The Worst Case for Corporations That Fail to Plan for the Future.
Many companies start out with a couple people joining together to create an enterprise, and dividing their interest 50/50. They incorporate and all is well until one leaves the business for whatever reason, and the other "partner" continues to run the business. The now passive owner, or his family, may have very different objectives from the active owner. Once one owner has a free hand to do what he or she wants, sometimes the business is not run for the benefit of the passive shareholder.
When business founders pass away, the second generation is many times not interested in the business, or sells their interest to others. In an interesting case decided last April, one party left the business and transferred his interest to his son. Eventually the family owned the 1/2 interest. meanwhile the active remaining 50% shareholder appears to have run the business for his own benefit and ignored the other shareholders. Much or what can go wrong is set forth in the Rosenfeld v. Luccaro case. When the Rosenfeld family became passive owners, and Luccaro stayed active and ran the business, ignoring the interests of the other 50% owners. When the Luccaro family started asking questions and wanted to see the books, they were denied.
Luccaro, the sole remaining original owner claimed the stock had been sold to him, and that the family of the deceased partner had no stock interest. All these claims were without any evidence to support them. Despite the courts orders, Luccaro refused to provided the books and records.
The Rosenfelds brought an action to dissolve the corporation because the parties were, "hopelessly deadlocked." Luccaro wasted 1 1/2 years presenting defenses with no support. In the end he lost.
The New York Business Divorce blog has some interesting thoughts on how the prevent this result. The most important is successor planning and written agreements. I constantly find clients with no written agreements, and now in a dispute with an equal owner. The lesson is clear, it you don't want to leave your family a mess, do some planning.
