If you are a passive investor in a closely-held business, there are many things from which you need to protect yourself. In New Jersey, these can include excessive salaries and bonuses, personal expenses being run through the company, cash transactions never making their way onto the books, and relatives on the payroll in no-show jobs. You can (sometimes) protect yourself from such oppressive acts by taking certain precautions, like reviewing the finances with some frequency. However, a less common form of minority shareholder oppression can be somewhat difficult to discover – when the majority shareholders simply start another company off-books that either competes with your company or does work that is related enough that the existing company could have easily done it.
When the majority shareholders know a minority owner is reviewing the books and records, they (sometimes) realize that things like over-inflated salaries/bonuses and monies paid to family members will be seen, discovered, and likely complained of. However, if a completely new company is started and certain projects are run through it, those transactions may never be discovered by the minority owner. For example, an architectural firm can simply bill come of its architectural projects under another company’s name. Or, an engineering firm that has never previously done environmental consulting starts doing those types of projects but does so through an entirely different company. Of course, the common denominator in these new companies is that your fellow shareholders in the existing company (the one you know about) are the only shareholders in the new company. Not only have you been cut out and excluded from owing any piece of the new company, but you don’t even know about it.
Minority Shareholder Oppression
So, how can you defend yourself against something you don’t even know about? It may not be easy and reviewing the books of the company you own may-or-may-not reveal anything that jumps out at you. One thing to look for is a downward trend. If sales have gone down, do the majority shareholders have a plausible explanation for the decrease? If sales of a construction company have plummeted while the industry as a whole seems to be soaring, can those in charge adequately explain what is going on?
Sometimes, though, discovering improper competition is as easy as a Google search. One client came to me because he was searching for competing companies on the internet – not suspecting any wrongdoing, but simply researching his own industry – and discovered a company that sounded exactly like his own company, but with a different name. When you accessed the “contact us” tab, the name was familiar – his business partner! When the majority shareholders tried to argue that the projects done under the name of the new company could not have been done by the old company, even they knew how ridiculous they sounded, and a settlement was soon reached.
It isn’t always this easy. Sometimes all you have is suspicion and no idea where or how to look. Sometimes the majority owners hide the competition so well that you don’t even realize you should be suspicious. But if you do suspect any improper behavior at all, or simply want to discuss whether there could be anything improper going on, contact an experienced business divorce attorney who has seen all of this before.
If you have any questions about this post, shareholder disputes, or any other related business law matters, please feel free to contact me at firstname.lastname@example.org.