HOW NOT TO RUN A BUSINESS - MINORITY SHAREHOLDERS AND BREACH OF FIDUCIARY DUTY

In 1994, Husband and his brother start a business.  Because they are intelligent, they incorporate that business.  Brother owns 50% of the corporation’s stock, Husband owns 25% of the stock and Wife owns 25% of the stock.  All is well until 2007 when Husband and Wife divorce.  According to the court, Wife had a “personal relationship” with a Company employee which appeared to precipitate this result. 

Normally, property, such as stock in a family business, would be transferred to one spouse as a part of the property settlement.  In this case, for reasons unknown, Wife kept her stock in the Company after the divorce.  And, Wife continued to be employed by the Company.

Then, in May, 2008, Husband fired Wife – now ex-Wife.  The Company then employed Husband’s new wife. 

At this point, the soap opera changes from a mildly interesting story to a tutorial on corporate law.  Husband testified that as CEO, “I am the company.”  He forgot, however, that Tennessee corporate law protects minority shareholders.  Here are a few of his mistakes: 

1.         Notices of Meetings.  Although Wife was a Director, she did not receive notice of meetings of the Board of Directors.  This included the meeting at which Husband decided to fire Wife.

2.         Bonuses to Insiders.  Husband, new wife and Brother all received bonuses.  These bonuses were not approved by a vote of “disinterested” Directors – in this case Wife.

3.         Actions of the Board.  The Husband and Brother decided to forego exercising an option to purchase property without holding a Board meeting.

4.         Removal of Plaintiff as a Director.  The Husband and Brother removed Wife as a Director without her knowledge.

The trial court concluded that the Husband and his Brother instituted a “systematic scheme” to deny Wife her rights as a shareholder.   The court concluded that they acted with malice and avarice toward Wife.  Consequently, the Court found that Husband and Brother violated their fiduciary duty to Wife.

The Moral of this Story.  If you divorce your business partner, buy out all of the stock.  Husband and Brother could have avoided a lot of attorney’s fees if they had merely purchased Wife’s stock. 

Proffit v. Smoky MountainWoodcarvers Supply, Inc., No. E2011-0180-COA-R3-CV (Tenn. Ct. App. May 15, 2012).