Check out some similar questions!

jonbecerra · Apr 27, 2009, 10:38 AM

Good morning,

Myself and a friend started a business aand incorporated (c corp) in 2007. About 6 months into it we needed to borrow money and did so from my grandma. One of her stipulations was that I own 81% of the corporation. So he and I signed and stamped the shares issuing 19 to him and 81 to me, we have 100,000 total. Now my partner has lost interest in the company and is actually bring it down and making things harder. He's lazy, never comes into the office and when he does he does personal stuff rather than business. I'd like to exercise being the majority stock holder and either buy him out or kick him out with proper compensation of course. He is going to fight tooth and nail I'm sure of it so I want to make sure everything is legal like before I spring it on him. Any and all help would be much appreciated.

Thank you,
Jon

AK lawyer · Apr 27, 2009, 04:56 PM

He is a 19% shareholder, but is he also an officer of the corporation? If he is not an officer or an employee he has no office-rights. So, to start with, you can kick him out of the office and proceed to do business without him.

When and if you declare dividends, he has a right to his 19% of dividends. This is about all the rights he has.

jonbecerra · Apr 27, 2009, 05:06 PM

Thank you for your answer AK. Yes, he is an officer of the corporation. We started as 50/50 partners but because of the loan my grandmother requested I be 81% shareholder. I'm curious as to what makes it legitimate that I'm the 81% shareholder. Was the action of just signing the shares and stamping them good enough? I don't need to report it to anyone or have it certified or anything? What's to stop him from tearing up the shares out of our corporate book should he get his hands on it?

AK lawyer · Apr 27, 2009, 05:13 PM

Corporations can only act by resolution of their board of directors, or in some cases by vote of the shareholders.

The corporate secretary's duty is to write accurate minutes which would reflect such actions.

Actually, the board of directors should have met and, by resolution, decided to issue so many shares to him and so many to you.

What office does he hold?

There are two distinct business forms: partnerships and corportions. If your company is a corporation you should not use the term "partner". You should call him a shareholder.

What's to stop him from tearing up the shares out of our corporate book should he get his hands on it?

He can destroy evidence such as that, but you could still testify as to what happened.

jonbecerra · Apr 27, 2009, 05:19 PM

AK, you're absolutely right! I remember we turned in minutes to our accountant stating the change in shares October of 2008. He's the secretary, I'm the president and CEO.

AK lawyer · Apr 27, 2009, 05:45 PM

Ok. Hold a duly noticed meeting of the sharelholders &/or board of directors, and remove him from office.

excon · Apr 28, 2009, 04:52 AM

Hello jon:

In my view, simply filling out papers giving your partner 19% while you take the lions share, won't hold up in court if the only reason you're doing it is to satisfy the grandmother... Usually shares are divided proportionate to the investment in time or money into the corporation. If the grandmother was worried that her investment wouldn't be under the control of a family member, she could have required a split of 51/49. Her requirement of 81/19 is bizarre.

If your partners investment is equal to or greater than yours, I suggest that he can win additional shares should a court fight ensue.

excon

AK lawyer · Apr 28, 2009, 09:11 AM

Originally Posted by excon

... won't hold up in court if the only reason you're doing it is to satisfy the grandmother.... Usually shares are divided proportionate to the investment in time or money into the corporation. If the grandmother was worried that her investment wouldn't be under the control of a family member, she could have required a split of 51/49. Her requirement of 81/19 is bizarre. ...

It's very common for people to assume a corporate form without a clue as to what they are doing. This is a good example of that phenomenon.

That said, if grandmother conditioned her loan upon a 91-19 split, and if the loan was in a significant amount, I would expect the courts to uphold it. The loan was, in contract terms, sufficient consideration for the transaction.

jonbecerra · Apr 28, 2009, 09:29 AM

Let me back up just a little bit guys... initially the other shareholder and myself applied for a loan through a bank that was helping young businesses. Due to the other shareholders bad credit the bank insisted in order to process the loan that I hold at least 81% of the shares since the loan would be riding on my credit solely. The loan went amiss because of some bad wording the secretary (the other shareholder) put into the corporate minutes report that scared off the bank. So the back up plan was to go to my family for the money. My Grandma knowing the whole story, his bad credit included wanted to roll with the same deal the bank wanted and so that's how the 81/19 split came to be.

AK lawyer · Apr 28, 2009, 10:11 AM

Originally Posted by jonbecerra

... The loan went amiss because of some bad wording the secretary (the other shareholder) put into the corporate minutes ...

That's probably not relevant, but it is interesting. What was the wording that scared off the bank?

jonbecerra · Apr 28, 2009, 10:52 AM

He put in the minutes that the shares would to return to 50/50 status one year after the loan was assumed. We were applying for an ongoing credit line that would initially give us 25k then as we paid it back it would be there to borrow again.

ScottGem · Apr 28, 2009, 11:36 AM

The bottom line here is that the other partner would have to agree to turning over 31% of the shares to you. That agreement would need to be in writing and be a part of the corporate minutes. Since this is not a publicly traded corporation that should be sufficient to record the ownership. It MIGHT be necessary to reissue the share certificates so that you have certificates indicating ownership of 81,000 shares and his certificatre showing 19,000.

AK lawyer · Apr 28, 2009, 12:05 PM

Originally Posted by jonbecerra

He put in the minutes that the shares would to return to 50/50 status one year after the loan was assumed. We were applying for an ongoing credit line that would initially give us 25k then as we paid it back it would be there to borrow again.

So, since the loan was never assumed (approved and issued by the bank), this language presumably is not in effect, and you would still be entilted to your 81%.

jonbecerra · Apr 28, 2009, 12:09 PM

He put in the minutes that one year after the loan was acquired the shares would go back to 50/50. We were applying for a credit line that didn't have an end date so as long as we paid back the initial 25k the money back it would be there again for the borrowing whenever we needed it.