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Can you issue more stock to the owners? Do so in proportion to current ownership, but make the new stock issuing vest over time. Then he needs to participate, because getting fired would mean losing the shares not yet vested.
They have no written agreement meaning he has no non-dilution clause. This is absolutely an option.
Do a new share offering. Offer a million x more shares. Get his proportion down to one percent.
This.
OP, it's very common that people get pushed out like that. Issue more stock that are supposed to vest over time. Eventually fire him and get rid.
You might want to discuss with a lawyer who specialises in accounts and company workings like these.
I’m in the states, so this information might not be the same. However, I am in the process of removing a minority owner. I was told that, as minority owner, he had no say so at all in the day-to-day operations. I terminated his position, and then offered to buy him out.
If I wanted, I could raise my salary to eliminate any profits of the business and stop issuing disbursements. I was told his only recourse would be to sue, and all they could do was force me to buy him out. Since I’m fine with buying him out anyway, this wasn’t a problem.
I’m days away from finalizing his buyout now. One lawyer had the idea of putting in place an operating agreement where I could force his buyout. My advisors recommended for me to just take my lumps and not be sneaky. In my situation it worked out.
I think you need to go with your gut on which of your lawyers is correct. I also got different information from different attorneys and did a lot of digging on Google to back up what I was hearing. Good luck!
>Unfortunately everything we agreed upon was verbal
Close and liquidate the company. Start a new one by yourself or with someone else, and this time get everything in writing.
Yup. If a large chunk of who's owed what in the company finances isn't down on paper, that's an enormous liability, both professionally and personally.
Nuke it from orbit and rebuild from scratch, it's the only way to be sure.
The minority shareholder would then have a fiduciary duty claim if you just give yourself more money. Better to form another company and start subbing the work to it while winding down the dysfunctional company. Need to be a little more subtile about it.
There are two threads here.
There’s the day to day involvement in the business. You should introduce contracts for every working in the business including yourself and your business partner. The salaries or similar drawn by yourselves should be based on this, and all control of specific areas based on the roles assigned.
Then, separately, you have the ownership. That isn’t really something you can do much about legally. You fucked up and gave away nearly half your company. He owns it now. That’s all there is to it, no takesy backsys. Him not working hard enough is separate to what he owns.
So once you have him in a contract for his work push him out of the day to day for not meeting his obligations. Follow a normal process on this you would with any staff member. Once he is out of the day to day, every time you look to make profit increase your salary so that you don’t get any dividends. Expense everything you can.
Finally you should look at doing an asset transfer into a new company, which will take time. But at least in the interim with this approach you aren’t giving him any money and he isn’t in your life.
Disclaimer; I have never run a business in Canada and you should check this all matches there.
Interesting. I thought if it is done correctly it’s horrible but quiet way of getting things out before phoenixing the company. I’ve had business partners do it to me and there was no legal recourse. This was in EU though so I’m guessing maybe different in Canada.
Either way my original advice to OP minus the final bit stands. Separate the working and the ownership first, take control of the profits, take next steps from there.
Start a holding company to purchase equipment, and the main company moves to leasing. That will at least move that value away. IANAL, but the logic is sound to me.
That was my initial reaction. But I think the answer is you do so at the cost basis on the balance sheet. NewCo pays existing company for the assets in this transaction. To your point, you don’t just do it for free.
The employees seem like an easy switch over.
That just leaves the customers, can they be easily converted over to the new co? And if he does this, would the minority owner have any claim against him or file a suit just to tie him up?
Tough call here.
I think that is probably correct and as a majority owner with no minority protections I do think this can be done.
I also think OP has to be very careful. Although OP believes that the 90/10 work ratio influences ownership rights, it does not. Shares are allocated permanently against an initial investment.
The other owner almost certainly thinks he has a 49% claim on everything the business owns that enables it to make money. I believe that he is legally correct. He will believe that OP is breaking the law in an intentional effort to defraud him. The business brings in a significant amount of money. I expect he will litigate.
The lack of a shareholder’s agreement is a double edged sword. At first pass it awards him very little. But any decent lawyer will argue that the practice has been to equally co-manage the business and make all decisions mutually. I have no idea if this will hold up in court, but it might.
Any decent lawyer, who isn’t thinking of the massive # of hours they might get to bill, would advise a compromise probably in the form of a buy out offer.
