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Loren, Attorney
Category: Business Law
Satisfied Customers: 34504
Experience:  30 years experience representing clients .
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Biz law i was one of four members on the Board of Directors

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Please disregard multiple typos in following message. Working in poor light and do not have spell check on IPad... Biz law: i was one of four members on the Board of Directors in 2006. At rhe time, it was a start-up company and cash flow was tight. I did not receive compensation at the time but was told that an 'equity' position wouls be formed in the near future once the company began to bexome better struxtured and proditable. I had worked with these three gentlemen before so had no trust issues. Time progresses, the company is sold. No compensation. When i went to look for tax records (on a didferent subject), i discovered that the three orher board members had formed a "management company" without my knowing and had in fact, been billing for their services dor the entire diration of ownership. Furthermore, when i found where the company had bwen sold, the three same members represented them as the owners of the company and rolled the funds into a new business. I was not on the new board, not compensated, no equity. I had unknowingly been completely diluted off the books back near start-up od the diest company in 2008. Since i was in marketing and responsible for office build-outs, i was not in the 'financial loop' of the day to day activities that they were more incolved in and responsible for. I juat discovered this a month ago when looking thru files. Can you give me a rundown on what exactly has happened from a legal perspective. Also note, that since I had not known of the secrecy of the management company, i actually worked dor this same group of men for several months in the new business before I became suspicious. I had found a settlement paper where a contract employee had to threaten action in ordwr to be reimbursed dor 6 months compensation. They settled out of court. Is this a pattern of deception? Can you help me understand some of the legal language of what this is?
Submitted: 6 years ago.
Category: Business Law
Expert:  Loren replied 6 years ago.
At first blush it would appear that the directors, except for you, were self dealing with the company. That means that they were entering into business agreements with the company without disclosing that they had an interest in the company they were contracting with. That is a violation of the fiduciary duty owed to the company for which they were board members. This could subject them to personal liability in a claim by other shareholders.

If you were not a shareholder, you would need to prove that you were defrauded. That means that you were promised some sort of compensation (an equity position) when they knew they were already forming another entity and there was no plan to include you.

You will have to prove through testimony and documentation that they misrepresented the material facts. You can demand documents during discovery and also take depositions.
Customer: replied 6 years ago.
I WAS an investor ($250k) and one of 6 equal shareholders. The 4 board members consisted of the four of us that had put in risk capital. At one point, i saw a report listing us as 6 equal shareholders (i had an engraved certificate). When i saw a report generated at a later date, the three other board members had been issued additional shares, the other two men were terminated and i had my position of number of total shares issued diluted fo 1%. I just am not a financial expert, like I said, i do build-outs and graphics for marketing. I wouldn't have even known what questions to ask... I assume my monies were rolled into the new company. But without ever needing my signature? This time, i looked for the report (the certificates had not been engraved) and my name was no longer on as a shareholder or a board member. The same three men were the only ones listed except they had added a fourth person that I did not know.I was issued a Convertible Promissory Note for $202.50 maturing in 2015. 12% interest of which I am receiving approx $2000 a month. I am no longer working for them but know that there has been an injustice here but like I said, I know something wrong was done, I just don't know know what it's called, who is responsible and what kind of compensation/damages might be appropriate. Is this illegal or just unethical? What penalties would they face. Of course, now that I have a note that won't mature until 2015, can i get that out based on false pretenses, or now I'm xoncerned that the company fails (at it's own hands) and I lose the money all together. Stuck between a rock and a hard place. Please advise
Expert:  Loren replied 6 years ago.
As I said the directors owe a fiduciary duty to the shareholders. Your shares may not be exchanged for a note without your consent, unless all the shares of the same class are included and it is done in accordance with the bylaws. You would sue them for conversion and fraud. The damages would have to be determined by an accounting to calculate your loss.
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