Expert: Timmy Chou - 2/16/2010

Question
We have a family construction business with my father being 45% owner, my mother being 45% owner and my brother 10%.  My parents have been divorced for quite a few years now. the problem is that my father does whatever he wants with jobs, money, equipment and such. He just recently closed 2 of their banks accounts and opened 2 more without my mothers knowledge. Now she has no access to the accounts and is not certified to write any company checks.  All statements and checks are sent to my dad.  He writes out checks to all kinds of things that are not business related.  He is completely shutting out my mother from her own business and my brother doesnt do anything about it because my dad wants to turn it all over to him someday.  He is running this business into the ground.  Where can my mother find out her rights as a co-owner or does she just need a lawyer to handle this?

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.

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 attempts to manage the situation are being crafted "on the fly" as best you can.  Note that this issue may certainly have legal ramifications and you may wish to consult an attorney.

Your father has confused the roles of corporate governance, but unless the other shareholders object he can get away with it.  There are no "corporation police" and you must enforce the rules on your own.  Often people are either not able to afford the legal bills or they are unwilling to get into a fight -- especially in a family business -- and the bully merely goes on with no checks and balances.  

To prevail in these situations you will almost certainly have to have a big fight -- sometimes this destroys relationships, but you would have to hire a lawyer and get him to file a temporary restraining order and get the court to lock up the corporation assets and cash until a trustee or someone can sort it out.  It would be very expensive, especially if the father resists the suit.  If you are resolved in your collective intention to change the balance of power, you could get a mediator to help you lay out the landscape to the father and see if there is some cooperative way to make changes first.

Consider doing the following preparatory and proactive steps right away.  

1.  Be sure you are documenting a chronological timeline noting the management issues and conduct in the business, the 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.  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 , 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