The Ugly Truth About Giving
Others “Skin in the Game” – All
About Sharing the Ownership of
Your Business
Presented by
Teri G. Rasmussen
Lane, Alton & Horst, LLC
LANE, ALTON & HORST LLC
Attorneys and Counselors at Law
Two Miranova Place, Suite 500
Columbus, Ohio 43215-5100
(614) 228-7052 FAX: (614) 228-0146
www.lanealton.com
Teri G. Rasmussen
Partner and Vice Chair, Business Practice Group
Lane, Alton & Horst, LLC
trasmussen@lanealton.com
(614) 233-4752
Teri G. Rasmussen
Business Acquisitions and Sales
General Corporate and Business Law
Joint Ventures and Strategic Alliances
Corporate Governance and Shareholder Disputes
Contracts and Loan/Lease Documentation
Business Formation and Financing
Business Planning
Creditors’ Rights and Debt Collection
Business Bankruptcy and Insolvency
UCC and Secured Transactions
Commercial Finance
Litigation
Real Estate
Teri G. Rasmussen
B.A., with honors, 1981, University of Iowa
J.D., cum laude, 1984, University of Michigan
Bar Admissions:
Supreme Court of Ohio, 1984
U.S. District Court, Southern District of Ohio, 1984
U.S. District Court, Northern District of Ohio, 1993
U. S. Sixth Circuit Court of Appeals, 1997
Professional Associations:
Columbus Bar Association (Former Chair, Financial Institutions Committee),
Ohio State Bar Association (Chair, Banking, Commercial and Bankruptcy Committee)
American Bar Association Business Law Section
Commercial Law League (CLLA)
National Association of Women Business Owners (NAWBO)
Executive Women’s Golf Association (EWGA)
Teri G. Rasmussen

Special Counsel to the State of Ohio for Wright State University

Special Counsel to Franklin County, Ohio Prosecutor Ron
O'Brien

Lead counsel to banks, other secured lenders, and lessors, in
structuring, negotiating and documenting scores of commercial
loan and lease transactions ranging from hundreds of thousands
to tens of millions of dollars, as well as with respect to hundreds
of commercial and business collection actions and numerous
workout/turnaround situations, ranging from a few thousand
dollars to multi-million dollar obligations in asset-based, real
estate, line of credit, and all business asset transactions.

Formed numerous limited liability companies and prepared
Operating Agreements for businesses ranging from two person
family or owner-operated companies to investment vehicles to
joint ventures to sophisticated real estate companies.
Part I: The Scenario
Why Add Shareholders?

Reward Key Employees

Attract Crucial Talent

Compensate for Low Compensation

Raise Equity Capital
Understand the Ground Rules

Before bringing anyone into your business,
make sure that both parties



Understand the whys for the new ownership
opportunity
What it means and what it doesn’t mean
Agree on how you’ll know and what you’ll do if and
when it’s over
Getting the Right Talent




You are finally ready to commercialize your idea.
Since you don't have a business background, you decide
to hire someone else to act as President of the
Company.
Because of the start-up nature of the business, your
new President demands that she be given stock shares
in the new company.
After several years, you find out that the Company's
President really isn't very good at finances and decide
you'd like to make a change.
Rewarding Employees



After your father passed away, the running of the family business
has passed to you.
The business has been moderately successful over the years, but
now you want to both reward some long-time employees and give
greater incentives for performance by giving certain key employees
shares of stock in the Company.
While the Company's profits increase substantially initially,
eventually you find your employee/shareholders questioning the
direction you want to take the Company and why the Company is
making your car payments.
Easy Money?




Your company needs money, but really isn't bankable at the
moment.
Your brother-in-law agrees to put money into the business in
exchange for shares of stock.
At first you appreciate his generosity and the business tips he now
hands out freely.
However, when you discover he’s cheating on your sister and
divorce ensues, you start wondering how you can get rid of the
arrogant pain in the neck.
Part II: The Danger
and the Rule
Different Environment, Different Problems

The profitability of a privately owned business is in large
part a function of the owners’ and investors’ personal
contributions of money, time, and effort.

Ordinary corporate norms such as majority control can
lead to serious problems and oppression in the close
corporation context.
History – Corporate Ownership Power
Ironically, the potential for oppression of those with small
ownership stakes arose historically out of responses to
the problem of oppression by those very people.

