Legal Question in Business Law in California

Unequal Shareholder Dividends

Five of us formed a corporation 17 years ago with $20k each. Annual sales are $10 mil. We are all equal shareholders, board members, and employees. Positions range from President to Facilities Maintenance. Hourly pay varies by $10.00 depending on job title. Three share holders have decided to pay unequal performance based bonuses (30%, 25%, 22%, 13%, 10%) instead of equal dividends. My shares were recently valued at 800k. The corporation offered me 400k for my shares in unsecured installments over ten years starting with the 100k I loaned the company (shareholders loan the company money when needed at 10% interest). I was unsuccessful selling my shares on open market for 400k in a lump sum. Our building is worth $1.5 and we owe $500k. I have to wait until the company is dissolved to get any equity in the building. I would get 200k if the business was dissolved now and even less if shareholders borrowed more money. Three shareholders now want a buy sell agreement with a shareholder buy out price of 200k. Can only three shareholders do this? If I continue to work Iíll get less money. If I sue the other shareholders Iíll be spending my retirement while theyíll be spending the companies. What are my options? Help!!!

Asked on 3/16/07, 12:35 am

5 Answers from Attorneys

JOHN GUERRINI THE GUERRINI LAW FIRM - COLLECTION LAWYERS
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Re: Unequal Shareholder Dividends

It sounds as if you already know the options. Suit may very well be the only viable way to force our soon-to-be ex-partners to buy you out. But I would really need to see and analyze a variety of documents to make a firm conclusion.

First and foremost, do you and your partners have an agreement between you (in writing) defining your equity positions and mechanisms for buyouts? If so, what does the agreement provide?

Are there any agreements post incorporation that speak to the issue?

Are there minutes from any board of directors' meetings or shareholder meetings that speak to the issue?

Assuming that you have none of the above items, then we look to the Corporations Code for guidance. And here, you would likely be faced with either forcing the corporation to buy you out (at a discount, most likely), or suing the corporation and your soon-to-be ex partners for any number of claims (as a strategy to force them to buy you out).

Either way, there are likely no quick fixes to this situation, and you will have to think well in advance to plan your strategy.

If you would like to discuss further, please feel free to call us or email. We accept some business litigation and would be happy to speak to you further.

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3/16/07, 9:23 am
Amy Ghosh Law Offices of Amy Ghosh
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Re: Unequal Shareholder Dividends

Lawsuit is probably the only option. You need to consult with attorneys in depth. This bulletin board cacnot give you that kind of guidence you are looking for.

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3/16/07, 12:38 pm
Bryan Whipple Bryan R. R. Whipple, Attorney at Law
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Re: Unequal Shareholder Dividends

The analysis begins with whether the five of you are currently equal shareholders, 20% each. Other questions are whether there is any kind of contract between the shareholders with respect to rights such as buy-sell, management control, rights in liquidation, or the like, and whether the bylaws provide for cumulative voting for directors, and what limitations are placed on the power of a bare majority of the directors or shareholders. Some corporate actions may require a supermajority - check the bylaws.

Assuming no agreement, and no special voting arrangements, any three shareholders could probably elect a majority of the directors, and the majority could then run the company as it sees fit, with some significant limits. One of those limits is that all holders of the same class of stock are entitled to the same per-share dividend.

However, majority shareholders can to some extent feather their nests by appointing themselves to highly-paid positions and taking other corporate perks, to the disadvantage of the minority holders.

Directors of corporations owe duties to the corporation and its other directors and shareholders. These include fiduciary duties of care and loyalty. There are limits on the extent of unequal treatment and taking of perks. Knowing the limits and how to enforce minority rights is a special skill of lawyers who specialize in assisting oppressed minority shareholders.

Regarding the specific question about a proposed mandatory buy-sell agreement, I would say that no existing shareholder could be forced to sign, or to sell under the terms of, such an agreement.

Be careful about advice that discusses your situation in terms of partners or partnership; this is a corporation, and partnership law concepts do not apply. Forcing buy-outs and buy-backs in a corporate setting is much more difficult than it is among dissenting partners.

Finally, I would be wary of parting with my shares under any arrangement where my payment wasn't secured by good collateral -- at very minimum, the shares themselves!

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3/16/07, 1:57 pm
OCEAN BEACH ASSOCIATES OCEAN BEACH ASSOCIATES
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Re: Unequal Shareholder Dividends

It will take some analysis to determine whether or not all the corporation's actions which put you in this position were according to the bylaws or the Corporations Code. A C.P.A.'s report on the financial documents may also be helpfull. Call me directly if you wish a legal opinion.

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3/16/07, 2:37 pm
Terry A. Nelson Nelson & Lawless
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Re: Unequal Shareholder Dividends

Without trying to give actual legal advice, which is improper without an attorney-client relationship, you need to understand that the others can't take action that would treat you 'unfairly'. The sale of stock and payment of bonuses are both subject to 'fair dealing' rules. Your stock can be properly valued by appraising the business by experts who do that.

If you have to sue, you should be able to do so under theories that will allow you to recover your attorney fees if successful. You should get some actual legal advice before deciding what you can and can't accomplish. Feel free to contact me.

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3/16/07, 3:50 pm

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