Corporate Malfeasance and Self-Dealing

By Donald Loose

We represented a group of minority shareholders in this case for corporate malfeasance and self-dealing by the majority shareholder. The parties in this lawsuit owned two businesses: a block manufacturing company and an affiliated land holding company.  The block company conducted its business on property owned by the land holding company.

The majority shareholder owned 51% of both companies; he also was the president of the block company and sole manager of the land holding company.  His wife was vice president of the block company.  Our clients, who collectively owned 49% of the companies, invested $800,000 in the companies when they were formed, but were completely uninvolved in the business affairs.

The majority owner sought to liquidate and dissolve the companies, based largely on the fact that the block company was losing about $100,000 per month.  Our clients agreed that the companies should be liquidated, but they asserted claims against the majority owner for breach of fiduciary duty, conversion, and breach of contract.  They also filed an application for the appointment of a receiver, due to the majority owner’s alleged financial mismanagement. The court granted the application and appointed a receiver for the companies.

The receiver proceeded to sell the assets of the companies at auction for $1,900,000.  The sale proceeds were deposited into receivership accounts and added to other monies held by the receiver, which totaled approximately $4 million. 

Our clients alleged that the majority owner and his wife had misappropriated hundreds of thousands of dollars a year, even as the companies were losing money.  When the minority owners finally gained access to the financial records, they discovered that almost $1.5 million had been expended by the majority owner for the apparent personal benefit of himself and his family, including expenditures for sporting events, worldwide travel, and cases of expensive wine. 

While the majority owner served as the president of the block company and also as the sole manager of the land holding company, he and his wife bought four lots of vacant land adjacent to the property where the block company’s business was located. The block company had ample cash to buy the lots, but the majority owner and his wife bought the lots themselves without first presenting the opportunity to the companies or informing the minority owners. Then, without the minority owners’ knowledge or consent, they leased the lots to the block company, pursuant to two long-term leases.  The rent under the leases was, according to an expert, nearly triple the fair rental value under a typical arms-length negotiation. Months later, the majority owner disclosed the existence of the executed leases to the minority owners. 

The minority owners retained an expert in the field of corporate governance, who concluded that the majority owner and his wife breached their fiduciary duty as corporate officers and were liable to the minority owners.  Prior to trial, the parties reached a settlement favorable to our clients and the monies held by the receiver were distributed to the owners in the agreed amounts. No party admitted liability in the case.  

Tags : Self Dealing