[Question] Close Corporation - Member interest dispute

[Samual]

Hi All

I am hoping that you are able to help me out. I am 1 of 2 members of a CC. When we registered our cc (no associate agreement in place), the interest was 50% a piece.
However circumstances have changed over the past few years and my partner now has a 60% interest in the business thus leaving me with 40%. This came about over an argument whereby he felt he deserved more. Being the person that I am, I have always trusted him and had the utmost faith in our business relationship. When it comes to signing forms, i trust that he will not screw me over however i was given a bunch of forms to sign and one of them he mentioned is our shareholder agreement. Since i trusted him i signed it as we did not commit to change in member interest. It so happened that the "Share holder" agreement was actually a founding statement which granted him 60% interest in the cc and me 40%.

I know i should have never trusted him when signing documents however its too late now. Anyway, we currently in a deadlock over how the business must be run. I am not willing to part ways with my interest in the CC due to a payout owed to the CC which i am entitled to and may help me with future businesses.

My questions are:

1. Though he has majority interest (60%), is he allowed to dictate how the business may be run?
2. Is he allowed to dictate my duties within the business (Salary, responsibilities, working hours, etc...)?
3. Does he have control over distribution of dividends payed to the CC?
4. If we in a deadlock over an idea, does his 60% grant him a higher vote or does our dis-agreement count as a vote each thus a deadlock?
5. Whilst i did not commit to the change in member interest but signed the founding statement (CK2), can it be considered illegal/fraud?

Bare in mind and as mentioned, there is no associate agreement in place

[Greig Whitton]

1. Though he has majority interest (60%), is he allowed to dictate how the business may be run?

Per Section 46 of the Close Corporations Act:

"The following rules in respect of internal relations in a corporation shall apply in so far as this Act or an association agreement in respect of the corporation does not provide otherwise.

a) Every member shall be entitled to participate in the carrying on of the business of the corporation;

b) Subject to the provision of section 47, members shall have equal rights in regard to the management of the business of the corporation and in regard to the power to represent the corporation in the carrying on of its business: Provided that the consent in writing of a member holding a member's interest of at least 75 per cent, or of members holding together at least that percentage of the members' interests, in the corporation, shall be required for-

i)a change in the principal business carried on by the corporation;
ii)a disposal of the whole, or substantially the whole, undertaking of the corporation;
iii)a disposal of all, or the greater portion of, the assets of the corporation; and
iv)any acquisition or disposal of immovable property by the corporation;

c) Differences between members as to matters connected with a corporation's business shall be decided by majority vote at a meeting of members of the corporation;

d) At any meeting of members of a corporation each member shall have the number of votes that corresponds with the percentage of his interest in the corporation."

You don't have an associate agreement, so those "standard" rules would apply. That means, no, he can't do as he pleases (he would need 75% interest for that) but he would get the final say in most matters.

However, you do have some legal protection per Section 49 of the Close Corporations Act:

"Any member of a corporation who alleges that any particular act or omission of the corporation or of one or more other members is unfairly prejudicial, unjust or inequitable to him, or to some members including him, or that the affairs of the corporation are being conducted in a manner unfairly prejudicial, unjust or inequitable to him, or to some members including him, may make an application to a Court for an order under this section."

2. Is he allowed to dictate my duties within the business (Salary, responsibilities, working hours, etc...)?

Your terms and conditions of employment are separate from your rights and responsibilities as a member and are governed by your employment contract (PLEASE tell me that you AT LEAST have an employment contract!)

While your partner could try to use his majority interest to terminate your employment, he would need to have a fair reason for doing so and follow fair procedures as for any other dismissal.

3. Does he have control over distribution of dividends payed to the CC?

See answer to question 1.

4. If we in a deadlock over an idea, does his 60% grant him a higher vote or does our dis-agreement count as a vote each thus a deadlock?

See answer to question 1.

5. Whilst i did not commit to the change in member interest but signed the founding statement (CK2), can it be considered illegal/fraud?

You could try to argue that you were deceived or coerced into signing it, but proving that is going to be VERY tough. If your argument amounts to "I trusted my friend and didn't read the contract that he asked me to sign" then you will be laughed out of court.

[desA]

Get out of Dodge as quickly as possible.

No matter what SA law purports to say - the reality is as follows:
"He who controls, or has access to, the money - is king!".

With this in mind, if your partner decides to attack you legally, using 'your' money - you will have an uphill battle in SA. The lawyers will get richer & richer - with little, if any, resolution.

Sell the person your shares & start your own operation... You will thank yourself!

[Samual]

Hi Greig and desA

Thanks for the feedback. I really do appreciate it.

Things seemed to be resolved however they have taken a turn now. My partner has still holds 60%, controls the financials and seems to take the cash home with no record of it being used for the business.

I am barred from accessing our internet banking as well so at the moment i am being treated as an employee with no knowledge of any dealing and and no access to any material which is business related. Furthermore, there is an outstanding debt of 200,000 which has not been paid yet and my partner has been threatening me by advising that he will not give me a single cent of any dividends paid to the business and i will not gain a cent to any payouts the business receives from investments.

I am not 100% sure if i would be able to challenge him on malicious behavior. I have proof of the threats however not sure what avenue needs to be taken.

If i do sell, i lose out a lot but if I stay, i am not guaranteed my share to any of the investments due to him controlling the financials and its distributions (there is still no associate agreement in place or any written and signed agreement).

