Legal Question in Business Law in California

Re: share holder rights

You don't need an urgent answer, you already know that the situation is improper or you wouldn't have asked. If you are a shareholder as implied, you need to take action to protect your rights and interest in the company, including demanding and calling special meetings of shareholders and directors. If those meetings don't t resolve the problems, court action would be next. Feel free to contact me if you're serious about doing so.

Re: share holder rights

These may be considered ultra vires acts (which are essentially unauthorized acts). A person can be held personally liable to third parties and the corporation for ultra vires acts. Also, the corporation must be sure not to approve or ratify the ultra vires acts; otherwise, the corporation can be liable as well to third parties. It can also serve as the basis for alter ego liability. Alter ego liability subjects the corporations shareholders to personal liability. Alter ego can be shown where the shareholders are commingling the assets of the corporation with their own and not respecting the corporate separateness of the entity. If you are a shareholder, you should have an appropriate letter drafted to the shareholder and the board of directors and also demand to see all the financial books and records.

We practice business law out of Newport Beach. We can help you if you are interested. Feel free to call or email.

Re: share holder rights

I disagree with the prior answer. In my opinion, the indiscretions you describe are not ultra vires acts. That term refers to acts by a corporation (not those of a shareholder) which exceed the corporation's authority, such as a corporation whose Article of Incorporation state that it is formed to engage in the business of a canal company, but then decides to build and operate a railroad. Ultra vires acts rarely occur any more because almost all corporations are now formed to engage in any lawful business except the banking, trust company and insurance businesses. Look at your Articles of Incorporation and see what your company is allowed and forbidden to do.

Instead, what's going on here falls under the general heading of "oppression of minority stockholders" and your facts show several examples of typical oppressive tactics.

Your potential remedies very with the particular abuse and the background circumstances. First, you did not say whether this abusing shareholder is also a director and/or officer, or how many other directors there are. Your posting suggests there are at least three shareholders. A California corporation with three or more shareholders must, by law, have at least three directors. Directors have the power to run the company. So, maybe he is violating the law by not having enough directors, or maybe he is violating another law by not heeding the orders of a majority of the three-member board, or maybe the board is all his buddies, in which case you'd have to look harder to find a broken law, but probably one can be found.

Another question is whether the corporation has profits or retained earnings. Distributions can be made from earnings, current or retained, but not usually from invested capital. Further, they have to be made in proportion to stock holdings. The minority holders are perhaps entitled to damages in proportion to their share of the looted benefits taken by the abuser (since they are equivalent to dividends).

Finally, you did not say how this shareholder has all the voting rights. In a sense, a 51% holder may have control over the outcome of any vote, but that's not quite the same. Does he own a special class of stock, or is this by contract?

I don't know whether you can get an preliminary injunction; a TRO is more likely but very short-term. It would be necessary to file suit first, and that would entail a quick and thorough analysis of the corporation's affairs and the facts of all aspects of the abuse.

I am fairly well equipped with prior experience as an abused minority shareholder myself, long before I became a lawyer, and I own the major treatise on this subject (O'Neal). If you would like a further analysis, at no charge, plase contact me directly. I'm in Marin County, but in the 21st Century we can handle cases statewide by telecommunications.