In my last post, I addressed the fact that, just because a minority shareholder has gone along with certain practices in the past, his acquiescence will not necessarily be fatal to a shareholder oppression claim. However, that does not mean you should simply go along with something that you fundamentally disagree with, and assume it will have no consequences to you in the future.
What happened in the past has already taken place and cannot be undone – obviously. You cannot change the fact that you did not object eight years ago when your business partner started expensing his personal vacations to the company, and you followed suit. However, that does not mean you should continue to do so. It is never too late to take a stand, especially if you think you are headed for a “business divorce.”
One client was faced with years of using company monies for personal expenses – simply trying to keep up with what the majority shareholder was doing – when the majority shareholder proposed that the wives of both shareholders start drawing a salary. Of course, neither wife did any actual work for the company. But funneling money to them was another business expense to lower taxes.
Always in favor of lowering taxes, the minority shareholder initially did not object. But after consulting with an accountant, he realized that such an arrangement was jeopardizing the company and putting it in peril of a burdensome tax audit, which probably would not turn out very well, and would likely uncover other improper deductions from years past. However, even though the minority shareholder objected to and refused the arrangement, the majority shareholder was undeterred and proceeded to pay his own wife a handsome salary. In these circumstances, after months of expensive shareholder dispute litigation stemming largely from this issue, both sides concluded that a court would likely sever their business relationship and force a buyout, so they negotiated a settlement.
Of course, there was more to the business divorce litigation than this one issue. Years of small disagreements had finally boiled over into one large, unsolvable one. It is very likely that, had the minority shareholder permitted his own wife to be hired too, he would have lost his ability to complain about any of the improper expenses. But his failure to draw the line on day one did not mean it was too late for him to finally take a stand.
If you have any questions about this post or any other related matters, please contact me at dcroberts@norris-law.com.