Any suggestions?
I feel i need to go legal

[IanF]

Sit down with a trusted friend or adviser and work out your alternatives in a cold dispassionate way. EG start up again with very little from the current setup. Once you have this bottom line it is easier to negotiate up from this.
You also have to factor in peace of mind, as to what is better for you.
Good luck and keep asking questions.

[Dave A]

I feel i need to go legal

If you don't have the knowledge and posture to push for your rights yourself, going into a partnership meeting with your lawyer at your side might shake things up a bit.

You are entitled to full access to the financial records of the company.
With only two partners in the business, it would not be unreasonable to insist that both partners must approve and / or release any payment.
You are entitled to check that any transaction that you are aware of has been properly recorded in the books of the company.

You have to flip the pressure, or you'll be a doormat and wide open to being unfairly taken advantage of.

The honest and trustworthy partner has nothing to hide. When one partner starts getting less than transparent, you have to either fix the problem, or break the partnership.
To my mind, there is no middle ground between these two options.

[Greig Whitton]

With only two partners in the business, it would not be unreasonable to insist that both partners must approve and / or release any payment.

I agree, Dave, but if Samual's description of the situation is accurate then his partner clearly has no interest in acting reasonably. While Samual is legally entitled to full access of the company's financial records, he is not legally entitled to a say in the company's financial transactions outside of those set out in Section 46 of the Close Corporations Act.

When one partner starts getting less than transparent, you have to either fix the problem, or break the partnership. To my mind, there is no middle ground between these two options.

I absolutely agree. Samual, you're at the point of no return. From what you have described, your "friend" has no interest in negotiation, collaboration, or treating you with basic human decency. Either cut your losses and walk away with what you still have outside of this business, or gamble everything and fight him to the bitter end by consulting with an experienced attorney.

From what you have described, it sounds like you do have a case for legal action (e.g. if your partner is keeping all the cash for himself and denying you any share then he is unfairly prejudicing your interests per Section 49 of the Close Corporations Act). However, enforcing these rights can be a long, expensive process. And the absence of an associate agreement, coupled with the shareholder agreement that you recently signed, won't help your position.

Your situation has gotten decidedly worse since you originally posted and it will almost certainly continue along that trajectory unless you do something different. Either walk away or consult with an experienced, reputable attorney.

[desA]

Short & sweet - you have been screwed!

Similar modus to my situation. My saga began in similar fashion to yours - except more members were involved & they assisted in fleecing assets as they saw fit - eventually handing all over to an external third party. See longish thread on forum.

Welcome to the members of the "Victims of Business Hijacking" fraternity. Please be so kind as to add this to your forum signature.

[Justloadit]

Just walking away and starting a similar business may encroach on the term called "fiduciary" duties of a member of a CC - open up in competition to the CC while still a member of the CC

If you intend doing this, then get signed paper that you no longer are a member of the current CC when you hand in your resignation as a member of the CC, as this will protect you when you become successful in the new business. Of course the only way you going to get this is by selling/giving away your current shares

[desA]

I'd suggest not being Mr. Nice Guy. In SA, nice guys who faithfully follow all the so-called rules - generally lose to business hijackers.

Send the CC a stern note laying claim to what is rightfully yours & that you are going to proceed on your own steam. Also let them know what you think of their modus. The 'fleecers' (attorneys) will always tell you otherwise.

After that - stuff them...

[Samual]

Thank you all for the advice and kind words of support. Ultimately i am responsible for allowing this to get out of hand.

The business is due for a big share payout in 9 months time. If i give up now, i stand to lose out. If i stick it for 9 months, i still have a fighting chance to the payout.

I have decided on the following:
1. I will setup a meeting to discuss the poisonous relationship and the way forward
2. If things turn sour again, i will approach a lawyer for advice on the best way forward (i'd prefer not too due to the costs involved)
3. If there is no winning chance for me, i will sell my interest in the CC with first offer given to my partner.

In the interim, do any of you know of a great lawyer with extensive knowledge in Close Corporations and is reasonably proced?

[desA]

What about dividing up the CC's assets between the two members? Then each goes on their way.

I sincerely doubt you will ever see a penny of this 'big share payout'.

[Samual]

What about dividing up the CC's assets between the two members? Then each goes on their way.

I sincerely doubt you will ever see a penny of this 'big share payout'.

I doubt my partner would want to split the assets. All the issues started when the payout amount was revealed. That alone implies that he will not budge until the payout. But the business gets the payout so even he tries, we still have an interest in the business which means he will be liable to distribute accodingly

[desA]

^ It surely sounds like he is your Boss. You do not appear to be acting as a partner, I'm sorry to say. You appear absolutely & utterly afraid of the person.

Assert your rights & lay claim to your 40% of the business. Otherwise, live with the consequences of the hijacking.

[Samual]

^ It surely sounds like he is your Boss. You do not appear to be acting as a partner, I'm sorry to say. You appear absolutely & utterly afraid of the person.

Assert your rights & lay claim to your 40% of the business. Otherwise, live with the consequences of the hijacking.

Hi desA

Thats exactly how it was hence i am fighting him on it now. It is also the reason I am looking for an experienced lawyer who specialises in business agreements (and the CC act) and will be able to advice me on what my 40% interest in the business grants me.