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Minority owners in a company

Minority ownership in a privately held business may create opportunities for “squeeze out" techniques by majority owners. In Missouri, to investigate that conduct, we use the following analysis outline: Documents to review: Articles of Incorporation and By-laws, or Articles of Organization for a limited liability company Is this a statutory Close Corporation? (See remedies and dissolution) Ownership agreement/shareholder agreements Employment agreement with majority owner Other contracts defining the relationship of the parties and contributions to capital Leases and contracts with controlled corporations and significant vendors Financial statements for last 5 years and/or tax returns Shareholders Minutes and Notices of Meetings for the last 5 years. Directors Minutes if available Correspondence showing attempts to obtain information by the minority shareholder Squeeze-Out techniques and issues to consider: 1. No dividends 2. Elimination from Board of Directors or Board of Managers 3. Exclusion from company employment 4. Siphoning off earnings by high compensation to majority owner or relatives 5. Sale of corporate assets to other insiders 6. Withholding information 7. Leases and loans favorable to majority owner 8. Other enterprises controlled by majority owner that perform services for company 9. Appropriation of assets, contracts, or credit for personal use 10. Usurping business opportunities that belong to the company 11. Issuance of additional stock or ownership interests to dilute minority interest 12. Self-dealing in general Remedies in Missouri Courts 1. Dissolution -based upon illegality, fraud, misapplication of assets or waste, or “oppression" -if a statutory “Close Corporation," Missouri allows the majority shareholder the alternative of buying out the minority shareholder for “fair value." 2. Receivership to liquidate and wind up the business 3. Appointment of a Custodian to take over management of the business 4. Court appointed provisional director to help resolve disputes 5. Setting aside fraudulent or abusive transactions 6. Injunctive relief to prevent future similar conduct 6. Suit for damages for: Breach of contract Breach of fiduciary duty Damages for excessive salaries or self-dealing Punitive damages against majority shareholder (to reduce the benefit he will derive by recovery by the corporation in which he owns the majority interest anyway. Types of actions - first distinguish between corporate rights and personal rights; the former require a derivative suit. 1. Derivative suit on behalf of shareholders or minority owners a. Must be preceded by demand on the controlling directors or managers to take action to remedy the issues b. Types of claims covered (numbers refer to same number in “squeeze out" list above) 4. Siphoning off earnings by high compensation to majority shareholder or relatives 5. Sale of company assets to other insiders 7. Leases and loans favorable to majority owner 8. Other enterprises controlled by majority owner that perform services for company 9. Appropriation of assets, contracts, or credit for personal use 10. Usurping company opportunities 12. Self-dealing in general c. Downside Damages are recovered for the benefit of the corporation, and hence, ironically or the partial

benefit of the majority owner also. For a 10-15% minority owner, this means that 85-90% of

the recovery will benefit the majority owner anyway. 2. Direct suit by minority shareholder, for individual claims 1. No dividends 2. Elimination from Board of Directors 3. Exclusion from company employment 6. Withholding information 11. Issuance of additional stock to dilute minority interest

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