Here's the scenario: a small incorporated outdoors recreational
business has been operating for a number of years on a good chunk of
valuable real estate. The board of directors has been in place for a
number of years running the biz. There are 12 shareholders/owners,
each with the same number of shares. The 4 Board members have
intertwined their personal lives with the operation of the business.
However, they've advanced their own personal interests at the expense
of the other shareholders. Question: if they are voted out by the
majority of shareholders, or if indeed the majority votes to close or
change the nature of the business, what's to prevent them from simply
ignoring the majority? Sure, the law, but what due process kicks in?
If the police are called to remove these "trespassers," do we show the
cops the meeting minutes to support our claim? If we bring a bulldozer
in, do we recite the law as we ourselves are hauled off? What
literally happens/needs to hapen?

Hi Sailguy, and thanks for visiting us.

First of all - you really do need an attorney for this matter - it
will save you a LOT of heartaches, headaches and money in the long
run. Make sure the attorney is a business law specialist and it would
be helpful if he practices in the same geographic area that the
business is located in.

Now with that said, here are my thoughts:

1.  The law really frowns upon "self-help" and given your facts, self
help is removing the board with any type of force or coercion that is
not based upon a judicial order.

2.  You will need a copy of the bylaws of the corporation.  A
shareholders meeting will have to be called for purposes of holding an
election of directors.  In all likelihood, there will be provisions in
your bylaws that will address annual meetings of shareholders and
another for "special" meetings, and what restrictions, if any, are
placed on "special meetings."

So the first question is what do the bylaws require in terms of a
meeting for purposes of electing directors.

3.  After you know what the bylaws provide, then you should also know
what the state law provides as part of its corporation law that might
aid you.

If you would get back to me through a "clarification" request with the
state that the corporation is based in, I will see if I can find the
pertinent and applicable statutes.

4.  A meeting will be called by the appropriate number of shareholders
as the bylaws permit. Now it is entirely possible that the bylaws
might appear too restrictive to have a meeting, but that/those
restriction(s) would be superceded by state statute. This is to say
that the bylaws and the state statutory law have to be read together
and in the same context - this is good lawyer work.

The bylaws will no doubt dictate that special meetings can be held to
conduct business of the corporation, including the election of
directors, based upon the action of X number of shareholders (or Y
percentage of voting shares), and that notice of the meeting be given
to all shareholders and that notice must be at least N number of days
(usually ten) prior to the meeting and no more than M days (usually
sixty) prior.

Again, the providing of notice is an excellent job for the attorney.
The issue of whether notice was sent and whether that notice complied
with the bylaws and the corporation statutes will be a HUGE issue if
you have to go to court.

5.  It would be very useful if your group went into this meeting with
an agenda and a slate of candidates so that the debate doesn't get too
out of hand. The attendance at this meeting by your attorney would be
a good thing - first, it will tend to make things a bit more civil,
and more importantly it will provide first hand info to the attorney
if you have to go to court.

6.  Have your actions properly ratified at the meeting - don't try to
do too much. Elect your slate of directors and end the meeting.  Then
allow the new directors to meet as a board and take whatever action
they deem necessary.

BUT BE CAREFUL HERE- Most states require that actions to sell or
otherwise convey significant corporate assets requires a vote of all
of the shareholders. Some states require a super-majority (maybe
two-thirds) of the shareholders to vote for the sale or dissolution. 
This is a pretty complex area, certainly far beyond the scope of the
answers that we can provide here, and is very much in need of
excellent legal talent to lay out the groundwork.

7.  If after the election, the old board/management will not cede
control to the new group, you will have no choice but to go to court
and obtain an injunction / court order against the old group.  If the
old group doesn't honor the court order they are in contempt and face
civil contempt sanctions, which could include jail.

Without a court order, if the cops are called (after someone tries the
aforementioned self-help) - someone will be going to jail and it won't
be the old group. (Personal opinion - I don't care how many corporate
minutes you have, the cops will cuff someone first, honor the old
groups wishes, and let the CRIMINAL court figure it all out - very bad
- very messy - ).

