Legal Question in Business Law in California

Our company is a California C corp. I joint the company in 2004 and owns 32.5% of the shares. In 2006 and 2008 we borrowed $400K from a friend of our CEO and has been paying interests. Last October the lender asked us to start to pay the principles back and we agreed to pay $5000 for the first 4 months and $15000 thereafter. Because of the cash flow difficuties, we only paid $3000 on April 9th and told the lender we might need to reduce the monthly payment to $3000 -$5000 for next three months, and resume to $15000 after. On the 11th, the lender came to us and asked us to give him a report on our asset in US, we gave the report which shows about $580K in assets, and we have about $1.2M raw materail in a contract manufacturer in China which is owned by our CEO's brother, who is also a 15% share holder of our company. On the 12th, the lender asked us to sign a contract to transfer all of our assets to his possession. Our CEO signned contract and asked me to sign too, I did because I was convinced that the lender is CEO's friend and will not do any harm to the company. The contract also required us to open a new bank account and put all our money and future customer payments into that account. But the lender appointed our CEO's wife to manage that account. On the 16th, they did openned another bank account without my presence (I am the secretary of the company on State Filing paper). Now I feel suspicious of their actions. Our CEO also told me that we might not get those raw materails back from his brother since the company owes money to his brother on paper. My questions are:

1. Is it legal for a lender to take all our company's assets?

2. The lender does not allow us to pay any salaries, spending any money on company operation, does that mean I am automatically laid off by the company?

3. Do I need a lawyer to handle this?

4. Is it legal for them to open bank accounts without my presence (I am Secretary and owns 32.5% of the company shares)

Thanks,

Sean


Asked on 4/19/10, 11:45 am

2 Answers from Attorneys
Kevin B. Murphy Franchise Foundations, APC

You definitely need to contact a corporate attorney in your area and get immediate advice. Transferring all corporate assets to a lender just because they request it was NOT a good idea or in the best interests of the corporation. The same applies for the activities following this transaction. Again, contact a corporate attorney in your area as soon as possible.

Kevin B. Murphy, B.S., M.B.A., J.D. - Mr. Franchise

Franchise Attorney

Read more
Answered on 4/24/10, 4:21 pm
Bryan Whipple Bryan R. R. Whipple, Attorney at Law

1. Taking someone's assets without permission is illegal; it's called robbery. However, here it looks as though permission was given, probably foolishly.

2. No; not being paid is not the same as being laid off. This is especially true if you are an owner of the company.

3. Yes. Your situation shows that you lack the experience and wisdom to manage your affairs without assistance. You have been far too trusting.

4. Depends upon the corporation's bylaws, but the answer is probably yes. Opening bank accounts is something that requires action by the board of directors. This corporation has at least three shareholders according to the facts you've given. Therefore, it must have, by statute, at least three directors. Any two directors would constitute a majority of the board and would have the power to make major decisions including opening and closing bank accounts, choosing a new secretary, and so forth.

With a corporation of this size, any investor or co-owner without substantial business-management knowledge such as yourself is taking a big chance without having personal advice from attorneys, accountants, business people, etc. that are advising you personally and not connected with the family that seems to be controlling this business.

Read more
Answered on 4/24/10, 9:06 pm


Related Questions & Answers

More Business Law questions and answers in California