Expert: Timmy Chou - 1/31/2010

Question
I am one of four siblings in an s-corp family business. My father, the majority owner and founder, passed away 4 years ago. Estate issues have been settled resulting in a new structure of minority ownership percentage. I have attempted at several meetings to have the family restructure our board governance and by-laws to reflect the new minority structure. Unfortunately this has been dismissed under the assumed majority role of my brother who holds the position of president. I attempted to bring in a mediator to which my brother contacted the referring parties saying they work for the company first and cannot act in the interest of a shareholder. Board related questions re: fiduciary items are viewed as "crossing the line" and dismissed under the category of "operational". All executive and family estate decisions are currently being made by him without any checks and balances between the board and elected president (ex: he sets his own salary and bonus, implements strategies not reflected on annual reports, etc). This has caused serious conflict to the point of new amendments being passed in a kangaroo court type setting that allowed 2 siblings to purchase shares - resulting in dilution of shares for those excluded. I am concerned of self-dealing and that ALL shareholder/owner interests are not being protected by the current board dynamic. I am at a loss on how to protect my interests.  I do not want legal arbitration which would only hurt the company, yet I cannot ethically (or financially) allow our current dynamic to continue. Can you refer a mediator (NJ)to begin a positive resolution to my predicament?

Answer
Thank you for your question!

If you have looked at some of my previous answers you may know that I always advise questioners that 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.  You were wise to seek some mediation assistance - the assertion that a mediator "works for a company" is erroneous.  A mediator, by definition,  is NEVER an advocate.  

I am not an attorney and cannot give you legal advice but can respond from my mediation, management and consulting experience.  I am assuming that your settlement attempts are being crafted "on the fly" as best you can, and I am also assuming you have not done anything to put you in breach of any written partnership obligation.  Note that this issue may certainly have legal ramifications and you may wish to consult an attorney.

Your brother has confused the roles of corporate governance.  He works for the Board and, unless there is specific language in Bylaws or Operating Agreements, cannot merely assume powers or decisions, and can be fired by the Board.

Consider doing the following preparatory and proactive steps right away.  Here are my recommendations:

1.  Be sure you are documenting a chronological timeline noting the management issues and conduct in the business, the written objections you have lodged and the manner of dealing with them.  

2.  Review your existing documents.  Review whatever Bylaws, written agreements, operating agreements or other governing documents you have for guidance about the existing rules.  Be sure your written demands reference your authorities under these rules.  In most states, where there is no written rule in the corporation, the rules default to the statutory state established rules in the Commercial Code.  Try and get a copy of these rules and again reference and rely on them as you move ahead.    

3.  Go see a lawyer.  The local Bar Association usually has a referral service that will give you access to an attorney for free.  You should understand the legal landscape.  I would suggest that a possible next step would be to seek a restraining order from a court.  You can argue that your interests are being harmed and that your authority under the governing documents is being usurped.  You could ask for a restraining order and also ask for court ordered mediation.  Some legal advice to the company would also be very useful -- any rogue President that does not follow the rules of proper corporate governance needs to understand that there may be legal consequences to illegal actions.

4.  You may be in a position to force a purchase of your business interests if your docs require it.  It may be better to get what you can now, rather than watch the beast get bled to death till there is little left for you.

5.  Time is not in your interests.  You must act before too much time passes.  You may be able to argue that the corporation should pay all the legal bills.  As you have seen, there is no corporation police.  The law requires people to act to enforce corporation law and if in the meantime all the assets are wasted, no one cares.  

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 often a compromise, no 100% 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