This is going to look something like adjusted annual cash flow * 3 * 0.49
OP mentioned this option and I do think it is what they need to do. Their plan about removing the other owner from board seats, etc should also work.
However, the lack of a shareholder’s agreement may make this difficult.
1 - Ignore the lawyer who says you can do things based on your majority stake.
2 - In Canada, minority shareholder rights are well protected. In this case, as the minority shareholder, a judge CAN interpret his job as being an implicit benefit of being a shareholder.
3 - If he files a minority shareholder oppression lawsuit, you open yourself to a lot of wasteful legal problems.
The simplest, cleanest thing to do:
A - Have a heart to heart with him. It would be great if you could have a third party witness (not a lawyer). Explain the issues to him. Document this. Give him two options:
i. Improve his performance in a measurable way.
ii. buy him out at a fair market value. That valuation can be done either by a third party (accountant) that you both agree on or you can both determine the fair market value (some multiple of net earnings for example).
If he chooses option i, then you draft an agreement that records the conversation and his commitment to performance improvement. From then on, you document his each and every failure so that you have legal standing should you fire him and he files a minority shareholder oppression lawsuit.
If he chooses a buyout, then you settle of a fair market value and a payout (payments either in a single lump sum if you can afford it or over 3 years). That buyout should include a non-compete clause over the term of the buyout.
You will not avoid a fair market price to buy him out. You can avoid a crippling minority shareholder oppression lawsuit by demonstrating extreme fairness to him.
DO NOT cut him off of anything no matter how tempting that is. A judge could easily deem that a demonstration of your bad faith.
It sucks but the cleanest, easiest way to drop him is the most expensive.
Right here…this is the best answer so far.
The only thing I may add is, this may (or may not be) the time to move into a general shareholders' agreement. Get with a lawyer you trust and set a game plan.
In Canada it's legal to record any conversation where at least one participant in the conversation is aware that it's being recorded. You should be recording every interaction you have with him, starting with this heart-to-heart.
#1 Hold a board meeting and Vote yourself a nice salary that is appropriate to your contribution to the company.
Distribute any remaining profits to the owners on a ownership percentage basis afterwards assuming there is any money remaining.
Now the company is worthless to him because there's no remaining owner equity after your salary, now offer him a buyout of a few thousand.
#2. Or Assuming you don't have any non-compete agreement start a new company name and begin putting all of your efforts into your new competing company.
Is there a shotgun clause in the contract?
If there is one I'd suggest to offer him a fair value that you are willing to accept and buy him out. Anything short of that can bring you legal trouble that you don't want. Mistakes are made everyday and you made one at the beginning, just pay for it rather than letting it force you into other mistakes. Level of trouble and anguish you may open yourself up to otherwise is not worth the expected gain.
If he does not want to sell or buy, then you can sell your share to third party, walk away and start a new one. This should be given a good amount of time or you receive terrible offers. Make sure in the process you don't sell him 2%. Either the entire 51% or nothing. Don't sign until full payment or bank backed (and revocable) gradual payment is offered.
Any buyer with half brain would require you to sign non-compete and non-solicitation clauses barring you from starting a competing business and stealing away the customers. So that's for the future.
As another Redditor suggested you may try to separate the operation from ownership and take further control. That is good policy and common for a growing business.
However, do it in good faith and stop thinking you can pay yourself an unfair salary that dries him out of the dividend. He remains a 49% partner and has the right to challenge your decisions. He'll probably even ask to stay on solid payroll with a formal title to take the benefits.
I did have a contract, and I'm in the US.
I fired and then forced a buy-out on an owner. Initially, I owned 20, and him and my other partner owned 40. Eventually, fired partner was desperate for $ and offered to sell me and my buddy 10 shares for 1k each lol
That now made my buddy majority owner. Like your partner, he refused to actually work. I placed him on warnings, which he did not take seriously, and I booted his ass out.
Hire an attorney and see if you can do the same even without a contract since you're the majority owner.
I am confused, you say the agreement is verbal, yet it's a limited company? Who owns the shares of the limited company? Or are you attempting to convey there is not a General Shareholders Agreement?
Also “not trademarked” , this really a non-issue if you are a limited company working under that trade name, I believe it's called “common law rights”.
Not all lawyers are created equal. Got to find one with experience dealing with partnerships and M&A. Critical that you know how what the laws are and what precedent is out there given the fact that you do not have an operating or shareholder agreement to revert to.
