Unnecessary Capital Call as Means of Dilution Can Be Shareholder Oppression
When majority shareholders want to force a minority owner out of the company, there are a variety of means for doing so. One of the most popular methods is the unnecessary capital call.
One recent case involved a client who was a part owner of a corporation that seemed, on the surface, to be in need of money. In reality, the majority owner was "in need" of "getting rid" of the minority shareholder (my client) to solidify his control over the company. The majority shareholder engineered a capital call, knowing full well that my client would be unable to raise enough cash to increase his already hefty investment in the company. As a result, my client was diluted from a one-third owner to a nine percent shareholder. He was ready to accept a meager payment for his shares when he came in for a consultation.
A forensic accountant discovered in his review of the company’s books and records that the majority owner was siphoning money out of the company. As a result, he essentially met the capital call with money taken in the form of substantial overpayments to himself, and illegal reimbursement of hundreds of thousands of dollars worth of purely personal expenses.
When it became apparent to the majority owner’s counsel what his client had done, the settlement offer increased several multiples, and a lengthy and expensive litigation was largely avoided.
The most amazing part of this case is that my client started out believing that he had no rights whatsoever. The majority shareholder had issued a capital call, which my client knew to be a perfectly legitimate mechanism to raise money, but he had no money to contribute. Having an experienced business divorce attorney review the facts before he made a fateful decision made all the difference in the world to him.