Legal Question in Business Law in California

Is the entity a corporation or a partnership? In order to respond to this question, it would be necessary to see the corporation's bylaws or the partnership agreement. If it is a corporation, then you might be able to bring a derivative suit or have a shareholder meeting to force the removal of the Operations Director.

You don't make it clear what legal form the business is in. You mention a partnership but talk about shares, which implies you are incorporated. In either case, there are things you can do to force the majority to act in the interests of the minority owners, but it tends to be a very messy affair and usually winds up with the business being dissolved (although frequently some of the former owners continue the business under another legal entity). What you will not be able to do, however, is exercise detailed control over the business the way you wish to. You cannot force the lay-off of a particular employee. All you really have the power to do is force them not to pay out so much in salary that they are unfairly treating your interest in the business. Without a lot more information, those general thoughts are all I can really tell you.

If the business is a corporation, which I think more likely, a "shareholder derivative action" under Corporations Code section 800 seems to be the best approach after attempts to negotiate a voluntary reduction in costs has been tried, without results. This is usually the best way for shareholders owning less than a controlling stake in a corporation to force management to run the corporation in a fair and businesslike way.

Before proceeding with a derivative suit or otherwise, you should make a serious attempt to reason with your co-owners. It should be very evident to them that the business is in difficulty and that costs need to be reduced as revenues drop, or the company has no future. By the way, with 70 employees, there are many others with a stake in the company's future in addition to the three owners. I would suggest getting business advice as well as legal advice about the company's management, direction, and future. The business climate, especially in the San Jose area, is not at all horrible, and a well-run company should be doing at least OK. If yours isn't prospering, there may be reasons besides two salaries out of 70 being out of whack. Maybe an overall efficiency or cost-reduction program is in order.

Whether the business is a corporation or a partnership, the majority owners and managers have so-called "fiduciary duties" to minority owners. Under such duties, the majority or the management cannot conduct the business irresponsibly or without regard to the rights and interests of minority shareholders or other partners. There is a lot of case law covering what practices are considered within management discretion and what constitutes a breach of fiduciary duty. Excessive executive compensation is often a subject of minority owner claims of breach of fiduciary duty.

OK, now what if the business is a partnership, not a corporation. Partnerships are governed by another part of the Corporations Code, usually section 16100 et seq., the Uniform Partnership Act of 1994. Section 16404 outlines the fiduciary duties of a partner to the other partners and to the partnership. It provides, inter alia, that a partner must refrain from engaging in grossly negligent or reckless conduct, and must exercise any rights consistently with the obligation of good faith and fair dealing. Perhaps a case can be made that the two controlling partners (if that they be) are in violation of these duties.

By the way, partners are not entitled to pay themselves anything (no salary, no wages) unless they have a separate agreement to work for pay. Partners are expected to take profits, not paychecks. Of course, many do, but the right to pay depends upon an agreement and is not automatic.

Please feel free to contact me for further assistance at no obligation....business disputes are a sub-specialty in my practice, and before going into law, I was an entrepreneur for 30 years.