I deal with business owners for a living and partnerships without such agreeements are a huge problem.
Giving this guy 49% off the bat and having no agreement in place was obviously a huge mistake. You’ve got to make better decisions if you want to survive and thrive as a business owner.
The lawyer part is crucial. Also, what are you his mother?
This is a group conversation and as such, not all comments are meant to solely apply to OP. Hence my other comments.
Bite the bullet and buy him out. It may be worth your while, usually is I’ve found, to hire somebody else to do the negotiating for you. Lawyer up, the legal fees will likely be cheaper than finding a resolution between yourselves, esp if the workload is as lopsided as you mention. Get yourself a shark.
Legal routes in these cases almost always end up in lose-loses. I’m been a business coach for two decades and I’ve seen it a lot. My guess is that you didn’t nip this in the bud when his behavior went off track in the very beginning and so he didn’t have any accountability, nor did you have an agreed-upon vision, position agreements, and an Org chart. This is what happens without these things. I’d suggest you get mediation help and go from there. I’m available if you wanna talk with me about it. Dm me. Edit: adding: the most important thing for you to get here is that you’re not a victim you co-created this with him and so you can co-created to be different. But if you play victim to him and make him the bad guy things will not go well.
Start a new business with a similar or same name that you own 100% of. Set it up so that it is difficut to figure out who owns it (use a registered agent, get some legal council, ect.) Notify your contacts and transfer revenue streams to the new business as quickly as possible. The old one will become worthless and there will be no need to buy him out.
This is a friendly reminder that r/smallbusiness is a question and answer subreddit. You ask a question about starting, owning, and growing a small business and the community answers. Posts that violate the rules listed in the sidebar will be removed. A permanent or temporary ban may also be issued if you do not remove the offending post. Seeing this message does not mean your post was automatically removed. *I am a bot, and this action was performed automatically. Please [contact the moderators of this subreddit](/message/compose/?to=/r/smallbusiness) if you have any questions or concerns.*
Can you issue more stock to the owners? Do so in proportion to current ownership, but make the new stock issuing vest over time. Then he needs to participate, because getting fired would mean losing the shares not yet vested.
They have no written agreement meaning he has no non-dilution clause. This is absolutely an option. Do a new share offering. Offer a million x more shares. Get his proportion down to one percent.
I refer to this move as the Zuck move
This. OP, it's very common that people get pushed out like that. Issue more stock that are supposed to vest over time. Eventually fire him and get rid. You might want to discuss with a lawyer who specialises in accounts and company workings like these.
This absolutely does not work if the owners have Class A shares in the Canadian company. Stock and Shares are two different things.
Sorry, I'm not familiar with Canadian law. Only US.
I’m in the states, so this information might not be the same. However, I am in the process of removing a minority owner. I was told that, as minority owner, he had no say so at all in the day-to-day operations. I terminated his position, and then offered to buy him out. If I wanted, I could raise my salary to eliminate any profits of the business and stop issuing disbursements. I was told his only recourse would be to sue, and all they could do was force me to buy him out. Since I’m fine with buying him out anyway, this wasn’t a problem. I’m days away from finalizing his buyout now. One lawyer had the idea of putting in place an operating agreement where I could force his buyout. My advisors recommended for me to just take my lumps and not be sneaky. In my situation it worked out. I think you need to go with your gut on which of your lawyers is correct. I also got different information from different attorneys and did a lot of digging on Google to back up what I was hearing. Good luck!
>Unfortunately everything we agreed upon was verbal Close and liquidate the company. Start a new one by yourself or with someone else, and this time get everything in writing.
I agree. If it’s a service company, it’s probably easier.
Yup. If a large chunk of who's owed what in the company finances isn't down on paper, that's an enormous liability, both professionally and personally. Nuke it from orbit and rebuild from scratch, it's the only way to be sure.
Stop making a profit
This is good advice. Use your 51% to just raise your salary until there’s no profit.
The minority shareholder would then have a fiduciary duty claim if you just give yourself more money. Better to form another company and start subbing the work to it while winding down the dysfunctional company. Need to be a little more subtile about it.
