Music May Tame The Savage Beast, But It Won’t Resolve Corporate Disputes

Published on August 28, 2017

Although the music never stopped, a recent opinion from Florida’s Third District Court of Appeal proves that the music business is just that – a business. Thus, while hundreds of thousands of delirious EDM fans descended on Miami for the Ultra Music Festival©, few, if any, knew of the turmoil taking place behind the scenes between its founders. In Olmes v. Ultra Enterprises, Inc., the Court shed light on this dispute, highlighting the importance of careful negotiation and drafting of corporate agreements or, in the absence of such agreements, having a clear understanding of the rights and remedies available under the Florida Business Corporate Act (Chapter 607 of the Florida Statutes).

When Ultra Enterprises, Inc. was founded in 2002, its two original shareholders probably never imagined the Ultra Music Festival© would achieve such mind-blowing success. They also did not realize the importance of carefully documenting their business relationship. In 2005, they added a new shareholder to the mix and apparently realized that more than a friendship and handshake was needed to run the company. So they signed a “Memorandum of Understanding” (“MOU”) that “set forth the general duties of each person, and stated an ‘intent’ that the original shareholders be co-managers.”

What the MOU did not do, however, was clearly define the directors and shareholders’ rights and remedies if disputes arose between them. Nor did the MOU limit the board of directors and shareholders’ authority with regard to corporate governance matters. This left the Florida Business Corporate Act’s default provisions to govern all such issues.

By 2012, the success of the Ultra Music Festival© led to increasing disagreements between its founding shareholders and “co-managers.” One of the founding shareholders was alleged to have used the fame and success of Ultra to promote his own events, some in direct competition with Ultra’s events. The other Ultra shareholders did not participate or share in the success (or failure) of these separate and competing events. They also grew increasingly concerned that the “rogue” founder was diminishing the value and prestige of the Ultra Music Festival© and its related events.

Eventually, the shareholders owning 70% of Ultra’s shares, and all of the company’s directors had enough. The shareholders amended the company’s by-laws to prohibit self-dealing and competition with Ultra by its shareholders. They did this by written consent and without notice to the offending 30% shareholder pursuant to §607.0704, Fla. Stat. Immediately after adopting the amendment to the by-laws, the board of directors unanimously agreed by written consent to redeem the offending shareholder’s shares based on his self-dealing and competitive personal business in violation of the newly amended by-laws. The Board’s action was also taken without prior notice as permitted by §607.0821, Fla. Stat.

The Board then notified the ousted shareholder of the amendment to the by-laws and of the unanimous decision to redeem his shares. The Board also notified him that it valued his shares at $360,000, that the funds were placed in an escrow account to be delivered upon his acceptance of the redemption, tendering of his shares and execution of a stock power. He was further notified of his right to object to the Board’s valuation and to an appraisal of the fair value of his shares. All of this was done in compliance with §607.1322, Fla. Stat.

The ousted shareholder objected to the Board’s valuation, but he accepted his right to an appraisal and tendered his shares and stock power. However, he did so under protest while simultaneously claiming that the shareholders and Board violated the MOU such that their actions were ultra vires, meaning they were done outside their authority and thus should be voided.

Years of litigation ensued. At trial, the court determined that the MOU did not alter either the directors or shareholders’ statutory authority to manage corporate governance. Rather, the MOU governed only the day to day operational management of the company. As a result, the amendment of the by-laws and the unanimous decision of the board of directors to oust the 30% shareholder and to redeem his shares was entirely lawful and proper under Florida’s Business Corporation Act.

The Third District Court of Appeal affirmed the trial court’s decision. The appellate court agreed that while the MOU could have modified or limited the directors’ and shareholders’ corporate governance rights, it did not do so. Therefore, the default statutory provisions governed. The ousted shareholder was entitled only to receive payment of the fair value of his shares. While this was an issue properly subject to the ousted shareholder’s appraisal rights, the appellate court affirmed the trial court’s decision valuing the ousted shareholder’s 30% interest at $720,000, rather than the $111 million he demanded.

The lesson for other closely held and family owned corporations is that it is better to face the music early in your business relationship. Take the time to discuss and prepare a carefully drafted and clear shareholder agreement with experienced corporate counsel. While this may not avoid every dispute that may arise, it can provide clear guidance as to how to resolve disputes without years of painful and costly litigation. A second lesson is that if you did not do your due diligence up front, it is imperative that you find experienced corporate counsel when disputes arise. As this case shows, the parties who better understand corporate governance under the Florida Business Corporate Act can better protect their interests.

The Third DCA’s full opinion can be found here:
Olmes v. Ultra Enterprises, Inc.

If you would like more information about this decision or have questions about other corporate and commercial legal issues, please message me through LinkedIn or visit my website at