Legal Question in Business Law in California

Majority Shareholder Started New LLC

My husband and I are minority shareholders in a California C Corp. (33%) We've discovered that our partner formed a new LLC with a business associate without our knowledge. The business is similar but not necessarily competing with our current business. We have a ''sweat equity'' agreement that is in writing but not yet formalized. Also, the new business ''idea'' is one we had been discussing as a potential revenue stream for our company. Do we have any recourse for breach of fiduciary duty in this instance? This shareholder is the primary salesperson for our business and the new business will require a great deal of his time.


Asked on 9/08/07, 3:00 am

2 Answers from Attorneys
Bryan Whipple Bryan R. R. Whipple, Attorney at Law

Re: Majority Shareholder Started New LLC

Yes, this is a breach of fiduciary duty, the duty of loyalty. There is a lot of case law precedent for recovery of damages from this type of misconduct,

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Answered on 9/08/07, 10:32 am
Michael Meyer Law Ofc. Of Michael J. Meyer

Re: Majority Shareholder Started New LLC

Yes, forming the LLC to pursue a business opportunity misappropiated from the C Corp is a beach of fiduciary duty.

You could bring a shareholders' derivative suit for an "accounting" to find out of the LLC is making any money, for disgorgement if it is, and any lost profits or damages sustained by this person's breach of his sweat-equity agreement.

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Answered on 9/08/07, 12:40 pm


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