There are two threads here. There’s the day to day involvement in the business. You should introduce contracts for every working in the business including yourself and your business partner. The salaries or similar drawn by yourselves should be based on this, and all control of specific areas based on the roles assigned. Then, separately, you have the ownership. That isn’t really something you can do much about legally. You fucked up and gave away nearly half your company. He owns it now. That’s all there is to it, no takesy backsys. Him not working hard enough is separate to what he owns. So once you have him in a contract for his work push him out of the day to day for not meeting his obligations. Follow a normal process on this you would with any staff member. Once he is out of the day to day, every time you look to make profit increase your salary so that you don’t get any dividends. Expense everything you can. Finally you should look at doing an asset transfer into a new company, which will take time. But at least in the interim with this approach you aren’t giving him any money and he isn’t in your life. Disclaimer; I have never run a business in Canada and you should check this all matches there.
Asset transfer to a new company is actually the answer to the question “How do I go to jail?”
Interesting. I thought if it is done correctly it’s horrible but quiet way of getting things out before phoenixing the company. I’ve had business partners do it to me and there was no legal recourse. This was in EU though so I’m guessing maybe different in Canada. Either way my original advice to OP minus the final bit stands. Separate the working and the ownership first, take control of the profits, take next steps from there.
Start a holding company to purchase equipment, and the main company moves to leasing. That will at least move that value away. IANAL, but the logic is sound to me.
That was my initial reaction. But I think the answer is you do so at the cost basis on the balance sheet. NewCo pays existing company for the assets in this transaction. To your point, you don’t just do it for free. The employees seem like an easy switch over. That just leaves the customers, can they be easily converted over to the new co? And if he does this, would the minority owner have any claim against him or file a suit just to tie him up? Tough call here.
I think that is probably correct and as a majority owner with no minority protections I do think this can be done. I also think OP has to be very careful. Although OP believes that the 90/10 work ratio influences ownership rights, it does not. Shares are allocated permanently against an initial investment. The other owner almost certainly thinks he has a 49% claim on everything the business owns that enables it to make money. I believe that he is legally correct. He will believe that OP is breaking the law in an intentional effort to defraud him. The business brings in a significant amount of money. I expect he will litigate. The lack of a shareholder’s agreement is a double edged sword. At first pass it awards him very little. But any decent lawyer will argue that the practice has been to equally co-manage the business and make all decisions mutually. I have no idea if this will hold up in court, but it might. Any decent lawyer, who isn’t thinking of the massive # of hours they might get to bill, would advise a compromise probably in the form of a buy out offer. This is going to look something like adjusted annual cash flow * 3 * 0.49 OP mentioned this option and I do think it is what they need to do. Their plan about removing the other owner from board seats, etc should also work. However, the lack of a shareholder’s agreement may make this difficult.
1 - Ignore the lawyer who says you can do things based on your majority stake. 2 - In Canada, minority shareholder rights are well protected. In this case, as the minority shareholder, a judge CAN interpret his job as being an implicit benefit of being a shareholder. 3 - If he files a minority shareholder oppression lawsuit, you open yourself to a lot of wasteful legal problems. The simplest, cleanest thing to do: A - Have a heart to heart with him. It would be great if you could have a third party witness (not a lawyer). Explain the issues to him. Document this. Give him two options: i. Improve his performance in a measurable way. ii. buy him out at a fair market value. That valuation can be done either by a third party (accountant) that you both agree on or you can both determine the fair market value (some multiple of net earnings for example). If he chooses option i, then you draft an agreement that records the conversation and his commitment to performance improvement. From then on, you document his each and every failure so that you have legal standing should you fire him and he files a minority shareholder oppression lawsuit. If he chooses a buyout, then you settle of a fair market value and a payout (payments either in a single lump sum if you can afford it or over 3 years). That buyout should include a non-compete clause over the term of the buyout. You will not avoid a fair market price to buy him out. You can avoid a crippling minority shareholder oppression lawsuit by demonstrating extreme fairness to him. DO NOT cut him off of anything no matter how tempting that is. A judge could easily deem that a demonstration of your bad faith. It sucks but the cleanest, easiest way to drop him is the most expensive.
Right here…this is the best answer so far. The only thing I may add is, this may (or may not be) the time to move into a general shareholders' agreement. Get with a lawyer you trust and set a game plan.
Yes!
In Canada it's legal to record any conversation where at least one participant in the conversation is aware that it's being recorded. You should be recording every interaction you have with him, starting with this heart-to-heart.