8.  This isn't a "for sure" but your attorney fees in this matter,
should you prevail, should be able to be covered by the corporation,
assuming that it has the funds to pay those fees.

**************************************************

NOW, if all of that is not enough, there is another angle, and that is
to have your attorney bring a shareholder derivative action against
the current board for minority shareholder oppression, misfeasance, or
whatever other charges your attorney can, in good faith, develop.

Here is a link to a treatise on derivative suits that will give you
plenty of background:
http://216.239.37.100/search?q=cache:uVWww5Fr3DQC:cori.missouri.edu/WPS/CORI-WPS01-03.pdf+%22shareholder+derivative+suits%22+delaware&hl=en&lr=lang_en&ie=UTF-8

But in a nutshell, this is a civil action asserted by a shareholder on
the corporation's behalf against a third party (usually a corporate
officer) because of the corporation's failure to take some again
against the third party. Perhaps the officer or member of the board
voluntarily and consciously worked to keep the shareholders out of the
picture.

A derivative suit is not what you were looking for, and is probably
not the best option, but I wanted you to be aware of what it was
because it will no doubt come up in the discussions with your
attorney.

************************************************** 

So, Sail, that is what "needs to happen".  I can't emphasise enough
that a trained attorney in this area is worth his weight in gold.
These disputes can be a minefield of technicalities and special rules
and laws.

With that said, if you want to get going on this, obtain a copy of the
corporation's bylaws and articles of incorporation from the company.
You can simply ask for them, and if they don't deliver, give them a
demand letter (personally I would have that letter hand delivered by a
legal process server and obtain an affidavit of delivery).

Again, if you get back to me with the state of incorporation, I will
see if I can uncover the applicable corporation law statutes for your
reference as you prepare for the seige.

Best of luck, and please feel free to ask for clarification.

weisstho-ga

Search Strategy:

://www.google.com/search?sourceid=navclient&q=%22shareholder+derivative+suits%22+delaware

---

Request for Answer Clarification by sailguy-ga on 20 Nov 2002 18:04 PST

I truly appreciate the work you've put into answering my question.
Unfortunately, except for item 7, you were describing what I need to
do and what I need to be concerned with, which is not what I'm
interested in. In other words, I'm interested in the obstacles and
processes to ending the matter not starting it. Do you care to
elaborate on what happens if the old board doesn't "cede control and
provide some data sources to support your answer? Again, thanks for
your work thus far.

---

Clarification of Answer by weisstho-ga on 20 Nov 2002 20:41 PST

Hello, again, Sailguy,

You asked: "Do you care to elaborate on what happens if the old board
doesn't "cede control and provide some data sources to support your
answer?"

Of course I do!

Let me indicate that I practice law in Michigan and have had quite a
bit of experience in this topic, and am pretty comfortable with the
routines involved.  The disclaimer of course is that there can be
unique rules in a particular state and so the advice on this forum is,
out of necessity, general in nature.

Firstly, for the existing board to refuse to cede control, this
presupposes that there is a legitimate basis for the outsider
shareholders to replace the incumbent board; there has been a
shareholder meeting, a vote on a new slate, and an election that
yielded a new board of directors.

Secondly then, given that the new board has legitimate standing,
underlining "legitimate standing", then the new board must exercise
its legitimate authority. If there is a block upon that authority by
the past management, what then?  Remember, self-help is frowned upon
by the judiciary - in fact, more than frowned upon depending upon your
jurisdiction. The only alternative to self-help is judicial order and
the courts work through its orders - which is an injunction -
enjoining the prior management from blocking the efforts of the newly
elected board.

An injunction is issued by a court based upon a motion by your group
forbidding the old group from performing management acts which the
group has attempted to commit, or restraining them in the continuance
of those acts, such acts being (1) unjust and inequitable, (2)
injurious to the legitimately elected board, and (3) the matter cannot
be adequately redressed by an action at law (such as money damages
awarded by breach of contract, business tort, etc.)

