Philip E. Mazur
 
Philip E. Mazur Law Offices: FAQ
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Partnership disputes and disputes between shareholders in a closely held entity are generally determined on a highly fact-specific basis.  The following FAQ outlines the general principles governing issues that tend to arise in those disputes. 

1. Can one shareholder terminate another shareholder, or conversely, can a shareholder demand employment or reinstatement of employment with the entity?

One of the benefits of holding an interest in a small company is the implicit promise of employment, generally for more money or under better terms than one can expect in the open market.  That expectation of employment is not absolute, however.  Some factors that a court considers in addressing this issue are (1) whether the shareholder is a founder of the company, (2) whether the other shareholder(s) is active in the business, (3) the effect that continued employment or termination of employment will have on the function of the business, (4) whether and to what extent the employee-shareholder is disruptive (5) whether and to what extent the shareholder was previously active in the business and (6) the circumstances under which the shareholder-employee received his or her shares.  This list of factors is demonstrative and non-exhaustive.  The existence of an Employment Agreement, depending on its terms, may also affect the resolution of this issue. 

2. Whether and to what extent a shareholder can demand access to and control of information, books and records.

Generally, a shareholder is entitled to full access to adequate financial and business information in a reasonably timely manner and under reasonable circumstances.  The shareholder is not, however, necessarily entitled to physical access to the work premises to obtain that information. 

3. Whether a shareholder can limit the physical access to the place of business of another shareholder. 

A court examining this issue will frequently examine one or more of the same factors listed under Question No. 1.  A shareholder may be permitted physical access, at times, for legitimate reasons and under certain circumstances, consisted with an analysis of those factors.

4. Whether a shareholder can be removed from the governing board of the entity. 

A majority of shareholders can generally remove an officer or director, unless an operating agreement provides otherwise.  The removed shareholder is generally entitled to adequate notice of any board meeting where the issue of his or her removal will be addressed.  Moreover, a shareholder is entitled to board information, such as meeting minutes, irrespective of whether or not he or she has been removed. 

5. Whether a shareholder can compel the distribution of profits. 

The governing body of a corporate entity enjoys the protections of  a “business judgment rule”, which generally protects the officer, director, or body from having its business determinations overridden by a court.  That rule, however, has boundaries that cannot be traversed, and at a certain point, the court will  step in and override a determination, such as whether or not profits should be distributed.  At a minimum, the determination must be made in good faith. 

Moreover, a court may examine the foundational facts upon which the determination was made to ascertain the propriety of any determination. For example, were there no profits to be distributed because certain salaries are inflated? Because funds have been diverted? Because the books and records have been manipulated?  Because corporate opportunities were diverted from the business?  All of those possibilities must be examined to determine this issue. 

6. Whether a shareholder can override a decision of the governing board.

The considerations addressed under Question No. 5 similarly apply to the resolution of this issue. 

7. Whether one shareholder can compel the sale or purchase of shares by another shareholder. 

Generally speaking, a court will not allow a shareholder to maintain ownership of his or her shares under circumstances where the shareholder is deriving no benefit from that ownership.  There is substantial authority upon which a court can compel a sale of shares.  There is also authority upon which a court can compel one party to purchase the shares of the other party, although that authority is far more limited.  Which party sells and which party buys the shares is frequently determined by an examination concerning which party is best suited to continue running the business successfully, which party founded the business, and which party is/has been most active in the business. 

8. What methods of valuation may be applied in the event of a stock sale or buyout. 

Valuation usually requires the retention of an accounting expert to examine the financials of the business, as well as the market for the business’s product or services.  Mr. Mazur has vast experience coordinating with experts in cases involving valuation, as well as with the legal doctrines that govern expert valuations. 

10. Whether and to what extent family members of shareholders can demand or reasonably expect employment.

In these types of cases, problems often arise because the family members of shareholders (and not necessarily the shareholders themselves) cannot maintain a reasonable working relationship.  The factors that are considered in the context of family member employment are similar to those that are considered under Question No. 1 regarding employment of a shareholder.  However, the expectation of employment of a family member is more attenuated than that of the shareholder. 

11. Whether salary taken by a shareholder is excessive.

Resolution of this issue often involves overriding the determination of an officer or director, as discussed under Question No. 5.  In more complex cases, resolution of the issue also frequently requires the retention of an expert.  An expert opining on the issue will examine the tasks performed by the shareholder and compare it to the tasks and compensation of other similarly situated individuals in order to render an opinion as to whether or not the compensation is excessive.  Mr. Mazur has vast experience dealing with this issue of reasonable compensation, including coordinating with experts on the issue, and using legal doctrines that govern the issue to achieve a favorable result for his clients

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