DAVID V. GOLIATH- Rights of Minority Shareholders

Just because someone may not hold a majority interest in a corporation does NOT mean they are without rights with regards to the operation of the company.

  1. General rules of governance
    • All management is vested in directors[1]
      • Directors are elected by shareholders[2]
        1. Unless there is a provision in the articles of incorporation directors are elected one at a time
        2. Unless there are provisions in the articles of incorporation or bylaws to the contrary, directors are elected by majority vote.
      • The number of directors[3]
        1. Must be at least one
        2. Established in Articles of Incorporation or bylaws
        3. Can be changed by vote of Shareholders[4]
        4. Unless there are special provisions in the Articles of Incorporation or Bylaws each share get one vote[5]
      • Directors can be removed by majority vote of shareholders with, or without cause[6]
    • Directors appoint and/or remove officers[7]
    • Because they are charged with operation of the company[8], directors (or the officers to whom they delegate such authority) hire, fire and determine salaries for employees.
    • Unless otherwise specified in the Articles of Bylaws:
      • Action can be taken by the Board if a majority of the Board is present[9]
      • The Board acts by majority vote of those present[10] (NOTE: a quorum must be present for action to be taken)
    • By virtue of control of the election/removal of directors, who are charged with company operations, majority shareholders control the operation of the company.
  1. ALL shareholders have the right to access, inspect, and copy business records of the corporation[11]
    • These records include minutes of meetings
    • These records include financial and accounting records
  2. Opportunities for abuse of minority shareholders
    • Operational issues
      • Excessive salaries/benefits
      • Withholding distributions (dividends)
      • Self-dealing
    • Sale of the company’s assets or a dispositive merger[12]
  1. Protections for minority shareholders
    • Operational issues
      • Directors and officers duty to the corporation and ALL shareholders[13]
        1. Actions must be in good faith
        2. Actions must be, in reasonable belief of the director/officer to be in the best interests of the corporation
        3. There has to be a reasonable basis for decisions being made[14]
      • Minority shareholders can sue for damages or injunctive relief if directors or officers fail to meet this level of care[15]
    • Sale or dispositive merger
      • A corporation cannot sell or otherwise dispose of substantially all of its assets (other than in the normal course of business) without a vote of BOTH the directors AND the shareholders[16]
      • Unless ALL of the directors[17] AND at least 90% of the shares eligible to vote[18] are in favor of the transaction, and sign minutes to that effect, there must a physical meeting of directors and shareholders to discuss the transaction.
      • Shareholders who vote against the sale or dispositive merger have the right to have their shares purchased by the corporation at “fair value”[19] and if necessary can get their legal fees paid by the corporation[20].
    • SAMSON Option-dissolution of the business
      • A court can order the dissolution of the corporation if it finds[21]:
        1. The directors are deadlocked in the management of the corporate affairs, the shareholders are unable to break and the deadlock is injurious to corporate business affairs.
        2. The directors or those in control of the corporation have acted, are acting, or will act in a manner that is illegal, oppressive, or fraudulent.
        3. The corporate assets are being misapplied or wasted.
      • A dissolved corporation cannot carry on ANY business EXCEPT as appropriate to liquidate its business assets and activities[22]
        1. After payment of all creditors, assets are distributed to shareholders (pro-rata)[23].
        2. NOTE: some assets (like intellectual property) may have to be valued and distributed “in-kind” to shareholders.
      • In lieu of a judicial dissolution, the remaining shareholders can purchase the complaining shareholder’s shares at “fair value”[24]

Contact the Kreamer Law firm, P.C. at 515-727-0900 or info@kreamerlaw.com if you need assistance in dealing with shareholders of your company.  