Here is an outstanding summary of injunctive relief from the Cornell
School of Law: http://www.law.cornell.edu/topics/injunctions.html

**********************************************
Now that I read and re-read your initial question and your
clarification, it appears that there has already been a shareholder
vote which resulted in a new board, or at least a number of new
directors being elected.

That group seeks to take their rightful control.

The old group won't permit the new group to have that control.

Can you "call the cops"?  I don't think they will do anything, and in
their defense aren't equipped or trained to sort out corporate
minutes, etc.  They will only react to a breach of the peace, and as
mentioned in the main body of the answer you would then have to
contend with a criminal matter on top of the civil matter with the two
"boards."

Can  you bring in the bulldozers? As you indicated, you would be
"hauled off."

There is one, and only one, way to peacefully, effectively and
"legally" take control and that is through the legitimate legal
process.

**************************************************

What can you anticipate from the "old board"?

They can take exception to the election that brought in the new group
- was there proper notice of a special meeting, was the meeting
properly constituted and are the results of that meeting and its
related election binding upon the corporation?

They can argue that particular directors were not able to be replaced
due to some defensive mechanism in the corporation's bylaws.

There are any number of ways for the old group to challenge the
mechanisms employed by the new group - please refer to items 2-5 of my
main answer.

Even if the old board was then successfully replaced, they could
enjoin the new group from disposing of assets (see my item #6 above)
without shareholder approval.  This is very important. Most states
recognize the "business judgment rule" that says that the board must
be empowered to make the business judgments and it is not in the
province of the shareholders to make those judgments. BUT when it
comes to a sale of a large chunk of the business assets, most (not
all) state laws require a shareholder vote.  Perhaps the potential
sale of a substantial asset (the land you mentioned) would be enjoined
by the old group . . .

Or a group of shareholders on the outside could ask the court to
disolve the corporation - because of a deadlock of shareholders the
corporation cannot effectively run, and a receiver be appointed by the
court and everything is sold off and the proceeds distributed to the
shareholders. This is an extreme, but not uncommon result of
shareholder disputes - a forced business divorce, if you will.

*********************************************

I have a sneaking suspicion that I am not hitting this nail on the
head for you. IF SO - would you do me one favor and lay out the
specifics - what has happened - what the new group has done, and what
roadblocks have been put in your way.  ALSO, please let me know what
state you are in so that I can bolster my answer with some state
specific legal decisions that support your position.

This is an interesting legal problem. I hope that my assistance has
been of some help.

weisstho-ga

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Request for Answer Clarification by sailguy-ga on 21 Nov 2002 08:30 PST

Thanks again. It's difficult hitting the nail on the head since there
seems to be unending opportunity for recourse. With that said, I
believe you've answered my question as best you can without actually
being retained. And for that, I'm thankful. I guess the final
clarification/lament is: how indeed do the cops know who to listen
to/arrest/restrain ... the old board at the front door with arms
crossed or a new board at the same door with arms crossed, both having
called 911?

---

Clarification of Answer by weisstho-ga on 21 Nov 2002 19:30 PST

The short answer is: the cops won't know who to listen to. Cops
enforce criminal laws.  Your dispute is civil.  Cops don't do civil,
except when a civil dispute escalates into actions which are
prohibited by the criminal statutes.

Civil agreements and disputes are settled by the judiciary.  It used
to be ("back in the old days") that there were two courts - the "law"
courts that tried the criminal cases and some few civil cases, and the
"courts of equity" (aka "courts of chancery") that settled the civil
disputes. These days very few states maintain that separation, having
merged the two courts into one court of justice. Your dispute would
have been a chancery dispute. The resolution of civil chancery claims
could, and can, only be made by the court.

We have developed quite a treatise here, sailguy!!  Heck, print it
out, bind it up, and you could probably sell it down at the court
house for a buck two ninety-eight!

I hope you have received enough information to be able to resolve your
differences with the recalcitrant directors. If you act by the book,
you will find, I trust, that you can get through this period of
transition with a minimum of trouble and cost, and a maximum of
benefit on the back end.

Thank you for allowing me to serve you. Its been fun!

Best,

weisstho-ga

Thank you very much. Your work and wisdom are very helpful. All the best.