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I want to buy out a 50% shareholder in an S-Corporation with no buy-sell agreement. Can I force the shareholder to sell at FMV?

Dallas, TX |

I am a 50% shareholder in an S-Corporation with no buy-sell agreement. I have been running the day to day operations of the business for 15 years and make all decisions. The other 50% partner has not been involved in the business for the last 10 years. I have made an attempt to buy the partner out but he rejected the offer even though the offer was generous. Unfortunately, the partner is now beginning to interfere in the business because of lower operating performance as a result of the economic downturn and I want and need to buy him out. He is now inhibiting growth and causing problems within the company. My question is, is there any way I can force the partner to sell his share of the company. Again, I am willing to pay a fair price for company based on an independent appraisal.

Attorney Answers 4


  1. First of all, a lot more information is needed to steer you in the right direction as far as what to do. You should contact a qualified attorney that specializes in business or corporate law. Is there a shareholder's agreement for your corporation? If so, there may be a clause that addresses dissolution of the company (and you could start a new one) or potentially a forced buyout. If the matter went to court, a FMV would be used by the court to determine the value of the company. Any clauses in the corporation's formation document would govern, including any arbitration clause.

    Disclaimer: Provision of the foregoing response does not create an attorney-client relationship, does not constitute legal advice, and should not be relied upon because the response is based upon the limited facts provided and it is impossible to meaningfully evaluate any legal problem without a thorough review of the pertinent facts and law which applies to the matter.


  2. With you both being 50% shareholders, neither of you can force the other to do anything without some shareholder agreement. The fact that you have been in control does not give you greater rights now, particularly if the other shareholder has some gripe about how the business is being run.

    I suggest that you consider engaging a qualified mediator to help resolve your disputes. The cost of a mediator will be a lot less than the expense of attorneys for both of you. You may need to retain a business valuation expert before a mediation to help determine the value of the business. You may consider setting a strike price for the other shareholder either to sell his 1/2 or buy your 1/2. Depending on the kind of business, the value of the business is tied to the persons running the business and if that person leaves, the business is worth a lot less. So, you may consider starting a new company of your own.

    A Google search for Dallas County mediators follows:

    http://www.google.com/search?q=Dallas+County+Texas+mediator&rls=com.microsoft:en-us:IE-SearchBox&ie=UTF-8&oe=UTF-8&sourceid=ie7&rlz=1I7DKUS_en

    If none of that works or is acceptable, you can retain an attorney to sue to dissolve or wind up the company. You can preview Texas law on Business Organizations at the Texas Constitution and Statutes home page:

    http://www.statutes.legis.state.tx.us/

    Chapter 11 of the Texas Business Organizations Code concerns the winding up and termination of corporations. The web address for Chapter 11 of the BOC is:

    http://www.statutes.legis.state.tx.us/Docs/BO/htm/BO.11.htm

    Good luck.


  3. You need to look at the corporate by-laws regarding dealing with shareholders. One problem you may have is the 50/50 split. A lot of by-laws do not have sufficient provisions to deal with this type of situation. Also take a look at the dissolution and wind-down provisions to see if there is some language that would allow you to wind down and handle it that way. Another avenue, albeit a costly one, can be to request a court appoint a receiver to figure out what to do. Be careful in how you handle this, as officers owe the corporate a fiduciary duty and in certain circumstances stockholders can owe each other fiduciary duties. I have litigated these types of matters before and they can get very sticky very fast. I think it would be a good idea for you to take your corporate records to a good corporate attorney with litigation experience to review and help you determine what options you might have.


  4. The starting point is a thorough review of the corporate Bylaws and any associated Shareholder Agreement. If you used a standard form book then you may not find anything to help you. If a competent business attorney drafted the documents you may have a force out provision. The careful review should be done by an experienced business attorney who can give you accurate advice.

    If there are no Bylaws or a Shareholder Agreement, or neither has any language that helps answer your question, you should seek the assistance of a mediator but get one that is experienced with business litigation matters. A non-attorney mediator will not be very helpful in this situation. If the mediation files you can resort to filing a petition with the court in Dallas County to have a receiver appointed or you can discuss with your business attorney the possibility of simply forming a new corporation and continuing on your own. You'll need to make sure you don't run afoul of any laws or agreement that prohibit you from doing so.

    DISCLAIMERS. Mr. Connor is licensed to practice law in the State of Texas. He may be reached by phone at 512.477.2141, by email at jconnor@connorlawfirm.com, or through his website at www.jonconnorlaw.com. The responses provided in this comment are not legal advice, do not create an attorney-client relationship and may vary depending on the jurisdiction of the matter. This site should not be used as a substitute for legal advice. These responses are for educational purposes only and should not be relied upon as anything other than general information. Seeking the advice of an attorney is strongly encouraged. Any information in this comment may not be used to eliminate or reduce penalties by the IRS or any other governmental agency.

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