Legal Question in Business Law in California

Re: Spousal Minority Stockholder rights

I've looked at the four previous answers and will try not to duplicate what's been said, and I agree with all of it.

My first comment is to suggest you look carefully at the 70-30 ownership split. Unless you have a pretty clear written agreement or financial paper trail establishing that ratio, and showing that there isn't a community-property interest, you should expect a future legal challenge in a civil or family-law challenge.

Second, remember the legal heirarchy of corporate control. The shareholders elect the directors, usually once a year at the annual meeting of shareholders. You've done that, of course (?!). The directors run the company -- they approve major transactions, appoint officers, etc. The officers (President, Secretary and Treasurer are required, additional officers are permissible) are appointed by, and serve at the pleasure of, the board of directors. The Board can fire the officers at any time. If an officer has an employment contract with the corporation, the directors can nevertheless fire the officer, who then has a potential claim for money damages against the corporation, but probably not for reinstatement.

Third: a corporation with two or more shareholders must have at least two directors. See Corporations Code section 212. If this was a husband-and-wife business, very possibly the two of you are the directors. If so, you may not have the power to fire him...any vote on the issue would be deadlocked at 1-to-1 (unless of course he voted to fire himself!).

However, if you really have 70% of the voting power in this corporation, you could elect both (of two) directors at an annual or special meeting of the shareholders, even with cumulative voting. See Corps. Code section 708 for a (not-too-clear) description of cumulative voting. So, you may have to take some additional corporate action to fire him effectively.

Only a review of your Articles of Incorporation, bylaws, and probably the shareholder register can really answer the questions about your power to fire other officers.

With 70% stock control, for example, you could elect yourself and a trusted friend as the corporation's two directors. Get legal advice before trying to remove a director before the end of the term to which he was elected, however.

Fourth: As to minority shareholder rights, they are many and varied. Most important, the corporation, its directors and officers, must act fairly with respect to the minority's financial interests. This means no excessive salaries, no back-door dividends, no shareholder meetings without required notice, and an equal per-share division of the pie when the corporation is liquidated. A shareholder does not, however, have the right to a job, to enter or remain upon company premises (but see below), or to take or possess corporate assets.

Shareholder records-inspection rights are detailed in the Corps. Code at sections 1600 - 1605.

Re: Spousal Minority Stockholder rights

Minority shareholders do have certain rights to basic company information. This can be a tricky situation as that right usually includes viewing certain files at the corporate office upon reasonable notice. In this case, however, I would argue he should not be permitted in the office since it was actions that relate to other employees that caused this. I supposed you and he are not on good terms as a married couple, and that animosity will clearly spill over into the company. However, his actions have created exposure to the company, you have eliminated any further exposure by firing him. Your company does not take the risk of someone's personal actions, and therefore the company may be able to seek indemnification from him if the company suffers damages from any lawsuit arising from his actions. Look to your bylaws and any other agreement that may permit you to purchase his interest upon his firing (for whatever reason). You will need to provide quarterly and annual reports, but day-to-day financial information is not required. Hope this helps a bit. I would advise you to seek counsel in your area.

Re: Spousal Minority Stockholder rights

Your spouse does not exactly sound like a team player. A minority shareholder is owed a "fiduciary duty" by the majority shareholder to act in good faith with respect to the minority shareholder's rights. You cannot act in your own best interest with respect to the corporation to the exclusion or detriment of the minority shareholder.

Given his attitude, I would gear up as if you are going to face a lawsuit from him. Make sure that all formalities with respect to the corporation are followed, i.e., all meetings of shareholders are properly noticed and minutes kept, all bank accounts are kept separately from individual accounts, no personal expenses paid for by the company, etc.

I would make sure to document all dealings with him in relation to company business. I would make sure that he is not in a position to harm the company or its relationship with customers, etc.

You should sit down with an attorney and discuss this as there are obligations in relation to distribution of profits, excessive salary, etc.

I would be happy to consult with you on this matter.

J. Caleb Donner

DONNER & DONNER

LEGAL WARRRIORS (R)

325 E. Hillcrest Drive, Suite 242

Thousand Oaks, CA 91360

Tel: 805-494-6557

Fax: 805-494-0990

email: [email protected]

website: www.legalwarriors.com

DISCLAIMER

This reply constitutes legal information for education purposes and does NOT constitute legal advice nor establish an attorney-client relationship. We will only represent you based on a written retainer agreement. Therefore, you should contact this office to discuss representation if you do want legal advice/representation.

Re: Spousal Minority Stockholder rights

I assume you mean he was also an employee of the corp and you have fired him in that capacity. It is important to distinguish between his roles as an employee, which your firing terminated, on the one hand, and as a minority shareholder and perhaps also officer on the other hand. You should consult with a business attorney and make sure you do what is necessary to live up to your obligations to him as a current shareholder and then to see if you can accomplish a buy-out or otherwise obtain his ownership interest in the corp.

Re: Spousal Minority Stockholder rights

I have more questions than answers. Are all shares held as Community Property? Do you have a prenuptial agreement? What do the artciles and bylaws say? Looks like marital strife when you start making allegations of sexual harassment. If you weren't married he could sue for dissolution and receive his fair share.