 

[1] Iowa Code 490.801(2)
[2] Iowa Code 490.803(3) Unless there is a provision in the articles of incorporation, directors
[3] Iowa Code 490.803(1) and (2)(a)
[4] Iowa Code 490.803(2)(a)
[5] Iowa Code 490.721(1)
[6] Iowa Code 490.808(1)
[7] Iowa Code 490.840(1) and 490.843(2)
[8] Iowa Code 490.801(2)
[9] Iowa Code 490.824(1)(a)
[10] Iowa Code 490.824(3) Accordingly, each member of the board has an equal vote.
[11] Iowa Code 490.1602(1)
[12] Abuse could be selling on terms which wind up benefitting the majority shareholders; or refusing to sell on terms which could benefit minority shareholders. A dispositive merger is where the company owned does not survive.
[13] Iowa Code 490.830(1) and Iowa Code 490.84.(1)
[14] Directors and officers have a duty to make decisions with the care that a person in a like position would reasonably believe to be appropriate. See Iowa Code 490.830(2), 490.831, and 490.832(3). This confers some responsibility to investigate the factual basis for the decisions being made.
[15] Iowa code 490.831, and 490.842(3).
[16] Iowa Code 4901202
[17] Iowa Code 490.821(1)
[18] Iowa Code 490.704(1)
[19] Iowa Code 490.1301 et. seq.
[20] Iowa Code 490.1331
[21] Iowa Code 490.1430(2)
[22] Iowa Code 490.1405(1)
[23] Iowa Code 490.1405(1)
[24] Iowa Code 490.1434

Year End Action Items for Business Owners

The end of the year can be a busy time for most business owners, so we’ve created a list to help you make sure your business is ready for the New Year!

  1. Internal Documentation:
    • Review your Minute Book
      1. FIND IT!
      2. Is it up to date?
      3. Have officers and directors been properly authorized?
      4. Have significant business activities been memorialized in minutes?
        • Loans
        • Leases
        • Significant contracts
        • Significant purchases
    • Go through your leases:
      1. Are they written?
        • Particularly important for “home offices”
        • Even if owned by related parties (example owner of the business is also the owner of the property)
      2. Do you have significant upcoming dates
        • Renewal clauses
        • Termination provisions
    • Non-compete and/or Non-disclosure Agreements
      1. Have key employees signed them?
      2. Are signed copies on file?
    • Consider Employee Issues
      1. Review employee handbook
      2. Update job descriptions
      3. Review Employee benefits
        • Adopt or amend a Deferred Compensation Plan for key employees
        • Options for employees to purchase business equity
    • Buy/Sell Agreements (if there is more than one owner)
      1. Establish an agreement if there is not one in place
      2. Establish an “agreed price”
      3. Review insurance policies for adequacy of coverage
  2. Establish or update a succession plan
    • Never too late or too early to start
    • Internal succession plan
      1. Stock purchase plan-
        • Creating an opportunity for key employees to buy-in
        • Terms need to be carefully documented
      2. Gifts to family members
      3. Most efficacious for family businesses
      4. “Grooming” of the successor is as important as the plan itself:
        1. Train the successor
        2. Introductions are important
          • Key clients
          • Key vendors
        3. Regular meetings are key
      5. Written Buy/Sell agreement is necessary if things don’t work out
    • External succession plan
      1. Selling the company to a third party
      2. Merger with a third party
      3. MOST commonly these involve a competitor or other companies seeking market share-Get to Know Them
  1. Tax Matters-MEET WITH YOUR TAX ADVISOR
    • Don’t postpone purchases-Section 179 Depreciation
      1. Up to $500,000 can be expensed rather than depreciated
      2. Must be “placed in service” before 12/31
    • The WAY your accounting is measured for tax purposes matters
      1. Cash basis
        • Revenue is recognized when it is received
        • Expenses are deducted when they are paid
      2. Accrual basis
        • Revenue is recognized when “all events” have transpired to create right to revenue
        • Deduction is allowed when “all events” have transpired to create liability
      3. IF YOU ARE ON THE ACCRUAL BASIS-Determine (and document) Bonuses (these must be paid by March 15th)
      4. IF YOU ARE ON THE CASH BASIS- Pay all of your outstanding bills
    • Plan now for tax elections for 2016
      1. Should your business elect to be an “S” Corporation for tax purposes?
      2. Should you change your basis of accounting?

