Courts could use wide latitude to address conflicts.

Bob, the oldest of four brothers, had established a fairly successful hvacr contracting business. A short time after starting the business, he hired one of his brothers and gave him a 25% interest in the company. As the business grew, Bob gave jobs to his two youngest brothers as well and eventually agreed to give each of them a 25% interest. Thus, in the course of 10 years, Bob went from sole owner of the business to a minority shareholder.

Bob was keenly aware of the risks of being a minority owner of the business, so at the time the shares were transferred, he signed an employment contract to serve as CEO/chairman of the board of the corporation.

He also wrote an agreement, which his brothers signed, that stated “in the event of a tie vote on a matter of corporate business before the Board of Directors, the tie shall be broken by the vote of the CEO/chairman of the board of the corporation.”

Proving that no good deed goes unpunished, a few years later, Bob’s two youngest brothers announced that they were revoking their “proxy” and argued that he could no longer break tie votes. Logic might tell you that the younger brothers have no leg to stand on. Unfortunately, legal issues often are more subtle and complicated.

In this particular case, there are two state statutes that deal with voting agreements among shareholders. One statute deals with a specific type of agreement among shareholders known as a “close corporation agreement.”

The other statute deals with a type of voting agreement known as a “voting trust.” The agreement among the brothers did not satisfy the requirements of either statute.

Fortunately, state law also stated that these statutory agreements are in addition to any rights “at law.” State courts have acknowledged the legitimacy of voting agreements under the common law. Thus, if the agreement is valid, a state court will likely enforce it. Thus, it appears that Bob has some protection.

Nevertheless, there are problems. Take a second look at the language that was included in the agreement. It speaks only to matters that come “before the Board of Directors.” There is always a risk that a court would invalidate the agreement as a shareholder agreement under common law, since it deals with board of director matters rather than shareholder matters. Alternatively, the court could uphold the agreement with respect to director matters but not uphold it with respect to shareholder matters. A deadlocked vote among the shareholders might be sufficient under state law to force dissolution of the corporation.

The lesson of this case is that agreements among shareholders concerning corporate control must be carefully drafted and usually must comply with very specific state laws. This is one time when a competent lawyer’s help is absolutely necessary.

In my next article in the November issue of HVACR Business, I will discuss the types of agreements that are available to business owners for dealing with corporate governance issues and minority shareholders. I’ll also talk about ways that minority owners can be forced out of a business.

Michael P. Coyne is a founding partner of the law firm, Waldheger Coyne, located in Cleveland, Ohio. For more information on the firm, visit: www.healthlaw.com or call 440-835-0600.