Corporate Law A Minority Shareholders Quest

HappyFisherman

New Member
I just found your site and had to post my situation. Hopefully this can help someone.

I am a 30% shareholder in two S-Corps in IL. Like many businesses, we started as best friends in the same field with big dreams. It was a handshake agreement and off we went. We grew the business and it became successful. After many year in and grinding, we landed a large customer which made us tons of money. Then in less than a year, he upset that client and they were lost. About 35% of the company revenues gone because of one email. The tension and stress of the company and how we worked together became an issue but I keep working to gain other customers to replace the big fish. It was tough but owning a business is tough. Then he tells me one day that he is looking at taking a job at one of our customers. This was a few years ago now.

Since he was leaving I told him that I would not stay working in the business. Him leaving would impact my family and the financial abilities of the company. I found other employment. Due to our discussions and best course of action for the business, I was required to sign (and personally guarantee) on a Line of Credit that would consolidate the debit at a lower rate. The agreement was that he would not take a salary and pay down the debit and we'd find a way to buy me out.

A couple of months went by and I talked to him about buying me out of my shares and taking my name off the loan. We shared another asset 50/50 which I agreed to sell and his proceeds could serve to but me out because he claimed to have no funds. So it took several months to sell. During this time things changed. We didn't see each other as much. Then I noticed that he purchased a brand new truck and a month or two later his wife was driving a brand new SUV (which had the company plates on it....) Something wasn't adding up so I started interviewing attorneys. Finally the sale of the asset was completed and I gave him a check for his half. I asked for us to finish the sale of the stock back to him and his attorney sent me an agreement that would prevent me from working in my field for 5 years. Now I was being attacked and he was trying to control my life because of this stock ownership. I picked my attorney and we requested the corporate records. It took some time and the looming court date but he finally complied with the request.

Several things I found out: I was never made an officer of the company. I am a shareholder and that is all. He was using the company funds as his own personal funds. The bi-laws that he represented were never signed. To this day, he has never held an annual shareholders meeting.

I found that he was still taking a salary, that the truck he purchased was purchased by the company, that his wife's SUV was a lease signed by the company, paid for gas/insurance/maintenance for the vehicles, purchased jewelry, vacations, an ATV for hunting, etc., etc., etc., and at the end of the year cut himself a big fat bonus check. Now I have totaled these expenses up and they are substantial.

We requested a buy out and received book value as their offer - junk. In speaking with my attorney we could file a shareholder derivate action against him which he likely does not have the funds to pay back. Even if he could pay it back, it would go back into the corporation. This would be a considerable investment that may not have any return. His advice was not to pursue it for those reasons and the looming LOC. I have 2 years since I noticed the improper actions which make this August my drop dead date if I wanted to file this type of lawsuit.

The other issue I face is with this Line of Credit. I was contacted one day in a panic from the loan officer and he said the LOC has matured (it was over a year after I signed on the loan) and I need to sign a renewal ASAP. I consulted my attorney and he advised me to sign as we were in the process of dealing with obtaining the books. I reluctantly signed it to extend the loan for 3 months while they worked out a new loan. When the loan was matured, I told them I would not be signing for a renewal or an extension. This was over 16 months ago. The bank has refused to call the loan. I've spoken with just about everyone at this bank and because I'm the guy who won't sign, I'm the enemy. I recently asked for the status of the loan this week and received the same run around. The bank is trying to extend my personal liability while granting him this flexibility to not deal with this situation.

So I'm stuck. My stock ownership gets me 30% of the tax liability for two corporations that will now never benefit me. He does not pay a distribution because I would get 30%, he pays himself salary or bonuses and shows a small loss every year now (so I'm not paying any tax liabilities unless the corporations make a profit). The bank refuses to call the loan which is backed by the assets of the company (his vehicles, jewelry, ATV, etc. - as well as the legit company assets).

My only thought now is who else can I use to help put pressure on the bank? If they call the loan he would have to come up with the money or the bank would start taking assets. If he was forced to refinance, it would remove my liabilities.

Why is there not an agency like the SEC that deals with private companies? Can I leverage the IRS to at least make him pay taxes on these personal expenses as income? I've already spent plenty of money to tell me that I'm stuck. Hopefully someone here has some ideas that can get this quest to an ending.
 
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Yes, your story is played out daily by dozens of other good people.
I advise my clients NOT to think a stock offering (especially if the stock is valued at $1.00) means they own any stake in a shyster's company.
All you can do is follow the advice of your attorney and remember the lessons learned.
Sure, you can eat some cheese and rat the crook out to the IRS, with any luck you'll even get a few dollars reward on what they collect.
Otherwise, let it go, build your next dream alone.
From what you've said, you didn't need the crook to destroy what you had already built.
I wish you well.
 
If he's truly hard up for cash, sue immediately. A lot of this sounds like evidence would be relatively easy to show, such as the company paying for his wife's leased car. He's certainly violating the spirit of your agreement, which doesn't matter much, so go back to see what actually was put in writing, or get an email chain going so that his position is documented.

My personal opinion is that you should sell for book value and a full release and written evidence that you're off of everything including any loans. Maybe use an escrow company so that you don't end up selling, to later realize that you're still on a loan you didn't know about or something.

Best of luck.
 
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