 

If we can be of assistance with your internal documentation, succession plans, or other business matters, Please contact the Kreamer Law Firm, P.C. at 515-727-0900 or info@Kreamerlaw.com. At the Kreamer Law Firm, P.C.: We get things done®

Tips to Avoid a Lawsuit

  1. Overview
    • In general, there are two basic principals:
      • Get it in writing (it’s the friendliest way to do business!)
      • Communicate
    • Sources of liability
      • Employees
      • Customers
      • General Public
  2. Avoiding Lawsuits from Employees
    • Adopt/Establish internal WRITTEN policies and procedures
      • Have a written job description and check to make sure it’s being followed
      • These can be as broad or narrowly focused as necessary to meet the situation
      • there are third party vendors who do a nice job preparing manuals. For example: Merit Resources
      • Follow the manual:
        • Even if you don’t want to. Policies which are either not enforced or enforced selectively may not be policies at all
        • If you have to terminate an employee for “cause” document the reasons for termination as well as the steps PRIOR to the termination
    • Treat employees properly
      • Don’t be a jerk-Remember the Golden Rule
      • Be careful with humor: “politically correct” should be reduced to “correct”
      • Be careful when you’re in social situations INCLUDING social media
  3. Avoiding lawsuits from Customers:
    • Use written contracts
      • The greater the specificity the better
      • If you use a “form” agreement, make sure you understand the form
      • Be aware that the length of the document is NOTHING compared to the contents of the document
    • Communicate with your customers
      • MOST customers will try to work with you
      • People don’t sue people they like
  4. Avoiding lawsuits from the General Public
    • The key here is avoiding lawsuits against the owners PERSONALLY
    • Pay attention to your business infrastructure
      • The more you treat you business as a business the less likely that you will be sued personally for a business problem
      • You business should have a written operating agreement, Bylaws, Annual Minutes, and other internal written documents (like certificates, leases, and contracts)

Contact the Kreamer Law Firm, P.C. at 515-727-0900 or info@kreamerlaw.com for assistance with establishing internal policies and/or procedures, contracts, and other business documents.

What You Need to Know Before Purchasing a Franchise

  1. Why a consider purchasing a franchise
    1. Proven business model
    2. Market recognition
    3. Advertising strength
    4. Might be easier to finance

 

  1. A “Franchise” is an oral or written agreement, either express or implied, which provides all of the following[1]:
    1. Grants the right to distribute goods or provide services under a marketing plan prescribed or suggested in substantial part by the franchisor.
    2. Requires payment of a franchise fee to a franchisor or its Affiliate.
    3. Allows the franchise business to be substantially associated with a trademark, service mark, trade name, logotype, advertisement, or other commercial symbol of or designating the franchisor or its affiliate.

 

  • What a franchise is not
    1. A guaranty of success
    2. A job
    3. A recipe (but it might include recipes)
  1. Due diligence on Franchisor
    1. Check their financial capability
    2. Check their reputation
      1. Ask other current franchisees
      2. Ask business rating services like Better Business Bureau and/or Iowa Business and Industry
  • Ask FORMER franchisees
  1. Visit their facility and meet key individuals
  2. Check their longevity (how long have they been doing business)

 

  1. Due diligence on the FRANCHISEE—YOU (the buyer)
    1. Are you passionate about the business/industry
    2. Do you have experience
    3. Do you have the capacity to run the business
      1. Managerial capacity
      2. Available workforce
  • Financial capability
    1. Pay all the costs of the franchise
    2. Six month personal reserve

 

  1. Why is it better to buy a franchise than to start your own business
    1. What “power” does the franchise mark have in your market/in its industry
    2. What services does the franchisor offer
      1. Training
      2. Marketing
  • Operating plans

 

  • Franchise documents
    1. Governed by Federal law[2]
    2. Primary document is the Uniform Franchise Offering Circular
    3. What to look for in the franchise documents
      1. Pre-opening expenses
        1. Purchase of the franchise (normally $25,000 to $50,000)
        2. Franchisee training costs
        3. Site selection fees
        4. Signs/Displays/Trade dress
        5. Initial inventory
        6. Uniforms
      2. Rates and computations of the franchise fees
  • Required purchases from the franchisor
  1. Advertising requirements
  2. Insurance requirements
  3. Territory
    1. Exclusivity/Non-exclusivity
    2. National accounts
  • Termination
    1. Sales requirements
    2. Rights to transfer franchise
      1. Franchisor
        1. Commonly based on non-payment of fees
        2. Termination fee
      2. Franchisee- normally has no rights to terminate
  • Personal guarantees

