A closely held corporation is often a family owned corporation, where all the shareholders are related in some way. Over generations, closely held corporations can amass vast amounts of wealth but can leave a family at odds with one another fighting over money and power of the corporation. If you've seen the recent show on HBO, Succession, you've seen a good example of what can happen when the younger generation is hoping to buy out and replace their older family members in the board room.

A case Business Law Group settled last year for $1.1M is a prime example of how things can go wrong when the leaders of the corporation use their position of power for their own good, at the expense of their family members.

In our case, four sisters and three of their adult children were shareholders of a meat-packing company. The company was started by their father in the 1950's and he turned it into one of the most successful meat packing plants in the state. After the father passed away, he left the ownership of the company equally to his wife and four daughters. For years, the company was managed by the husband of one of the sisters, and her two sons (our client's nephews) who took an active role in learning the business from their father while they were growing up. Our client worked as a bookkeeper for the company for almost 30 years, earning a moderate salary and benefits. She was very involved in the day to day operations of the corporation, whereas the other sisters were not active in the management. All of the sisters received handsome annual stock dividends from the corporation.

In 2005, the two nephews determined to take over the company and they devised a plan to buy-out the older generations. They put together a deal whereby the Company would begin buying back the shareholders stock as “treasury stock.” The plan was financed with corporate funds and a $3M bank loan. But the company could not afford for all the sisters and the mother to be bought out at the same time, so they negotiated individual agreements with each sister and their grandmother. Since our client was continuing to work at the plant, she determined that she could wait to be purchased out after her other sister were paid out and she ultimately, without consultation of a lawyer, signed an agreement entitled, “Stock Purchase Agreement.” This was a huge mistake, as we will see later.

The Stock Purchase Agreement required the client to hold her stock for 10 years, at which point the two nephews agreed to pay her $1,100,000 no later than the final day of the ten year period.

During the next ten years, the nephews acted as the CEO and Chief Sales Executive, respectively, also serving as board members along with their father and two other unrelated members of the management team. Fairly quickly the CEO began to take total control of the corporation, ousting Plaintiff from the bookkeeper role and encouraging her to stay home and enjoy “retirement.” The CEO began:

• approving his own expenses, including personal credit card charges
• making up company vendors who instead of performing work for the company were actually performing work on the personal residence of the CEO;
• forcing employees to turn over their customer-given cash tips to him after every shift;
• collaborating with his brother to sell the company's current plant and purchase a new facility in the name of an LLC owned solely by himself and his brother, not the company
• loaning hundreds of thousands of dollars to himself and his brother, and then having the company write off the loans as bad debt.

Suddenly, a corporation which had once been “debt free” began taking on large commercial loans secured by the corporation and its accounts receivable. As a part of these bank loans and because she was the only other shareholder, our client was asked to provide a personal guaranty. Her guarantee was used, along with the forged and inaccurate books and records, to obtain the loans.

After defaulting on one of the loans, the corporation was forced to refinance the debt and take out a second commercial loan with a new lender. At this point, Plaintiff who had been out of the loop in the operations became concerned and employed an attorney. To reassure her, the nephews agreed in writing that if client executed the personal guaranty to get the new loan, they would begin purchasing back her stock immediately. After signing the personal guaranty, the nephews then reneged on the written offer, refusing to buy back her stock.

An important tool that minority shareholders can use to protect themselves, and prevent and detect fraud is called a “shareholder's request for information”. Louisiana Revised Statute § 12:103 requires corporations to keep financial records and ledgers, and to allow shareholders to review these documents at their request. Even if the shareholder isn't involved in the company's operations, this request for information can be used to ensure that the proper safeguards are in place and that management is keeping a close eye on the those with control of the finances and assets. Another useful tool is engaging a forensic auditor to examine those books and records.

In our case, once the corporation's books and records were reviewed by the forensic auditor, it became clear that the nephews were guilty of fraud and had breached their fiduciary duty to the corporation. They were personally liable for the funds they had stolen. In an ironic twist, since the corporation had purchased all the sisters stock back as treasury stock, and the nephews had not purchased it individually from the sisters, our client's ownership interest became “supercharged”. This meant that her 114 shares, were actually more than the 45 shares owned by each nephew, meaning that she owned more than 50% of the corporation. Once this information was learned, it made negotiating the sale of her stock fairly easy due to the fact that the foresinc audit gave the client all she needed to prove share holder oppression.

Shareholder Oppression

In Louisiana, "[i]f a corporation engages in oppression of a shareholder, the shareholder may withdraw from the corporation and require the corporation to buy all of the shareholder's shares at their fair value." La. Stat. Ann. § 1-1435(A). Oppression occurs when the corporation fails to deal "fairly and in good faith with the shareholder" over a period of time. See id. § 1-1435(B). To do determine fairness and good faith, the court assesses the oppressed shareholder's conduct as well as "the treatment that a reasonable shareholder would consider fair under the circumstances, considering the reasonable expectations of all shareholders in the corporation." Id.

Derivative Suits

Louisiana directors must "act in good faith and in a manner the director reasonably believes to be in the best interests of the corporation." Id. § 1-830. Officers and directors owe a fiduciary duty to "the corporation and its members." Id. § 12:226.

The shareholder must be an owner at the time of the act complained of and must "fairly and adequately represent[] the interests of the corporation in enforcing the right of the corporation . . . ." La. Stat. Ann. § 1-741 (West 2015). In addition, before commencing any proceeding, the shareholder must serve written demand on the corporation to "take suitable action" and give the corporation 90 days to respond, unless "irreparable injury to the corporation" would result by waiting this time period. Id. § 1-742.

Conclusion

If you are involved in a bitter dispute with family over a closely held corporation, let Business Law Group advise you on the best steps to take to protect your interests. Take it from our client, family is not always trust worthy.