Law Offices of Philip E. Mazur, Esq.

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