Legal Advice
After working together for almost 15 years to build a successful cloud-based business (>50 employees; >$10M annual revenue) my business partner and I agreed that it wasn't working out between us anymore (He owns 52% of the company, I own 33%; he oversaw Ops and Finance, I oversaw Sales, Marketing, Tech). Simply put, he wants to run the company like a lifestyle business (i.e. weak corp gov, minimal transparency among key stakeholders, using company funds to make large asset purchases such as a private jet, running personal expenses through the business, etc.) and I want to run the business a like growth company (i.e. strong corp gov, financial transparency among key stakeholders, raise growth capital, minimize non-business expenses). I offered to sell him my stake in the company. He made an offer that I felt was unacceptably low based on prior transaction valuations for the business (we did a redemption of investors 3-4 years ago) and comparable valuations for recent transactions in our particular market sector. In addition, he has refused to provide any financial information about the company that he has not prepared himself and given certain events in the recent past and discrepancies between the information he has provided, I don't fully trust his numbers. Since he made his offer back in January, he refuses to negotiate any of the terms of his offer and has more or less gone unresponsive to my requests for more financial information about the company (audited statements, tax returns, etc.). Naturally, I think he's hiding something. Either the company is worth more than he claims in his offer, or there is something funny in the financials of the business (misuse of company funds...?) that he does not want to be exposed. What are my options here?
3
Answers
Clarity's top expert on all things startup
Unfortunately, the best answer you can get here is "it depends." On your country and state or province and primarily on the terms of the shareholder agreement / charter and also any documents pertaining to you leaving the company. Your best option is to consult a law firm in your jurisdiction to first review the core documents and then evaluate what your potential avenues are for addressing this.
Best of luck.
Best of luck.
Answered over 10 years ago
Founder at Elevate My Brand
That depends on what the bylaws say you can and can't do. There is a standard fiduciary duty of shareholders and if they aren't meeting that then yes you probably can but I would need more information.
Answered about 10 years ago
Lawyer/Entrepreneur/Community Developer
Hello!
Without knowing the specifics of your problem, i.e. what the governing documents state and which state you formed the entity in, I cannot give an absolute answer.
However, I can speak in generalities regarding minority shareholders' rights in closely held entities. In most states, (probably all states actually) minority shareholders have specific rights to review the business records. This means that you have the right to review reasonable records at a reasonable time. Usually, this means that you or any agent (lawyer, accountant, etc.) can review most any record if you provide some kind of reasonable notice.
Legally, a state might have some specific steps that the minority shareholder would have to follow. For instance, you might have to make your demand in writing and you might have to state the purpose of the demand. To comply fully with these requirements you have to talk to a lawyer licensed in your state. However, the answer to your question is that you can demand the transparency by reviewing the books yourself or with an agent. If you have an attorney that represents the business, he/she can probably answer the formality questions for you. However, please remember that the attorney that represents the business does not owe any duty directly to you as a shareholder.
Answered about 10 years ago