10 Small Business Dispute FAQs
If you are experiencing issues with the other shareholders at your business, you are likely pondering many questions. To begin our assistance to you, the Michigan business dispute attorneys at Seikaly, Stewart & Bennett have developed this list of our small business dispute FAQs.
- I’m going into business with a friend who has more money to invest than I do. He insists on having 51% of the stock even though I’m putting in more labor and expertise. Is that fair? Fairness is a very difficult question to judge in these situations. Perhaps the better question is what options you have. Can you find another business partner who won’t demand 51% for putting in more money? If so, is that person bringing as much to the table in other ways that will be important to the success of the business? Can you raise the necessary money through borrowing, and are you willing to your finances on the line to do that?An investor who is willing to put his capital at risk without guaranteed payback if the business fails is taking a big risk. He generally is not going to do it without being heavily rewarded if the risk pays off and, also have control of the business so he can protect his investment.In the end what is fair is largely measured by looking around. If the deal is very lopsided in favor of your potential investor, the market should provide other investors who will demand less. If it doesn’t, maybe your investor is not being so unfair after all.
- If I agree to give my partner/investor 51% control, does this mean I won’t have any rights in the company? As a general rule, if the business entity is a corporation or LLC, control follows percentage of ownership. Without an agreement, the party or parties with majority control have enormous latitude in the way they run the business. This may even extend to terminating the employment of a minority shareholder, so long as it cannot be shown to have been an unfair effort to freeze the minority shareholder out. There are many precautions a minority shareholder take to protect himself. For example, the bylaws of the company can provide that certain key decisions can be made without the approval of all of the shareholders. These important decisions may include:
- A sale or mortgage of the company’s assets
- Hiring and firing of shareholders as employees
- Changes in compensation payable to the shareholders
- The hiring of other employees
It may be possible in some instances to agree in advance that the Board of Directors will include a neutral person to break a tie in the event that the two principal directors disagree.
- I own a minority interest in a small business with a person I thought I could trust, but who has now fired me without any cause. Can he do that when I’m an owner of the business? Probably. In the absence of a shareholder agreement and/or provisions in the bylaws, the majority can make virtually all decisions affecting the company. While majority control means a lot, it doesn’t mean everything. If, for example, it can be shown you were fired for refusing to participate in illegal activity or to freeze you out of your ownership position in the business, you can attack the firing in court as minority shareholder oppression. The burden of proof will be on you to show that there was an improper motive, but if you succeed you can stop the firing or obtain relief including money damages or a forced buyout of your interests at fair market value.
- I rewarded my nephew, who works in my company, 5% of the stock as an incentive to work harder. Now he’s demanding to see all the books and records, and he is claiming company money is being spent on me personally. Can he do that when he only owns 5%? Absolutely. It is one of the great reasons why owners of companies need to be exceedingly careful about giving out stock. In theory, even one share can create a right in the new shareholder to delve into every aspect of the company’s affairs. This is true because all shareholders in closely-held corporations have a right to inspect the books and records of reasonable times and to a reasonable extent to be sure that the company’s affairs are being handled for the benefit of all the shareholders. Instead of offering company stock as an incentive, offer productive employees with bonuses or salary increases.
- I think the majority shareholder has been running the company like a personal piggy bank for years. I hired an accountant to look at the books, but they are a mess and he cannot make heads or tales of what happened. What can I do? Those in control of a corporation have a fiduciary duty to the company and its shareholders. The court has the power to order those in control to account for what they have done and how the company has been run. This means that the burden of explaining how the company has been operated – and that it has been done fairly – may fall back on the company.
- One of the shareholders of my company claims I am wasting the company’s assets and is threatening to have the court appoint a receiver/manager to run the company. Can he do that?The law does give the court the power to do exactly that. However, it is an extreme remedy that is only applied when the court is satisfied that a lesser remedy will simply not be adequate. The best way to prevent this is to obtain good counsel and be prepared to show the court either that no judicial intervention is necessary or that you will follow court orders to maintain the status quo until the issues are sorted out.
- The other owners of the company, who each have a 10% interest, are making the company buy its inventory from a company that they own. I think they are taking big profits through the other company at my expense. Can they do that? This is a classic example of self-dealing. The majority shareholders are not absolutely prohibited from dealing with their own company, but they can be required to justify the transactions and prove that the prices charged to the company were reasonable. If they cannot do that, the court can require them to reimburse the the company for the difference between a fair price and what was actually paid.
- I want to sue my partner, who is in control of our company but is taking unfair advantage of his control in a variety of ways. He has his wife on the payroll, but she does not do anything. Many of his personal expenses are paid by the business, but no one else is allowed to do the same. He says that if I sue, I will have to pay my own attorney fees, but the company will pay his. Can he get away with that? For a while, probably yes. So long as the majority shareholder can claim that the case has no merit and that it is really an unjustified attack on the corporation, he can get away with having the company pay his fees. The court has the power to change that if and when the evidence becomes strong enough to justify making him pay his own fees.
- I am about to go into business with two other partners. We each will own a third of the business, but the other two partners are good friends and I am afraid they will vote together against me. What can I do to protect myself? Draft a strong shareholder agreement that protects you from certain actions, such as being fired without cause or having your pay reduced except. The agreement itself should provide that it cannot be changed without unanimous consent of all the shareholders. The agreement should provide for an objective way of valuing everyone’s interest in the business and how the business or a partner’s interest can be sold if there is a deadlock.
- The other shareholder in my business and I have been arguing for months. I own a majority of the stock and told him I wanted to buy him out. At first he refused, but he finally agreed in front of our bookkeeper to sell for a specified price. Now he says he changed his mind and because his promise to sell was not in writing, I cannot enforce it. Is that true? In many states it is. Contracts to sell stock must be in writing. But Michigan does not require this. An oral contract for the sale of stock, if it can be proven, is enforceable.
Call Seikaly, Stewart & Bennett for a No-Obligation Consultation
If you are involved in a Michigan small business dispute, our business dispute attorneys at Seikaly, Stewart & Bennett are here to help. To schedule your no-obligation consultation, please call 866-671-8115 or fill out our contact form.