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Shareholder dispute for an S-corp in California with no shareholder

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Shareholder dispute for an S-corp in California with no shareholder agreement in place.

I am secretary, treasurer, and 50% shareholder of an incorporated pest control company in California and the president and 50% shareholder and I are no longer cooperating.

The dispute is that the president is our leading salesperson and I only have half the sales he has.

However, we are getting paid commission only. He has distributed $7130 to himself while I have received $800 total. I have contributed $4900 since we bought shares to his $1200.

Because I do not have many bills, I was fine with living off my savings because we could fix distributions later.

Now he has identified my lack of sales as a reason to discontinue our partnership. I taught his wife how to do the back-end accounting and scheduling and week later he has taken dictatorial control of the company and its assets. I believe he has told our technician not to communicate with me (the technician I found) and needless to say I am now excluded from the group.


That being said, I am still 50% shareholder of the company and his "offer" is to pay back "some" of my mom's loan (oh yeah, it was me who got the first loan to get the first truck, which launched the business, etc..) and "some" of my contributions, in exchange for my shares.

Otherwise he will dissolve the company and take "his" customers.

I realize this could be a breach of fiduciary duty. I plan to request a professional mediation, but after he refuses,

what are the different possible actions I can take now?

Thank you
Hello,

An officer or director of a corporation that appropriates business opportunities without first offering those opportunities to the corporation is, as you have succinctly put it, in breach of fiduciary.

If your co-shareholder (he is not really your partner, because corporate shareholders are not partners, as a matter of law) attempts to take "his" customers, then you would sue for breach of fiduciary, for damages related to any lost profits which should have been the corporation's -- and you would request that the court forcibly dissolve the corporation and distribute any remaining assets between the shareholders.

The botXXXXX XXXXXne here is that until the other shareholder resolves the issue of the corporation and either buys you out, allows you to buy him out, or agrees to dissolve the corporation and distribute assets, you have a claim against him for acting against the corporation's interests. This can be costly litigation, but you may have no choice, if you cannot reach a settlement.

You cannot force mediation on the other shareholder -- all you can do is offer to mediate as a means of reducing the litigation expenses. Ultimately, you will have to decide whether or not it's worth fighting over. Note also that no 50% owner can unilaterally dissolve the corporation. Dissolution would require a majority vote of shareholders.

Also, keep your eye on the bank accounts, because if you both have independent signing authority, then the cash could suddenly vanish -- at which point you would have to sue for an injunction to force the return of the cash to the corporation bank accounts.

Frankly, and although it would be a breach of fiduciary on your part, you may want to consider offering to simply divide everything in half right now, and go your own way, because otherwise, the cost of litigating this matter to a conclusion could bankruptcy both of you.

Hope this helps.
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Customer: replied 3 years ago.

Thank you,


 


Unfortunately, we can't really divide everything in half now, because he somehow sees most everything as "his."


 


I will of course consider just taking as much money as I can now, signing over my shares, etc... but..


 


most of this business was my idea. I found our fleet vehicles, which happen to run on natural gas which is readily available in our area
-- providing an efficiency advantage over our competition..


 


as well as the logo, the contract books we use for door to door sales, our employee, all of our legal paperwork and bookkeeping, software, customer communication (I exclusively answered the company phone until 1 week ago, or so). I have never worked so hard on anything in my life...


 


I don't see how I can just give it away. Even if I were to compete with him directly now, he has destroyed my capital, he has taken my labor without paying for it, and now he has my ideas (nat gas trucks, text communication with customers is very popular, well I put that on the contract books 4 months ago, I made the business phone number and internet number so we could send text with a keyboard, I anticipated its popularity, it didn't just happen overnight).


 


Can you estimate how much it would cost to litigate a breach of fiduciary trust lawsuit?


 


Also, are there any technical details that could derail my position? We issued stock in the articles of incorporation and we filed the directors with the secretary of the state. But we have not recorded an official "meeting." We just got to work right away. The company issued 1,000 shares and we both bought 500 for $500. We have only recorded this in the original articles of incorporation.


 


If I agree to dissolve the company, can he still do his own pest control businesses in this area?


 


Finally, does the fact that I am secretary and treasurer allow me to outvote him in any way? Frankly he is draining capital from the business faster than he is earning it, unlike me. He could rejoin the company when it can support him.

Can you estimate how much it would cost to litigate a breach of fiduciary trust lawsuit?

A: This sort of thing is called a "derivative action." You can't sue in your own name -- you must sue on behalf of the shareholders -- even though there are only two of you. Corps Code Section 800(d) requires that you post a $50,000 bond in order to file a derivative action. This doesn't mean that you will spend that amount of money. But, it does mean you could be liable for that amount if you lose. So, I would have to estimate $50,000 as the number, since it's authorized by statute.

Also, are there any technical details that could derail my position? We issued stock in the articles of incorporation and we filed the directors with the secretary of the state. But we have not recorded an official "meeting." We just got to work right away. The company issued 1,000 shares and we both bought 500 for $500. We have only recorded this in the original articles of incorporation.


A: Even if you didn't observe all of the formalities of corporate governance, a court will treat you as a corporation (de jure corporation), because you filed the articles with the SoS).

 

If I agree to dissolve the company, can he still do his own pest control businesses in this area?

A: Yes. Absent a noncompete agreement as part of a settlement, anyone is free to compete in any business. Most noncompete agreements are considered void in restraint of trade under California law (Bus. & Prof. Code 16600). This is in contrast to the law of practically every other U.S. jurisdiction -- where noncompetes are generally allowed.

Finally, does the fact that I am secretary and treasurer allow me to outvote him in any way? Frankly he is draining capital from the business faster than he is earning it, unlike me. He could rejoin the company when it can support him.

 

A: No. You could, of course, simply withdraw a bunch (or all) of the dough from the current corporation accounts, and deposit it into an account with only you as signor, and then tell your "partner" if he doesn't want to come to the negotiating table, then he'll have to find another source of money. Just make certain that the account is in the corporation's name -- if you put money into your personal bank account, that could be viewed as criminal embezzlement.

 

Hope this helps.

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