Wanted: Business Divorce Stories
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A company has four founding shareholders each of whom is a director-employee. Their agreement provides that the votes of three out of four founders are required to terminate the employment of any founder or to approve a series of other major decisions such as making distributions, issuing or redeeming shares, amending the certificate of incorporation or bylaws, etc.
When one of the founders no longer is employed and thereby automatically loses his seat on the Board, under the same provision the number of votes required to approve termination of another founder or the other enumerated major decisions drops to two out of three.
Sounds simple so far, right?
Now let’s complicate things. Under another provision, any amendment of the agreement requires the approval of the company and of the founders holding at least 75% of the voting shares, which raises the following questions:
- What happens when only three founders remain, two of them vote to terminate the third, and the remaining two hold less than 75% of the voting shares?
- Can the business be managed with less than three founders who lack the voting power to amend the agreement to allow the them to make the enumerated major decisions?
- Is the vote to terminate the third founder invalid absent a concurrent amendment of the agreement authorizing management of the company by only two founders?
- If so, does that render the two-out-of-three voting authorization meaningless? Continue Reading Then There Were Two: Court Rejects Minority Shareholder’s Claim of Wrongful Termination Under Founders Agreement