It is fascinating how many clients come in to discuss potential shareholder litigation against their business partner, completely unable to explain why it took so long for them to see a lawyer. Most perplexing are the ones who believe their business partners have been stealing from them for years. When asked to explain where they’ve been, the excuse is often that they “didn’t have proof.”
One client in particular (who agreed to let me mention him in this article as a cautionary tale to others), a 50% shareholder, noticed that there was never as much money in the bank as he thought there should be. However, he said he “could never be sure,” so he did nothing about it. Finally, after he got married, his wife convinced him he should at least talk to a lawyer, just to see if anything could be done.
Of course something could be done. Even a minority shareholder is entitled to inspect certain books and records of the company, and a 50% owner should have full access to everything. If your business partner won’t provide you with full access to all financial information, especially to a co-equal 50% shareholder, then every red flag should be raised as high as they can go. In fact, the Court will often force such disclosure, and will almost always side with disclosure over secrecy.
Another client, a 25% shareholder, also waited years to see a lawyer, thinking that the 75% majority shareholder could essentially do what he wanted because it was “his company.” Fortunately, he read one of the articles on this blog explaining that even minority shareholders have rights that must be respected, and which can be enforced.
Waiting is not simply an issue of timing. The majority shareholder defendant will almost always argue that you didn’t wait just because you were unsure what to do. Instead, he will argue that you waited because you knew and approved of everything that was going on – the acquiescence defense. While you may think it absurd for your business partner to argue that you actually approved of him using company money to fix the roof at his house, or pay for his kid’s car, that is exactly the type of argument that is made in defending shareholder oppression cases. He will argue that you had full access to all books and records, whether that is true or not, and then he will attempt to charge you with knowledge of everything. Since you didn’t object for so long, you must have approved. And it will be your word against his regarding whether you truly had access to the financial records.
Avoid this trap. While you should not institute unwarranted litigation against your business partner, since such a suit could tear the company apart, you also should not just sit back passively while your suspicions mount. See a lawyer and take action. More importantly, seek to keep yourself apprised of what is going on in the company from the outset. Tell your business partner at the start of your business relationship that you intend to be fully informed, that you intend to hold him accountable, and that you expect to be held accountable, as well.
Or, just stop by in a few years and tell me that you “always had this suspicion, but never acted on it because …”