As a business attorney representing closely held business I am often approached by clients who desire to make a key employee, a spouse, family member or an investor an owner. This usually prompts a discussion of their reasons. Typical responses include a belief that if the employee has a stake in the future of the company they will be less likely to quite; will maybe be more willing to stick it out when times are tough; the owner feels a sense loyalty to a key employee or spouse, a desire to reward past performance that has helped to make the company successful, this is a family business, to avoid paying interest on a loan or because it is a requirement of the investor.
The owner usually desires to maintain control which normally includes the ability to sell the business, control compensation and make all the important decisions concerning the business. This results in a discussion concerning what control means. Many owners believe that if they own 51% that they have control. Under Ohio law that is not necessarily true. Corporations normally require a 2/3 vote of the shareholders to approve many transactions unless the articles of incorporation provide a lesser amount but in no event may the vote be less than a majority. ORC 1701.76 (A)(1)(b) (asset sale) ORC 1701.83 (A) (stock sale) ORC 1701.78 (F) (merger) ORC 1701.71(A)(1) (amendment of articles of incorporation) In a limited liability company any action taken by a member that is not in the ordinary course of business requires the unanimous consent of all the members unless there is an operating agreement in place specifying a different ratio. ORC 1705.25 (A)(3).
Another common issue is whether there should be any restrictions on the transfer of ownership. While an owner is usually comfortable with an employee or investor owning stock the same does not follow for maybe their spouse, creditors, children or other heirs. It is for this reason and others that most often such ownership usually result in the implementation of a shareholders agreement, closed corporation agreement or operating agreement. Such agreements usually address a myriad of issues including restrictions on transfer, management control, covenants not to compete, purchase of ownership interest upon death, termination of employment, divorce, bankruptcy and disability.
Owners who are used to total control should also be mindful of the duties and restrictions Ohio courts have placed on majority owners of businesses. In 1989 the Ohio Supreme Court in Crosby v Beam 47 Ohio St. 3rd.105 created a fiduciary duty on the part of the majority owners of a closely held company to their minority owners. The minority has a right to have an equal opportunity to benefit from the business as the majority. On the face of it this only sounds fair. However, when you consider that as long as the owner owns all of the company he had no such duty. He or she is free to sell the business, hire or fire employees within the confines of employment law or simply close the business and open a similar business.
In larger businesses and in particular corporations if the majority or management take actions that advantage themselves or disadvantage the corporation the disadvantaged shareholders may only bring suit on behalf of the corporation to recover damages which if they are successful are paid to the corporation.. The individual shareholders have no independent right of recovery except possibly for attorney fees. This is commonly referred to as derivative shareholders suit. In a closely held corporation minority shareholders have a right to recover personally for any harm they may have suffered at the hands of the majority. Below are examples of issues courts have considered.
Two of three shareholders formed a new company to conduct a similar but unrelated business. Court held it was a question of fact for the jury to decide if they had breached their heightened fiduciary duty to the third shareholder who was not included. Medina v Perumbeti (1994 WL 716539)
An officer and shareholder of a company were not allowed to enter into new business that the minority believed would compete with the business of the company. Morad v Task (1994 WL 78157)
A shareholders employment could not be terminated unless there was a legitimate business reason. Morrison v Gugle (2001) 142 Ohio App. 3rd 244.
Minority shareholders may question the compensation paid to the majority shareholder. Soulas v Troy Donut University, Inc. (1983) 9 Ohio App 3rd 339.
Minority shareholders may force the payment of dividends. Ohio Jurisprudence 3rd Business Relations 721.