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If we were solicited to invest in a private corporation repeatedly and the President CEO is not acting as a fiduciary--recourse?

Temecula, CA |

We were asked repeatedly to invest thousands of dollars in a private corporation we were partners in by the President, who then forced us out. The money is still invested there and he shows losses every year on our K-1. We would like to get our investment out. Is that possible and, if so, how?

Attorney Answers 3

Posted

First, since you describe a corporation and a K-1, I speculate that you are shareholders in a sub chapter S corporation, rather than a partnership or a limited partnership. Many lay people use the term partnership generically, which may have caused confusion with the other answer I read.

In any event, just because he forced you out, in and of itself, is not a sufficient basis to get him to repurchase your shares.

However, if you have reason to believe that he made misrepresentations to you in connection with the purchase of the shares, you may have a variety of causes of action. Nothing you have said yet suggests misrepresentation or concealment. Also, you are talking about years, so I do not know whether the statute of frauds has been violated.

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Posted

Your question is a little difficult to answer as the facts aren't clear. It sounds like you invested in a company and you were admitted as "partners." I would assume that's "limited partners?" And you were "forced out" -- how? Were your interests in the company terminated improperly or wrongfully?

The first place to check is the limited partnership agreement that you hopefully have for your investment. There should be a section called "Termination of Partners" or something to that effect, and it should describe how interests are to be terminated and whether LPs have any recourse or rights to their money.

Much will depend on the location of the company and its state of incorporation. What you may have to do is file a derivative action on behalf of the company to get an accounting of assets, assuming you're actually a LP. I'm at a loss as to understand why you're receiving K1s if you're "out" of the company.

The foregoing is not legal advice nor is it in any manner whatsoever meant to create or impute an attorney/client relationship.

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6 comments

Asker

Posted

Thank you, Mr. Cornish. I was a co-founder. When I made someone President of the S-Corp, he got a lawyer and began a to force me out by store closing, closing bank accounts, forcing the potential calling of a lease, etc. I signed a settlement agreement under duress which gave me a percentage of the company shares by stepping down from the Board. I am now 'just a shareholder'. The President has continued to harass me after the settlement, including entering my business to extract information. All I want is to recoup my investment, as it is a sizeable amount of my life savings. I feel he is holding my money hostage to keep me from using it in my new business..there was no noncompete signed as part of the settlement.

Michael Prozan

Michael Prozan

Posted

Reading this, understand that being "just" a shareholder in California provides you with a lot of rights and the people operating the company with a lot of duties. While you may not have a cause of action for fraud in the investment, in California, as a shareholder, you likely have rights to inspect the books and records of the company. If you found that he was misusing funds, that might be grounds for a breach of fiduciary duty suit.

Asker

Posted

Thanks to both of you. There is still solicitation for investment going on to others on their website, even though the company has not shown a profit for 5 years. I would like to ask for P&L's, the names of current Board members and officers of the corporation and my stock certificates, but due to his past harassment, am concerned he might accuse me of industrial espionage or something else as a competitor. Even as a competitor, do I still have the right, as a shareholder, to ask for these things without getting into legal problems?

Michael Prozan

Michael Prozan

Posted

Well, if you are a competitor, all the more reason he should buy you out. Section 1600 of the California Corporations Code sets forth your inspection rights as a shareholder. http://www.leginfo.ca.gov/cgi-bin/displaycode?section=corp&group=01001-02000&file=1600-1605 On the one hand, you are clearly entitled to show up and inspect the books and records of the company for a purpose reasonably related to your being a shareholder. So, you can inspect the documents, but cannot use what you learn for competitive purposes. On the other, once the antagonism starts (and you're past that), I don't believe I have ever seen anyone honor that prevision. It is usually a precursor to a lawsuit, usually for something else, but perhaps just to get the inspection done.

Michael Prozan

Michael Prozan

Posted

I should say Section 1601 addresses what you seem to be concerned with.

Asker

Posted

Thank you again. This has been a great help. I will be in touch if we need legal help in future with this matter--you have taken time and I appreciate it!!

Posted

Depends on your contract and what you where told. You need to see a lawyer, don't say any more in a posting.

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