Expert: Timmy Chou - 11/23/2008

Question
I have a 26% ownership in a small corporation and don't have that much knowledge about my rights, one of the investors who own 50% of the corporation is also an employee of the company acting as the president. My questions are: 1. Do i have the right to be part of the decision making on capital investments and major company decisions? 2. Should I be getting reports pertaining to the company's business performance, capital investments,etc? If the answer is yes, then what kinds of repors am I supposed to get and how often? 3. Am I supposed to participate on company meetings or board meetings? How often should it be? 3. Can he decide for his salary increase as the company president (employee)all by himself without the approval of the other owners/investors?
Thanks a lot in advance, hoping you could help.

Answer
Thank you for your question!

Mediators act as neutral third parties to disputes and never "get involved" in judging the merits of conflict, but merely use special techniques to help the parties decide how to negotiate their own settlement.

The case you describe here does not sound like an active dispute but I suspect one may be brewing.  Your intentions about wanting to get more of your relationship on the table is wise and I urge you to move forward as quickly as possible to avoid an almost inevitable conflict.  Note that this issue may have legal factors and you may wish to consult an attorney.

It is best to have as much structure created at the outset of starting or building a business rather than in the middle because there are inevitable assumptions and expectations created by each party.

Hence, in your case, some necessary tasks were passed by earlier in your relationship and now you have some work to do to see if you can get a fair shake.  

Here is a short primer on small company equity.  

As you may have figured out, small company MINORITY stock positions often have little practical value usually.  

Typically shareholders of a corporation, after the corporation is formed, will then elect a Board of Directors to run the company.  A good Board may have shareholders on the Board, but then often it may also have independent non-owners too, in order to provide some objective oversight.  The Board's job is to act in the best interest of ALL the shareholders.  Usually the Board will put together a set of Bylaws.  These are the rules used to run the company and often the questions you have asked are treated in the Bylaws (or should be).  The Board also is usually empowered (by the Bylaws) to hire management such as a President and others.  Usually the Board (via the Bylaws) will constrain the Presidents powers and provide oversight and direction to the President and other management.  

The Management executes on a business plan as directed by the Board.  If a shareholder is not happy, he usually can call a shareholder meeting, but depending on the Bylaws, may only have a the option of holding a vote to fire the Board.  Usually the shareholders do not have a direct say in hiring or firing employees.  

As you can see you have a vote as part of the shareholders, but you are not in a governing position and can be outvoted.  

So the quick answers to your questions are:

1.  If the Bylaws give you the right to be part of decision making you must be included, but otherwise typically not.

2.  Most states have statutory requirements that specify what reports you are entitled to have (may also be in the Bylaws).  You most likely have the right to demand some reports.

3.  You may sit for election when the company elects Board members.  Again, normally the Bylaws state the manner of election of Board members.

4.  If the Bylaws allow the President wide authority with respect to salaries, he may have the authority to set his own salary.  Normally the Board would set the CEO salary.

If you are very unhappy with the arrangement you can bring shareholder actions against the Board.  These would not be cheap to initiate, but you do have rights.  Note that as a minority owner, you can be outvoted without very much recourse I'm afraid.

When considering whether to acquire stock in a small corporation, I typically advise my small business clients to have specific shareholder exit strategies defined so that people know how and when they will see some benefit.  Distributions, profit sharing, dividends, or automatic share purchase agreements are all examples of devices employed to actually make small company stock worth something to people.    


These are some ideas.  Feel free to follow up with additional questions.


For your general information, the pros and cons of the types of dispute resolution methods follows.

GOOD LUCK!

Arbitration, Mediation, and Litigation

Arbitration: the referral of a dispute to one or more impartial persons for final and binding determination outside of the judicial system

Benefits of Arbitration:

    Confidential, no public record
    Limited exchange of documentation, information
    Quick, don't have to wait for a court date
    Arbitrators have expertise in the subject matter and are trained in conflict resolution
    Cheaper than litigation
    Preserves business relationships

Negatives of Arbitration

    It's a compromise, no 0 winner
    Complex arbitration can be costly
    If not satisfied, may litigate the arbitration procedure
    Poor results with an unskilled arbitrator
    Both parties must agree to cooperate in the process

Mediation: the process by which parties submit their dispute to a neutral third party (the mediator) who works with the parties to reach a settlement of their dispute.

Benefits of Mediation:

    Neutral mediator can objectively suggest alternatives not considered before
    Parties are directly engaged in negotiating the settlement
    Can be quicker than litigation
    Less costly than litigation
    Preserves business relationships
    85 of American Arbitration Association cases mediated find successful solutions

Negatives of Mediation

    may not reach a binding decision
    unskilled mediator

Litigation: using the judicial system to resolve disputes

Benefits of litigation:

    a clear winner and loser
    uses a prescribed set of procedures
    more predictable outcomes
    is final

Negatives of Litigation:

    waiting for court dates can do more harm
    usually more expensive than mediation and arbitration
    part of the public record