian to wind down a business or to manage the business, under the supervision of a court.
(1) A court in a judicial proceeding brought to dissolve a limited liability company may appoint one or more receivers to wind up and liquidate or one or more custodians to manage the business and affairs of the limited liability company.
Any business organized under the laws of Florida can be subjected to this procedure to allow someone to take control of the business, even instead of someone who might otherwise have legal control of the company. Obviously the moving party is going to have to convince the court that the appointment of the receiver or custodian is warranted. If the manager is dead and no one has replaced the manager under the governing documents of the company, that should be simple to prove. Likewise, if the manager has disappeared or is in a coma and no one has taken control of the company under the rules set forth in the company’s operating agreement, establishing good cause for the appointment of a custodian should also be easy.
But going to court in the state where the company was formed can be expensive and inconvenient, especially when many court orders to confirm various actions are going to be needed, and especially when in-court evidentiary hearings are going to be required. Why should a company that operate exclusively in Florida, with only Florida owners, have to go to court in Delaware to manage a business where the manager has vanished, only because the company was formed under Delaware law decades ago and has no other connection to Delaware? The answer is you do not.
Florida law allows for a receiver or custodian to take over a business that operates in Florida, even though the company is formed under the laws of a different state. The concept is known as an ancillary receiver, even if there is not a receiver operating in the state of the company’s formation. Section 605.0704(6) provides:
(6) The court has jurisdiction to appoint an ancillary receiver for the assets and business of a limited liability company. The ancillary receiver shall serve ancillary to a receiver located in another state if the court deems that circumstances exist requiring the appointment of such a receiver. The court may appoint a receiver for a foreign limited liability company even though a receiver has not been appointed elsewhere. The receivership shall be converted into an ancillary receivership if an order entered by a court of competent jurisdiction in the other state provides for a receivership of the foreign limited liability company.
In Romay v. Caribevision Holdings, 147 So.3d 125 (3rd DCA 2014), a dispute arose involving multiple owners involving multiple related companies across several jurisdictions. One group of owners filed suit in Florida to take control and liquidate the main company in dispute, even though the company was formed under Delaware law. In allowing the procedure to continue forward, the court ruled:
The Romay Interests argue here that the Florida trial court lacked jurisdiction to grant such relief with respect to the entities, organized as they were in Delaware, contending that the Florida court thereby impermissibly regulates “the organization or internal affairs of a foreign corporation.”
In fact, however, Florida’s Business Corporations Act and Limited Liability Company Act expressly authorize a Florida court to appoint an ancillary receiver here for a foreign entity “even though no receiver has been appointed elsewhere.”
These provisions recognize that a foreign company with an office, property, and operations in Florida may require local supervision even before a “primary” receivership is commenced in the state of incorporation. If and when a receivership order is entered in Delaware, the Florida receivership in this case would become “ancillary.
If a company is owned by the former manager’s estate, does business in Florida, yet is formed in another state, such as Delaware, the ancillary receivership statute provides an excellent way to take rapid control of a company in Florida when the personal representative fails to do so.
Contact Jeffrey Skatoff, at (561) 842-4868 for further information.