At one time, corporate statutes required unanimity for
major corporate decisions, thus allowing a small
shareholder to extract concessions in exchange for his
agreement to a beneficial course of action for the
company.
Meinhard v. Salmon, 164 N.E. 545 (1928)

Judge Cardozo determined that defendant breached
is duty to his business partner by arranging a
number of favorable business deals with the
landlord concerning adjacent property to the
exclusion of the business partner

“The trouble about his conduct is that he excluded his
coadventurer from any chance to compete, from any
chance to enjoy the opportunity for benefit that had come to
him alone by virtue of his agency.”

No answer is it to say that the chance would have been of
little value even if seasonably offered.”
Meinhard v. Salmon, 164 N.E. 545 (1928)



"joint adventurers, like co partners, owe to one another
…. the duty of finest loyalty."
"many forms of conduct permissible in a workaday world
for those acting at arm's length, are forbidden to those
bound by fiduciary ties."
"Not honesty alone, but the punctillo of an honor the
most sensitive, is then the standard of behavior."
Equal Opportunity Principle
Donahue v. Rodd Electrotype Company,
328 N.E.2d 505 (Mass. 1975)
Facts: Majority shareholders/directors of family-controlled
decided to cause the Company to redeem the shares
held by Harry Rodd, the Company's retiring patriarch.
When the Company refused to extend the offer to the
survivors of employee-shareholder Joseph Donahue,
Donahue's widow sued, seeking either to stop the
Company's redemption of Rodd's shares or to compel
the purchase of Donahue's share on the same terms.
Donahue v. Rodd Electrotype Company
Tale of Two Lives

Harry Rodd and Joseph Donahue both started
working for Royal Electrotype Company of New
England, Inc. during the Depression in the mid
1930’s, but their work paths within the company
were quite different.


Rodd quickly became part of management and
ultimately became President to the Company.
Donahue achieved only the position of plant
supervisor and never participated in the “management
aspect” of the business
Donahue v. Rodd Electrotype Company
The Road to Majority Ownership

Although both Rodd and Donahue were given the
opportunity to buy stock in the Company, Rodd took
fuller advantage of the opportunity, buying 200 shares to
Donahue’s 50 shares.

In 1955, Rodd loaned the Company money to redeem
the 725 shares held by the Company’s parent company
and 25 shares held by another minority shareholder.
 Rodd mortgaged his house to obtain some of the
necessary funds.

This left Rodd with an 80% ownership interest in the
Company which was subsequently renamed Rodd
Electrotype
Donahue v. Rodd Electrotype Company
The Fruits of Majority Ownership

During the 1960’s, Rodd’s sons began working for the
Company and Rodd gradually began gifting some of his
shares to his daughter and two sons.

In 1970 when Rodd was 77, his sons wanted him to
retire.

Rodd was not averse to the suggestion, but wanted
some financial arrangement to be made with respect to
his remaining ownership interest.
Donahue v. Rodd Electrotype Company
Cashing Out



The Company agreed to redeem 45 shares, slightly less
than half of Rodd’s remaining shares
At a special Board of Directors meeting, Rodd resigned
as a director and his son Frederick was elected to
replace him. Rodd’s other son Charles and the
Company’s attorney were the other two directors.
Rodd then continued with his gifting program with
respect to his remaining shares and completed his
divestiture of Company stock the following year.
Donahue v. Rodd Electrotype Company
Minority Shareholder Perspective


Approximately nine months after Rodd’s shares had
been redeemed and after Rodd had completed his
divestiture of his ownership interest in the Company,
Donahue’s widow (to whom Donahue’s shares had
passed) learned about the transaction for the first time
and was unhappy about it.
Donahue’s shares were then offered to the Company
which refused to purchase them on the grounds that the
Company was not in a financial position to do so.
Donahue v. Rodd Electrotype Company
A rose by any other name…..


