Corporate Law Difficult Business Partner

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malverde

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My jurisdiction is: New York State

I am a 45% shareholder of a S-Corp along with 2 other shareholders. The common stock is divided 45%, 45%, 10%. The 3 of us plus our CFO sit on the Board of Directors. For the last 10 months the other 45% owner (Mr. Y) has begun to conduct himself in a number of very strange fashions. He has:

a) Asked for a substantial dividend payout (far above anything we could afford)
  • He tasked our financial department to produce a number of spreadsheets in an attempt to justify the large payout. He did this without the knowledge of our CFO.
b) Stalled or delayed board decisions for months
  • He has used every excuse from "I haven't read the policy yet" to "What does the word perceived mean?"
  • The "perceived" question cost us $450/hour to answer because he insisted that he talk directly with one of the corporate lawyers
  • Other tactics include showing up late to the meetings and leaving early
  • Recently, he stated that he didn't need to follow one of the Board's directives because he "didn't agree to that".
c) Requested a substantial pay increase ($70k)
  • He tasked the financial department (again without the CFO's knowledge) to make a number of phone calls to one of our regulation agencies determine what the maximum allowable pay rate he could be with his title.
  • To add insult to injury, he has almost completely ignored all his duties as described with his job title.
d) Repeatedly shown up to Board meetings unprepared
  • This has been an ongoing battle. 20 minute meetings turn into 2 - 4 hour meetings as we wait for him to read the material.
e) Requested that company pay for personal purchases
  • You don't even want to know what he's been asking for...
  • Additionally, recently we found out that he made a purchase for some computer equipment without management/board approval. We've also recently busted him stealing printer cartridges.
f) Requested to conduct work with another corporation that conducts the same work we do and gets funding from the same customers
  • We initially said that we would allow him to conduct the work provided that we own the IP and the other corporation contracts his services through us.
  • His latest zinger is that he developed all the data/rights/IP under the other corporation

Has he clearly violated his fiduciary and duty of loyalty requirements?
 
It appears that he wants out. Is there any way that could be done? You are in for a very difficult battle that could take years to resolve. Getting into business is easy, the rub comes when someone wants out or stops doing their job.

It sounds like the other corporation is a direct breach of his fiduciary duty. The corporation needs to have corporate counsel issue an opinion. That way he is paying 45%.
 
There is a way for him to leave but he will only get book value. We're unsure what his motives are. One moment he is working hard for the better of the corporation, the next he is doing everything humanly possible to tear us down.
 
Mal,

I went through a very similar situation not too long ago. It was our decision to inact a "termination for cause". I don't know what your shareholders agreement states (I hope you have something) regarding this subject but I highly recommend that the corporation aquires the services of a business lawyer.
 
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