What can be done about inappropriate distributions by a majority shareholder in California?  What action should a minority shareholder take if dividends are not paid, if shareholders within the same class receive difference distributions or if a primary shareholder is taking more distributions than those established in the corporate documents of a San Diego corporation or entity?

Key Takeaways for Resolving Inappropriate Distributions by a Majority Shareholder

•  There are specific laws here in California, and across the U.S. that govern how and when corporate distributions can be made.
• There are standards regarding distributions that must be upheld, and inappropriate distributions expose majority interests to personal financial liability.
• Disputes over the failure to declare or distribute dividends and other distributions are the most common types of disputes involving shareholders.  Follow the money.

Corporate Distributions are, by law, Discretionary

California law has established that the directors of a corporation retain exclusive authority to not only declare distributions, but the amount, the date(s) they are to be paid and the method for distributions.

California law establishes standards for the value of the corporations retained assets and earnings prior to a distribution.  For example, if a planned distribution would result in the corporation’s insolvency the distribution cannot be made.  While majority shareholders and/or the Board of Directors holds most of the power in this equation, inappropriate distributions by a majority shareholder in California can expose them to personally liability for their actions.

Disputes over Distributions in San Diego

Disputes over distributions by members in an LLC or shareholders in a Corporation are serious matters.  After more than 40 years of experience as a San Diego and California corporate and business attorney I can tell you that the majority of shareholder disputes relate to money, and distributions can be a core issue.  When you have a small company, some members or shareholders run it more carelessly than the corporate agreements may provide for.  The operating agreement or shareholders agreement should specify the types of distributions that are appropriate, by whom, and under what circumstances.

Are you concerned about inappropriate distributions by a majority shareholder?  Are you concerned about commingling or theft by one of the principles?  Has the company rewarded two shareholders in the same class with different returns on their investments?  Is this affecting the efficient business operations of your company or the corporate culture?  Disputes between senior members of the ownership team are a distraction which can ultimately threaten the viability of the company itself.

Pro-Tip: “we’ve, we’ve had so many shareholder fights where, um, a company group of friends or a group of friends who know friends, maybe 30 people invest in a company and it’ll be doing well, but not great. And they investors, the shareholders won’t be receiving, uh, disclosures, or they will be receiving them, but they sort of don’t add up. And then they do an investigation and they come to some law firm like ours and they say, well, let’s, let’s get in there seeing the books and records and you get some pushback from the company. And that’s when all the hairs in your neck stand up and you come to the Watkins firm and we file a motion. And we discover through our due diligence that the company’s doing very good and that they also formed an offshore corporation of the same name. And they’ve taken all the assets and they’re all driving Rolls-Royces. So this has happened more times than I can say, because it just does happen. Nobody fights over anything unless there’s money involved. If it’s just doing okay, they would tell the truth and say, it’s all great. But if that big money offer comes in the door and they have a way of, of keeping it for themselves, it’s very tempting for human nature to turn that down.

What are a couple of examples of common shareholder disputes? Breach of the shareholder agreement and most importantly, lack of access.

What can the Watkins Firm do as a shareholders’ dispute resolution attorney to help protect our clients interests in their shareholders agreement and their access to information?

Well, we like to say, if it’s off a penny, it’s off a million. So we look at the financial disclosures you’ve given, and if they don’t add up or doesn’t seem straightforward, we suggest you demand for documentation. And if they don’t give it, that’s sort of like them pleading the fifth, you know, something’s wrong when they’re not willing to give their investors, their owners full access, full transparency into what’s going on with the company.

So that sense that you have that something’s just not right. That should also be a sense that maybe I should get some help.  And you should do it right away, because when shareholder fraud or shareholder breach happens, it’s usually for a purpose. There is usually an opportunity for management, and it’s happening now.  And it’s probably a lot of money. They usually won’t do it unless it’s worth something.

This is often also a matter of timing. Let’s say you don’t have a shareholder agreement, or you have a weak shareholder agreement and management has broad discretion to do a lot of things, and they’re getting ready to do some questionable things, to make a big profit. And you come along and say, wait a minute, I think something’s wrong here. And you pose an objection. Well, before you file a lawsuit, this opportunity that management has is still there. So if you are the squeaky wheel right away, before they go forward with whatever they’re doing, then you may profit from that. But if you’re not, then it’ll just happen. And instead of sharing in the profits, you’ll be fighting to claim you had rights to get some money back.” – Dan Watkins, Founding Partner

Resolving Inappropriate Distributions by a Majority Shareholder

The reality is that many San Diego and California business interests were formed using downloaded forms and are run more like personal accounts rather than the independent LLCs or corporations they are required to be.  The Watkins Firm will aggressively represent your interests and evaluate all that has happened.  California law provides specific relief for members in an LLC or shareholders who are concerned about the actions of another principle of the company.  What action should you take if you are concerned about inappropriate distributions by a majority shareholder?

The Watkins Firm employs a proven and unique strategy for resolving shareholder disputes which is specifically designed to achieve our client’s goals and protect their interests while settling the dispute in a timely and cost-effective manner.

If you are concerned about unauthorized distributions, commingling of funds or other mismanagement of company funds we invite you to review our podcast Episode 14 – Shareholders’ Rights and Disputes as well as the strong recommendations of our clients and contact the Watkins Firm or call 858-535-1511 for a complimentary consultation today.

Meet Dan Watkins:

Daniel W. Watkins is a true people person who sincerely listens. He cares about things that occur in other people’s lives. Dan enjoys digging into the facts and finding creative solutions to problems. He is not shy about giving his opinion either.

Dan’s interest in people make him deeply invested in every relationship and his exuberant personality makes him a true litigator. Dan fights for his clients with a fierce and calculated commitment.

Dan has practiced in the areas of business, medical practices and healthcare business, high tech/science, real estate and employment defense law since 1987. He is a seasoned litigator and true trial attorney with over 50 jury and bench trials to his credit. Dan has successfully represented both large companies and individuals and achieved substantial victories in well-publicized trials throughout California and the U.S.

He is experienced in business and corporate formation and administration, as well as all forms of alternative dispute resolution, including binding arbitration and mediation.

THE ROAD TO BECOMING A BUSINESS LAWYER AND LITIGATOR

Dan has almost 40 years of experience working with, for and against some of the largest insurance companies in the country. He has successfully tried and litigated cases in the areas of Healthcare Compliance, Commercial Litigation, Unfair Business Practices, Fraud, Breach of Contract, Battery, Premises Liability, Product Defect, Medical Malpractice, Discrimination, Sexual Harassment, Construction Defect, as well as Unfair Competition, Defamation, and Trade Secrets.

In December 2003, Dan commenced litigation against Health South Surgery Centers-West, Inc and its’ subsidiaries, exposing the company’s extensive mismanagement and misconduct of its’ surgery centers. Dan has also been asked by some of California’s largest municipalities and corporations to conduct legally required investigations into matters involving alleged employment discrimination and harassment.