Corporate law question regarding majority shareholders regaining control of a corporation.
July 22, 2010 5:05 PM   Subscribe

Corporate law question regarding majority shareholders regaining control of a corporation.

I am a second generation working in my family's business. Family members/shareholders are currently going through heavy feuding on business matters and my father, who is the largest shareholder would like to step up and straighten things out. Shares are currently split this way:

My father - 47.5%
Uncle #1 - 17.5%
Uncle #2 - 17.5%
Uncle #3 - 17.5%

My father, although being the largest shareholder, currently does not get involved much with the business and the company is handled mostly by Uncle #1. Uncle #1 has been proven to be an incompetent and dishonest leader and my father is looking into regaining control of the company and putting it back on track. So I have a few questions:

1) My father currently does not live in the same country as the company but would like to grant me the power to be his shareholder proxy. What process do I need to go through to make this happen.

2) I've read that shareholders do not have control of the day to day business matters and those decisions are instead handled by the board of directors. Currently the official board of directors are the 4 shareholders. One of the shareholder is on my father's side so together they make majority. What can we do to make sure we have total control of the business?

3) Currently Uncle #1, the current incompetent leader, has control of all the books and finances. He has refused to disclose those information. Will a shareholder proxy have to power to visit an accountant and bank to obtain those information himself?

Thank you for all your help.
posted by willy_dilly to Law & Government (12 answers total)
You really need a lawyer. You don't even give the jurisdiction under whose laws the corporation is organized. We don't even know the country! All of these questions can vary widely.
posted by Admiral Haddock at 5:15 PM on July 22, 2010

Also, I will be visit a lawyer to get a 100% accurate picture of this, but would like some general advices from you guys so I will have more of a clue in my conversation with the lawyer.
posted by willy_dilly at 5:16 PM on July 22, 2010

Company is in the US. Sorry for the confusion.
posted by willy_dilly at 5:20 PM on July 22, 2010

Alright. IANAL. got it? this is my layman's understanding of the matter.

The CEO of the company works for the Directors. They have the ability to fire him if they want. The exact process by which that happens is controlled by rules set down when the corporation was begun (and maybe by his contract with the company), but some such process will exist.

The Directors work for the stockholders. Periodically an election will be held, but stockholders can demand an election at any time, as long as a majority of them agree.

If you own, or control by proxy, a majority of the shares, you can tell the directors to fire the president. They don't have to do so, just because of that.

But if they don't, then you demand a new election for directors, and that does have to happen because you said so. You put up a slate of directors, and then you vote your majority in their favor. They become the new board, and presumably their first act is to fire the president and begin a search for a new one.

That is about what you're going to have to do. But your father's 47.5% isn't enough. You'll need one of the other uncles to go along, either by giving you a proxy or by agreeing to vote the same way you do. One way or another, you need 50% + 1 share in order to pull a muscle move like this.

But you say that one of your uncles is on your side. Unfortunately, director votes don't count as a function of the number of shares they own, so for the time being the board is 50-50, and I think that means your proposal fails.

So you'll have to use your status as a stockholder to demand a new election for directors, and not include your two opposing uncles in the new board.

...this is going to rip your family apart. You do know this, right? It might be better to lay out for your uncle who is currently president the threat of forcibly firing him, and try to talk him into resigning instead. At least try that before going ahead with the muscle move.
posted by Chocolate Pickle at 5:26 PM on July 22, 2010

By the way, what I just wrote is generally how it works, but all the details are a function of the corporate bylaws, and your lawyer will have to review them in order to figure out exactly how you'll proceed.
posted by Chocolate Pickle at 5:29 PM on July 22, 2010

What state is the company incorporated in (not heardquarters, or operations, but who issued the charter)? Every state's corporate law is different, and a company that lives and breathes in Maine may actually be a DE corporation. Be aware that the right lawyer to consult may not be in your state/the state where the company operates.
posted by Admiral Haddock at 5:37 PM on July 22, 2010 [1 favorite]

I am a lawyer, and in fact my practice focuses on corporate governance litigation. I represented one side in a family dispute over control of a corporation not too long ago. Ignore any and all advice you get here, except this: go find a competent lawyer to represent your father. The legality of any strategy depends on so many different details in these situations that you really cannot get good advice from a forum like this. Get thee to a lawyer.
posted by monju_bosatsu at 5:48 PM on July 22, 2010 [2 favorites]

It makes a difference what state the company was incorporated in, and the company's incorporation document and the bylaws govern, too. I know you're just seeking reassurance before you talk to one, but nobody can really help without way more info, and would basically be giving legal advice, which is nooot allowed for lawyers or non-lawyers alike.
posted by elpea at 6:03 PM on July 22, 2010

Do you have a copy of the corporate by-laws? If so, read that to kill time between now and when you see your lawyer. That's a better use of time than asking questions here or getting yourself in trouble playing amateur lawyer on Google.
posted by mullacc at 7:42 PM on July 22, 2010 [1 favorite]

For 1), your lawyer will prepare a document where your dad grants you power of attorney. It's extremely common.
posted by stereo at 7:46 PM on July 22, 2010

1) You see a lawyer to get a proxy drafted.

2) A complicating factor here is that your company may qualify as a "close corporation" (sometimes called a "closely held corporation") in which the normal rules of corporate governance are (sometimes, depending on the jurisdiction) modified from the general case. In particular, the rights and duties of shareholders in a close corporation may be different from those of a shareholder in IBM. Therefore, much "general advice" you get or read about the relationship among shareholders/directors/managers may be just wrong in your situation. This is another reason to see not just a lawyer, but one familiar with close corporations law in the relevant jurisdiction.

3) Shareholders generally have the right to examine the corporate books. Does the holder of a proxy also have the right? Beats me.
posted by lex mercatoria at 8:19 PM on July 22, 2010

I deal with questions like this all the time.
1) Find out what state the business is incorporated in
2) Get a lawyer who specializes in those laws
3) Brace for shit to get messy - if possible you might just want to buy people out of the business rather then wage a battle like this.

Shareholders generally have the right to examine the corporate books.
amazingly this is not always the case. However this guy is actually the proxy of a board member which is very different from just being a shareholder.

(BTW your dad and his ally should probably just replace your dad with you on the board rather then make you his proxy. The see if the by-laws are written to allow a shareholder vote on increasing the board size, add one person, vote your dad in - et voila 5 person board with your group having three votes. But you need a lawyer to make this all happen)
posted by JPD at 4:05 AM on July 23, 2010

« Older Tax Evasion: Isn't that how they got Capone?   |   How large does a virtual used bookstore need to be... Newer »
This thread is closed to new comments.