So you own 70% of your company and 3 others each own 10%. So you can do what you want right? WRONG! In every state I’m admitted in (VA, DC & MD) minority shareholders have rights. Among other things, they have the right to see the tax returns, inspect the company records and be kept informed of the financial status of the company. This last is a bit vague but it usually consists of getting copies of the quarterly reports prepared by the company’s accountant.
But if 1 (or more) of the minority shareholders is a PITA, you cannot cut them off. You cannot force them out. You must continue to obey the law no matter how obnoxious they are. Over the years I’ve heard of several schemes to run off PITA minority shareholders:
- Just dissolve the company and restart it with a new name;
- A reverse stock split and they buy up the fractional shares held; and
- Buy out the PITA minority shareholder.
But the majority shareholder (who is likely to be a Director, as well), has fiduciary duties to the corporation (and possibly to the minority shareholder(s), as well, depending on how state law approaches the issue). In addition, people who are PITA-enabled tend to get upset when they are forced out. A lawsuit would surely be started arguing that his/her rights and property were stolen. There’s a good chance they would win too.
Bottom line: choose your partners and minority shareholders carefully. Getting married is easy but the divorce will be long, expensive, and painful.