July 5, 2020

Volume X, Number 187

July 03, 2020

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Majority Shareholder Threats May Backfire

If you are having an ongoing issue with your business partner and you attempted to discuss it, how did he react when you started raising concerns about the manner in which he was running the company? If he is like many entrenched majority owners who have let their power and authority go to their heads, his initial reaction was a threat.

“If you don’t like it, you can always leave.” “Keep complaining and I will fire you.” “How would you like a salary reduction?” These are some of the many responses my clients have heard over the years, but they pale in comparison to “I will close the business down and start another one without you in it!”

A Majority Owner’s Threat

These are all scary threats, to be sure. Just how seriously should you take them?

A majority owner may very well make threats that he does not intend to follow through on. However, many times the threat is very real. Therefore, you have to assume that the worst may happen if you persist in accusing your partner of wrongdoing or bad faith. But if the worst does happen, can this turn out to be, in actuality, bad for your partner instead?

While the loss – or reduction – in salary can be problematic, such blatant retaliation can often come back and hurt the majority owner in the long run. Ultimately, the parties will have their day in court if they can’t settle. How is it going to look to the judge who will be deciding the case when the party accused of wrongdoing retaliates in this manner? And the worse the threat, the greater the potential blowback. If a majority owner ever actually followed through on a threat to shut down the company and open a new one, yes, that would be a temporary blow to the minority owner. After all, you would now own a company that was utterly worthless, while it was business as usual (but with more money in his pocket) for your business partner. But a court will very likely not sit back and allow such a blatantly improper move to stand.

The Minority Owner’s Strategy

There are several things a court could do. The transfer of assets to the new business, including goodwill, employees, and contracts, could be voided as fraudulent. Or, the new company could be deemed a wholly-owned subsidiary of the existing company. Either way, such a transaction may do more harm than good to the majority owner – in the long run.

One mistake minority owners often make is to bring concerns to the majority owner’s attention verbally only. If there is a written record of complaints, then the above moves are more readily shown to be retaliatory in nature. In other words, how and when exactly to approach the majority shareholders with your specific concerns is not something that should be taken lightly. Often strategy should be involved because everything you do at that early juncture will be evidence in your ultimate lawsuit. As always, the stronger your case and arguments are, the greater the chance of avoiding costly litigation.

©2020 Norris McLaughlin P.A., All Rights ReservedNational Law Review, Volume X, Number 155

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About this Author

David C. Roberts Member  New Jersey fraud, fraudulent transfers, trade secret, restrictive covenant litigation, employment litigation, environmental matters, and insurance coverage litigation.
Member

David C. Roberts, Co-Chair of the firm’s Litigation Practice Group, devotes his practice to handling complex commercial litigation matters, such as fraud, fraudulent transfers, trade secret, restrictive covenant litigation, employment litigation, environmental matters, and insurance coverage litigation.

His practice has a particular emphasis on partnership and shareholder disputes, including oppression and dissenter’s rights cases, with a focus on attempting to resolve matters through mediation, if such an approach fits within client’s goals and objectives.  In 2007, Dave launched...

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