October 5th, 2023
The Standoff at Unity Innovations
Here's an engaging story inspired by a true case to answer a key question for successful business owners:
What would you do if your deceased partner’s spouse became your new partner?
In the vibrant heart of Delaware, Unity Innovations was a beacon of progress and partnership. Founded by Howard Lane and Robert Brooks, two visionaries who believed in changing the world with their groundbreaking tech solutions, the company flourished.
When Robert unexpectedly passed away, leaving no will, the weight of the future of Unity Innovations rested on uncertain shoulders. Robert’s widow, Clara Brooks, suddenly found herself thrust into a 50% stakeholder position.
Howard, loyal to Robert and conscious of Clara’s sudden financial needs, had always known Robert’s intentions. Robert wanted Clara to receive significant income after his demise. However, Robert’s untimely death caught him off-guard, with essential financial paperwork incomplete.
With Clara’s unexpected inheritance, discussions about liquidating her shares began. Clara’s valuation of her shares was astoundingly high—she demanded a price that was far beyond the valuation set by independent assessments. Unity’s board had to make tough decisions about their buyout options. The directors were Howard, a trusted employee named Alex Matthews, and the CFO, Ellen. These personal relationships were about to be put to the test.
As weeks turned into months, tensions simmered. Unity Innovations had two vacant board seats. Every time Clara called for special stockholder meetings to elect new directors, the decisions deadlocked with her and Howard on opposing sides.
Seeking resolution, Clara proposed the appointment of an external custodian for Unity Innovations, someone who could tip the scales in either direction. As whispers of this proposal grew louder, Howard acted swiftly. Alex Matthews, loyal to Howard and promised equity in the past, was suddenly offered a golden opportunity: the purchase of unissued Unity Innovations stock. This move diluted Clara’s shares and gave Alex a significant say in company matters.
With this strategic stock sale, the stalemate was broken. Howard and Alex, now aligned, rendered Clara’s position less influential, effectively sidelining her custodian proposal. Clara, feeling cornered, sued Unity Innovations. She claimed that the sale of stock to Alex was a manipulative tactic to infringe on her voting rights and to suppress her rightful voice as a major stakeholder.
The Delaware court, amidst a whirlwind of legal debates and media coverage, delivered its landmark judgment. The court recognized that boards could take actions that might seem to disenfranchise a stockholder, but such actions needed to stand up to scrutiny. In this case, the court decided that Unity’s board actions were a “reasonable and proportionate” response to the challenges the company faced.
So business owners, take note: To prevent the unexpected dilemma of your deceased partner’s spouse becoming your new partner, it’s essential to craft a preemptive plan. Ensure your operating agreement or stockholders’ agreement explicitly addresses how shares will be transferred or repurchased upon a partner’s demise, safeguarding both your business and your vision for its future.
Categories: Stories with a Lesson