We are an S-Corporation with 3 shareholders; 45%, 45%, 10%. All three of us work for the corporation and I am one of the 45% owners. Over the last 3 years one of the 45% owners has become increasingly difficult to work with, causing massive disruptions across the company. It is my belief that these disruptions are the major reason why the company has seen no growth for the last 3 years.
We have also found out that the shareholder has made several attempts (we don't know how successful any of them have been) to work with other organizations to get outside work for himself in the same professional field the corporation conducts its business.
The subject of buying out the business partner has come up but the amount he wants is significantly (approximate 5x) higher that our current evaluation says we're worth.
What are my options?
Corporate / Incorporation Lawyer
Your procedural path may be limited by your bylaws, but I think speaking to the 10% shareholder is key. If the other shareholder is involved in the day-to-day operations of the business and has attempted to compete against the corporation (irrespective of its S-Corp status), he has liability for misappropriation of corporate opportunities. I would seek the support of the 10% shareholder, and then, in accordance with the by-laws, oust the other 45% shareholder form the directorship and officer status of the Corp. As an S-Corp, you would then have indefensible leverage, as you can vote to K-1 him for income and choose not to make any cash distributions (much like a family limited partnership defensive strategy). At that point, you can buy out his 45% for a fair amount and send him on his way, although he may be entitled to an accounting before a sale of his shares.