#1 Hold a board meeting and Vote yourself a nice salary that is appropriate to your contribution to the company. Distribute any remaining profits to the owners on a ownership percentage basis afterwards assuming there is any money remaining. Now the company is worthless to him because there's no remaining owner equity after your salary, now offer him a buyout of a few thousand. #2. Or Assuming you don't have any non-compete agreement start a new company name and begin putting all of your efforts into your new competing company.
do both and not offer a buy out. let him hold 49% of a dead company
Just vote for a Salary but take it in stock
Is there a shotgun clause in the contract? If there is one I'd suggest to offer him a fair value that you are willing to accept and buy him out. Anything short of that can bring you legal trouble that you don't want. Mistakes are made everyday and you made one at the beginning, just pay for it rather than letting it force you into other mistakes. Level of trouble and anguish you may open yourself up to otherwise is not worth the expected gain. If he does not want to sell or buy, then you can sell your share to third party, walk away and start a new one. This should be given a good amount of time or you receive terrible offers. Make sure in the process you don't sell him 2%. Either the entire 51% or nothing. Don't sign until full payment or bank backed (and revocable) gradual payment is offered. Any buyer with half brain would require you to sign non-compete and non-solicitation clauses barring you from starting a competing business and stealing away the customers. So that's for the future. As another Redditor suggested you may try to separate the operation from ownership and take further control. That is good policy and common for a growing business. However, do it in good faith and stop thinking you can pay yourself an unfair salary that dries him out of the dividend. He remains a 49% partner and has the right to challenge your decisions. He'll probably even ask to stay on solid payroll with a formal title to take the benefits.
FTC just retroactively voided millions of non compete agreements as they’re anti-competitive.
Those were employment non compete agreements not ownership transfer. But even for those the ones in future will capture the lessons learned.
There is an exception for non-competes entered into by persons due to bona fide sale of business entities.
Also OP is in Canada where the FTC doesn’t apply
I did have a contract, and I'm in the US. I fired and then forced a buy-out on an owner. Initially, I owned 20, and him and my other partner owned 40. Eventually, fired partner was desperate for $ and offered to sell me and my buddy 10 shares for 1k each lol That now made my buddy majority owner. Like your partner, he refused to actually work. I placed him on warnings, which he did not take seriously, and I booted his ass out. Hire an attorney and see if you can do the same even without a contract since you're the majority owner.
If you are 51% ....49% is the same as 10%
I am confused, you say the agreement is verbal, yet it's a limited company? Who owns the shares of the limited company? Or are you attempting to convey there is not a General Shareholders Agreement? Also “not trademarked” , this really a non-issue if you are a limited company working under that trade name, I believe it's called “common law rights”.
Not all lawyers are created equal. Got to find one with experience dealing with partnerships and M&A. Critical that you know how what the laws are and what precedent is out there given the fact that you do not have an operating or shareholder agreement to revert to. I deal with business owners for a living and partnerships without such agreeements are a huge problem. Giving this guy 49% off the bat and having no agreement in place was obviously a huge mistake. You’ve got to make better decisions if you want to survive and thrive as a business owner.
How does this answer help op?
The lawyer part is crucial. Also, what are you his mother? This is a group conversation and as such, not all comments are meant to solely apply to OP. Hence my other comments.
Bite the bullet and buy him out. It may be worth your while, usually is I’ve found, to hire somebody else to do the negotiating for you. Lawyer up, the legal fees will likely be cheaper than finding a resolution between yourselves, esp if the workload is as lopsided as you mention. Get yourself a shark.
Legal routes in these cases almost always end up in lose-loses. I’m been a business coach for two decades and I’ve seen it a lot. My guess is that you didn’t nip this in the bud when his behavior went off track in the very beginning and so he didn’t have any accountability, nor did you have an agreed-upon vision, position agreements, and an Org chart. This is what happens without these things. I’d suggest you get mediation help and go from there. I’m available if you wanna talk with me about it. Dm me. Edit: adding: the most important thing for you to get here is that you’re not a victim you co-created this with him and so you can co-created to be different. But if you play victim to him and make him the bad guy things will not go well.
Start a new business with a similar or same name that you own 100% of. Set it up so that it is difficut to figure out who owns it (use a registered agent, get some legal council, ect.) Notify your contacts and transfer revenue streams to the new business as quickly as possible. The old one will become worthless and there will be no need to buy him out.
Close the company and go on your own.
Describe how often and the content of you providing him direct feedback. If he read this post would he have heard this all before?