
Ask HN: What to do when a company shuts out its shareholders? - throwingaway
Background: A few years back, I left a small, privately owned company that I had worked at for 7 years.  A few times during those 7 years, I was given small amounts of shares in the company, partially in appreciation for my hard work and partially in lieu of increased salary.  Two other long-time employees were also given shares.<p>Due to personality conflicts with the CEO and other department heads that were later brought on, I was forced out of the company.  The other two share-holding employees also left shortly after.  At that time, there were about 10 shareholders, with the CEO owning the majority stake.<p>Since our departure, the three of us have asked the owners to buy our shares back, but they have ignored us.  They do not have shareholder meetings, do not produce annual reports, and will not share any financials with us.  The three of us would rather cash out our shares now than wait for the company to go bankrupt.<p>What are we legally entitled to being shareholders?  Can they get in legal trouble with the state for not disclosing information to us?  Can we sell our shares to a competitor if the owners are ignoring us?
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grellas
As a minority shareholder in a closely held corporation, your rights will be
defined by the governing corporate law (in your case, that of Illinois) and by
any charter documents or agreements that may create contractual rights of some
kind.

Above all, see a lawyer in your local jurisdiction to get advice on this. I am
a lawyer but obviously can't give legal advice in this type of forum.

In the abstract, however, the following principles tend to apply:

1\. Shareholders in a closely held corporation generally cannot force the
company to back back their shares. Exceptions exist - for example, if you have
a shareholder agreement in place that gives you such a right or, in some
states, you might have what is called a "statutory close corporation," which
can have intricate contractual provisions defining its corporate structure.
Check with an Illinois lawyer on this.

2\. Minority shareholders generally do not have a right to inspect board
minutes (again, your local laws may vary) but do have a right to get annual
financial information and to inspect certain other corporate records.

3\. When you received your shares, you may have signed documents giving the
company or other shareholders a right of first refusal in the event you
attempted to sell or transfer your shares to a third party. If you did, then
you will need to first obtain an offer and then first offer the shares to
whoever holds such a right on the same terms before you can sell them to the
third party.

4\. Securities laws generally also forbid any immediate resale of the stock.
If you have held the shares long enough, however, you will normally be allowed
to resell them absent any specific restriction such as a right of first
refusal. However, the market for illiquid shares of this type is usually nil.

5\. It is usually very difficult and expensive to enforce legal rights as
minority shareholders. Many states prevent you from filing suit directly
against an incompetent management. Even if they are doing things wrong, your
remedy usually is to file what is known as a shareholder derivative action,
which means suing in the name of the corporation to try to recover monies for
the benefit of the corporation. A derivative action tends to be a clumsy and
expensive vehicle for most minority shareholders unless it is an unusual
situation where the stakes are high. On the flip side, some minority
shareholders will use this as a way of harassing the company until it is
motivated to get rid of them - it sounds like you have grounds to file such a
suit, but you will need to be able to fund it.

6\. You can insist that the company hold annual shareholder meetings and give
you whatever information your state law requires in such a meeting format
(usually, it is a basic financial report). If they refuse to hold an annual
meeting, you can sometimes complain to your state's corporate division, which
often has an enforcement arm having special powers to compel such meetings.

7\. If you hold a specified minimum percentage of the corporation's stock, you
can file an action for involuntary dissolution of the corporation. In
California, this number is one-third or more of the outstanding stock. Check
with a local lawyer to see what you need in Illinois. In an action for
involuntary dissolution, provided you can show grounds, you can get a court to
force the sale of the company's business or otherwise to force a distribution
of its net assets (or the value thereof) to shareholders.

Having said the above, if you and the others hold at most a few percent of the
company, you are likely stuck as far as what you might be able to do
practically through formal legal remedies. Before concluding this, though, do
the record inspections and consult with a lawyer.

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brk
Disclaimer: IANAL

Since it is still a private company, you're not entitled to much, really.

They are supposed to be holding some sort of board or corporate meetings, if
for no other reason than to maintain themselves as a corporation for the legal
benefits. You are supposed to get, or have access to, copies of the board
meeting minutes.

To cut to the chase, you're not going to get anything out of those shares. The
company has no enforceable obligation to buy them from you, and unless they
got their legal contracts out of a pop-up book, there will also be a clause in
there that would prevent you from selling the shares to a competitor. Besides,
what would you sell the shares FOR, money-wise? You don't even know what the
company is worth, or (I'm assuming here) what yours shares represent in
proportion to the total. And, why would a competitor want semi-worthless
shares in another company anyway?

For the most part, I would suggest you let it go and chalk it up to a learning
lesson.

~~~
throwingaway
_For the most part, I would suggest you let it go and chalk it up to a
learning lesson._

And what is the lesson?

~~~
brk
_And what is the lesson?_

Get better documentation of total shares in the company next time

Understand that shares granted by a private corporation will tend to have
little, if any, real value until such time as the corporation goes public or
gets sold. If neither seems probably, you basically just own "paper"

Don't be swayed by shares of stock

Don't take stock in lieu of pay (granted, you might not have had much other
choice here).

Make sure there is a clear, documented, signed understand of what exactly you
can DO with those shares.

~~~
jacquesm
Every corporation has articles of incorporation, bylaws and there may even be
a shareholder agreement. Any or all of the things you say may or may not be
applicable depending on the existence and contents of those documents.

OP may have more rights and possibilities to recourse than he thinks, being a
shareholder is not 'all bad', there are plenty of laws that govern your rights
as a shareholder too.

At a minimum there has to be an annual report and a once per annum general
shareholders meeting, if the percentage the three hold is large enough they
may even be able to convene such a meeting.

Seriously, get a lawyer if the stakes are high enough.

If it's a couple of grand your talking about let it go and hope that some day
they get bought out, then you will be in the drivers seat (they won't be able
to sell without your consent).

~~~
russell
Minority stockholders are pretty much at the mercy of the majority holder,
except for out and out fraud. They dont need the OP's consent. They may ask
for his vote, but that is all it is, a per share vote.

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jacquesm
Get a copy of the corporate bylaws and go to a lawyer, this is much too
complicated without further background to be answered here.

I take it that you can prove that those shares were transferred to you.

You can offer the shares to a 3rd party but the bylaws probably state
explicitly that you have to offer the other shareholders first right of
refusal.

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alain94040
Which state is this company incorporated in? That's the key question.

As a shareholder, you have fewer rights than you'd think. On the other hand,
you can be a major nuisance to the owner if you want to.

I dont quite see a win-win here. What are you trying to achieve?

~~~
throwingaway
It is an Illinois Corporation.

The business has been tanking in recent years, mostly due to the shady
practices of the owners. At this point I'd simply like to cash out my shares
for a fair price, whether it's selling them back to the company, to another
shareholder, or to a competitor.

~~~
startupcomment
As you hold shares of a small closely held corporation, you'll probably have a
tough time selling your shares to anyone other than the principal shareholder
or the corporation (and they may not be willing to buy). In addition, your
right to sell your shares to a third party may be restricted, as has been
noted above. If the business folds, you may be able to claim a capital loss to
the extent of your basis in the shares. I'm not certain of this, however. Best
to consult an accountant. Good luck!

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tokenadult
Closely held corporations ought to have buy-sell agreements, which are legally
enforceable contracts, at the beginning. But if in fact the company is tanking
(= a share of ownership in the company isn't worth much), this may not be
worth suing over.

