What Rights Do Shareholders Have?

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Under most state statutes, the rights of shareholders generally depend on provisions in the corporation's Articles of Incorporation, Code of Regulations, By-laws, Close Corporation Agreement or other Shareholder Agreement. Accordingly, these documents should be checked first when a shareholder is trying to determine his or her rights. All to often, Shareholders don't bother to find out what rights they have or don't have until a Shareholder dispute erupts.  And then it can be too late to do anything about it.

Shareholders of a corporation often have the following rights:

(1) Voting rights to elect directors, adopt the corporation’s Code of Regulations or amend the Corporation’s Articles of Incorporation;

(2) Voting rights on significant or extraordinary events that affect the corporation such as sale of all assets, merger, consolidation, liquidation, or dissolution of the corporation;

(3) Rights related to the sale, exchange or transfer of stock such as preemptive rights, put rights and call rights;

(4) Rights to receive dividends declared by the board of directors;

(5) Rights to inspect the books and records of the corporation;

(6) Rights to sue the corporation for wrongful acts by the directors and officers; and

(7) Rights to share in the proceeds when the corporation liquidates its assets.

If you have any questions about shareholder rights, or would like assistance preparing Articles of Incorporation, or other corporate governance documents, give me a call.  Jsenney@pselaw.com or 937-223-1130.

AND ONE MORE THING. Minority interests in a closely-held company are worth less that controlling interests in the same company because minority interests lack the ability to control company decisions. Interests in a closely-held company are also worth less than comparable interests in a publicly-traded company because there is no stock exchange or other ready market for sale of closely-held stock. It is important to consider and agree on how interests in a company are to be valued. Call if you have any questions about how to value interests in your company. Jsenney@pselaw.com or 937-223-1130.

Shareholder Fiduciary Duty

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Under the Ohio Supreme Court decision in Crosby v. Beam, majority shareholders have a fiduciary duty to minority shareholders.  When majority shareholders in a close corporation utilize their majority control to their own advantage, without providing minority shareholders an equal opportunity to benefit, such breach, absent legitimate business purpose is actionable.   

Ohio appellate courts have found that a minority shareholder in a close corporation is not an at-will employee who can be terminated at any time by the majority shareholder absent a legitimate business reason.  However, ohio appellate courts have reached a different decision where the minority shareholder signed an employment agreement that permitted termination without cause.  For example, in Cruz v. South Dayton Urological Associates Inc, the minority shareholder had signed an employment agreement that provided the minority shareholder-employee could be terminated without cause on 90 days written notice.  The court found that when the minority shareholder signed the employment agreement containing the without cause termination provision, he relieved the majority shareholders of any duty they owed him, and waived his right to argue that the majority shareholders needed a legitimate business reason to terminate him. 

So word to the wise, whether you are a majority or minority shareholder, review the provisions of your employment agreements and other legal documents with your attorney so you understand your rights and obligations.

AND ONE MORE THING. If you or a friend have invented a new product, or have improved an existing product, you need to be careful to preserve your rights as to such invention or improvement. To protect your rights, you can seek a provisional patent or a full utility patent. But you must make an application within one year after the first public disclosure of the invention.  A public disclosure is any disclosure of information about the invention that is made without restriction on the recipient’s right to disseminate such information. To avoid making a public disclosure, it is important to have every person or entity that will receive information about such invention sign a non-disclosure agreement. Call or email me if you need a non-disclosure agreement drafted.   Jsenney@pselaw.com or 937-223-1130.

How to Break a 50/50 Owner Deadlock

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  If you didn’t have the foresight to include tie-breaking mechanisms in your organizational documents, there are not a lot of options.   If both owners are reasonable, an accommodation acceptable to both can often be worked out.  Perhaps the owners can agree to appoint an impartial arbitrator or panel, and to be bound by the decision of the arbitrator or panel.  Or perhaps one owners agrees to buy out the other partner.  But on those occasions when a compromise or method of resolution cannot be worked out, a judicial dissolution may be necessary.  In a judicial dissolution, one of the owners petitions the court to divide the assets and business between the owners in some equitable manner.  But unless the business has multiple independent divisions that can be easily separated, such dissolution can have a disastrous effect on the business.
     It is inevitable that 50/50 owners will eventually disagree on the direction, the scope or the details of operating their business.  It is not possible to avoid every dispute.  But it is possible with carefully drafted organizational documents to make resolution of such disputes less costly and time-consuming.  There are many different types of tie-breaking mechanisms that can be adopted.  The partnership or operating agreement might provide for: (a) a third person to break ties; (b) a board with an odd number of directors to decide disputes; (c) arbitration to be handled by one or more arbitrators; (d) one of the owners to be the managing partner or member and have the final say; (e) flipping a coin to make the final decision; or (f) whatever else theowners can agree on.
 In the next blog we’ll talk about the fiduciary duty a majority owner owes to the minority owner, and the effect this has on splitting a business or terminating the minority owner.   If you would like assistance drafting tie-breaking mechanisms for a partnership, LLC or corporation, let me know.  Jsenney@pselaw.com or 937-223-1130.
     AND ONE MORE THING.  The definition of “accredited investor” was changed by the Frank-Dodd Act.  If you are trying to raise capital by selling shares to investors, you can avoid a lot of risk and make security law compliance easier, if you only sell to accredited investors.  One of the factors used to determine accredited investor status is net worth.  For this purpose, net worth excludes the value of the investor’s personal residence.  If you want to discuss raising capital by doing a private offering, please give me a call.  Jsenney@pselaw.com or 937-223-1130.

Do I Really Need a Buy-Sell Agreement?

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Latest Blog:  Buy-Sell Agreements

 

When setting up an LLC or corporation with multiple owners, it is absolutely crucial for the owners to enter into a buy/sell agreement. In the case of an LLC, the buy/sell agreement is often incorporated into the LLC Operating Agreement. In the case of a corporation, the buy/sell agreement is occasionally contained in the Code of Regulations or By-laws, but generally is a separate document.

A well-drafted buy/sell agreement should contain all the agreed-upon rules governing transfer of ownership interests. Among other things, the agreement should set forth what restrictions apply to transfer of ownership interests, what trigger events require or permit an owner to transfer his or her ownership interests, which party or parties have the right to acquire the offered ownership interests, what price the acquiring party will pay for the offered ownership interests, what payment terms will apply, whether the purchase price in a death or disability situation will be funded by life insurance proceeds, and how disputes as to value or transferability of interests will be resolved.

Without a buy/sell agreement in place, ownership interests are freely transferable. This can lead to interesting, but not so amusing situations. For example, if your business partner dies, you could find yourself in business with your former business partner’s spouse. Things might work out. Or not. Why take the chance? If I can help you put together a Buy-Sell Agreement appropriate for your situation, please let me know. Jsenney@pselaw.com or 937-223-1130.

AND ONE MORE THING. A taxpayer can mix some fun in with a business trip and deduct all of the round-trip transportation costs, so long as the trip was undertaken primarily for business reasons. The cost of lodging plus 50% of the cost of food and drink while on business status is deductible. In addition, if the taxpayer is an employee and is reimbursed for all of his or her business expenses under an “accountable plan” the reimbursement is tax-free to the taxpayer. Call or email me if you would like to talk about mixing business with pleasure at Jsenney@pselaw.com or 937-223-1130.