[1] Iowa Code 523H.1(3)

[2] 16 Code of Federal Regulations Parts 436 and 437

Business Divorces

  1. UntitledBusiness is like a marriage
    • In the beginning everything is rosy and the business will be successful and the co-ownership will last forever.
    • More of your waking hours are spent in the business than anywhere else.
    • Problems occur:
      • Between co-owners
      • With the operation of the business
  2.  What’s the issue
    • Termination of employment does not terminate ownership
    • The ownership interest is property of the owner- one owner cannot simply take from another.
    • It’s going to cost money
      • To buy the interests of the departing owner
      • To negotiate
      • To Exercise legal rights
  3. The hard way- Statutory provisions
    •  Corporations
      • The remedy is actually court ordered dissolution of the company
      • One or more of the following must be present[1]:
        • Deadlock of Directors and shareholders injurious to the conduct of the business (business paralysis)
        • Directors or those in control acting in a way which is:
          • Illegal
          • Oppressive; OR
          • Fraudulent
      • Assets being wasted or Misapplied[2]
    • Dissolution presents its own set of problems:
      • In a dissolution property remaining after payments to creditors (including taxes) are to be distributed among shareholders pro-rata[3]
      • Many assets may not be divisible:
        • Name, phone number website
        • Assets may be had to value
        • Intangibles like relationships
    • Limited Liability Companies
      • The remedy may be dissolution of the company BUT for an LLC a judge may order a remedy OTHER THAN dissolution[4]
      • One or more of the following must be present[5]:
        • It is not reasonably practicable to carry on the business
        • The Managers/members have acted in a way which is:
          • Illegal
          • Oppressive; OR
          • Fraudulent
      • Dissolution of an LLC presents problems similar to those of a corporation[6]
  4. Easy(er) Way- Buy/Sell Agreement
    • Like a Pre-nuptial Agreement
    • Avoids dissolution and problems with distribution of the assets of the business to the owners
    • Key Benefits
      • Flexible
        • Terms can be changeable at any time and from time to time by agreement
        • Often purchase price is based on appraisal or a stipulated formula
        • Payment amounts and terms can be tailored to meet the triggering event (Example different terms if co-owner simply quits than if they are fired)
        • Can be used to eliminate deadlock: one simply buys out the other.
      • Determined at a time when parties are not angry/under stress
      • Objectively “reasonable” since they are established by agreement-YOU NEVER KNOW IF YOU WILL BE A BUYER OR A SELLER so you better do the right thing.
    •  Drawbacks
      • YOU ACTUALLY HAVE TO DO IT!!
      • They can still be difficult and expensive to enforce
      • If ownership is not 50/50 they could work to the disadvantage of the minority owner
      • Recommended Formula for provisions on buyouts not caused by death, disability or termination of employment- Russian Roulette (one offers a price for the shares of the other and the offeree can buy the offeror’s shares at that price).

Contact the Kreamer Law Firm, P.C. for assistance with a “business divorce”, a buy/sell agreement, or any other legal matter regarding your business at 515-727-0900 or info@Kreamerlaw.com

[1] Iowa Code Section 490.1430(1)

[2] Also failing to elect successor directors

[3] Iowa Code 490.1405 (generally) and 490.1405(d) (particularly)

[4] Iowa Code 489.701(2)

[5] Iowa Code 489.701(1). NOTE: this section also sates additional grounds for judicial intervention.

[6] Iowa Code 489.702(2)

What Do Your Internal Corporate Documents Really Mean?

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Tom Kutz and I were back on Insight on Business – The News Hour with Michael Libbie again to answer the important business questions that everyone should know. Between bylaws and minutes, do you know what your internal corporate documents really mean for you and your business? Click the link to listen to the podcast!
http://insightadvertising.typepad.com/insight_on_business/2015/08/internal-business-documents-what-do-they-mean.html