The Palm Restaurant Case: Family Businesses Must Treat Family Shareholders Fairly
A recent case decided in New York involving The Palm steakhouse restaurant chain is a good reminder that, even in family-owned and run businesses, minority shareholders must be treated fairly. See news report here. Family-run businesses sometimes forget that majority shareholders owe various fiduciary duties to the minority shareholders even if everyone is family. Although the case was decided in New York, almost certainly, under California law, the same result would have occurred. Majority shareholders cannot use their power over the corporation to commit self-dealing and enrich themselves at the expense of the minority shareholders. Here is a quick discussion.
The Palm chain of restaurants started operating in the 1920s. It is rightly famous for its steaks and other food and has a unique decor involving caricature drawings of the rich, famous, and powerful covering the walls. The Palm franchise is owned by a company called Just One More Restaurant Corp. (“JOMRC”). As the franchisor, JOMRC owns the intellectual property along with the original restaurant and various other assets. Down the years, the majority ownership (80%) of JOMRC passed to Wally Ganzi and Bruce Bozzi, Sr. The other 20% is owned by Gary Ganzi and Claire Breen. All four are the grandchildren of the original founders. Gary and Claire sued Wally and Bruce claiming that, as majority shareholders, they had engaged in self-dealing with respect to the licensing agreements for the Palm intellectual property.
Both Wally and Bruce have part ownership of many of the franchise restaurants. Wally and Bruce also exclusively own a management company. The first franchise was approved in 1972 and the intellectual property was licensed for a flat fee of $6,000. That rate was never increased over the years and, from 2004 to 2007, Wally and Bruce had JOMRC enter into several licensing agreements for the same flat fee. Unquestionably, $6,000 a year was wildly below fair market value. As majority shareholders, Wally and Bruce owed a duty to their cousins to maximize the profits and rates of return for the company. Worse still, Wally and Bruce committed self-dealing because they had ownership interests in the restaurants that received the very favorable pricing for the intellectual property.
Worse yet, in 2007, Wally and Bruce had JOMRC enter into a master licensing agreement with their exclusively owned management company for an annual payment of just $12,000. Thereafter, the management company charged prevailing market rates for use of the Palm intellectual property, but still only paid $12,000 a year to JOMRC. This corporate and licensing structure enriched Wally and Bruce at the detriment of Gary and Claire.
As noted, litigation ensued and in November 2018, the New York trial court awarded Gary and Claire close to $120 million. The court ruled the licensing agreement, in particular, was a “textbook example of fiduciary misconduct” in that Wally and Bruce diverted to themselves the fair market value of the intellectual property that should have gone by portions to all the shareholders including Gary and Claire. The court also discussed the fact that JOMRC had — for years — failed to observe any sort of corporate formality such as shareholder meetings and regular board meetings. Thus, Gary and Claire were purposely kept in the dark about corporate affairs and dealings. The court was clear in asserting that Wally and Bruce were obligated to comply with their legal duties as majority shareholders even if the business was a “family affair.” The case is Ganzi v. Ganzi, Case No. 653074-2012 (N.Y. Sup. Ct.).
Contact San Diego Corporate Law Today
If you would like more information, contact attorney Michael Leonard, Esq., of San Diego Corporate Law. Mr. Leonard can be reached at (858) 483-9200 or by email. Mr. Leonard proudly serves business owners and residents in San Diego and in the surrounding communities.
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