Although the Trial Court and the Court of Appeals found
nothing wrong with what had transpired, the
Massachusetts Supreme Court REVERSED
Because of small number of shareholders and absence
of liquid market, close corporation are more like
partnerships than publicly traded companies and
therefore shareholders owe fiduciary duty to on another
Close Corporation = Partnership
“Just as in a partnership, the relationship among the
stockholders must be one of trust, confidence and
absolute loyalty if the enterprise is to succeed…. All
participants rely on the fidelity and abilities of those
stockholders who hold office. Disloyalty and self-seeking
conduct on the part of any stockholder will engender
bickering, corporate stalemates, and, perhaps, efforts to
achieve dissolution.”
Plight of Minority Shareholder
“Many minority stockholders will be unwilling or unable
to wait for an alteration in majority policy. Typically, the
minority stockholder in a close corporation has a
substantial percentage of his personal assets invested in
the corporation.
The stockholder may have anticipated that his salary
from his position with the corporation would be his
livelihood…. At this point, the true plight of the minority
stockholder in a close corporation becomes manifest. He
cannot easily reclaim his capital.”
Equal Opportunity Principle
“The controlling group may not, consistent with its strict
duty to the minority, utilize its control of the corporation to
obtain special advantages and disproportionate benefit
from its share ownership…. We hold that in any case in
which the controlling stockholders have exercised their
power over the corporation to deny the minority such
equal opportunity, the minority shall be entitled to
appropriate relief.”
Ohio Adoption of Equal Opportunity
Principle

Estate of Schroer v. Stamco Supply Inc.,
482 N.E.2d 975 ( App. Dist 1984)
 Company purchased shares of controlling shareholder
matriarch (CEO's Mom) and later those held by CEO’s
brother without informing other shareholders.
 Minority shareholder found out and her request of the
Company to buy her shares in a similar manner
 Company refuses to purchase shares from minority
shareholder
Estate of Schroer v. Stamco Supply Inc.

“Stockholders in a close corporation owe one another
substantially the same fiduciary duty in the operation of
the enterprise owed by one partner to another, to deal
inter sese in the utmost good faith.” Syllabus ¶1

Fiduciary duty breached by Company refusal to redeem
shares of minority shareholder on same terms.
Syllabus ¶2
“Heightened Fiduciary Duty”
Crosby v. Beam,


47 Ohio St. 3d 105, 548 N.E.2d 217 (1989)
Facts: Minority shareholder alleged that majority
shareholders improperly expended Company funds to pay
unreasonable salaries to themselves and personal
expenses
Holding: A "heightened fiduciary duty" exists between
shareholders of close corporations. Majority or controlling
shareholders breach such fiduciary duty to minority
shareholders when control of the close corporation is
utilized to prevent the minority from having an equal
opportunity in the corporation.
“Heightened Fiduciary Duty” = Equal
Opportunity Principle
“Where majority or controlling shareholders in a close
corporation breach their heightened fiduciary duty to
minority shareholders by utilizing their majority control of
the corporation to their own advantage, without providing
minority shareholders with an equal opportunity to
benefit, such breach, absent a legitimate business
purpose, is actionable." ”
- Crosby v. Beam, 1989
“Legitimate Business Reasons”

Gigax v. Repka, 83 Ohio App.3d 615, 615 N.E.2d 644
(2d App. Dist Montgomery Cty. 1992)

Facts: Gigax, Repka and Lensch (together with their
wives) were shareholders in a close corporation
engaged in contracting. Eventually Repka and Lensch
became unhappy with Gigax’s job performance and
decided that his employment should be terminated.


Repka and Lensch changed the locks, revoked Gigax's check
writing privileges and terminated his employment.
It was alleged that Gigax’s “profitability margin had substantially
declined, and legal and public relations problems frequently
arose out of his jobs.”
Gigax v. Repka: Odd Man Out
•
Gigax denied the allegations and sought injunction
preventing termination of his employment. Gigax had
been president and vice president of the company at
various times and, at the time of his employment
termination, was corporate secretary
•
All three men worked at the Company, but none had an
employment contract.
•
Other two shareholders contended that Gigax was an
“at-will employee” terminable at any time by vote of the
other two.
Gigax v. Repka: “Legitimate Business
Reasons”

To determine whether employment termination is
acceptable, a court must "balance the need to protect
the minority shareholder-employee with the needs of the
close corporation in ridding itself of the unproductive or
troublesome employee“

Removal of shareholder in close corporation must be
based on "legitimate business reasons".
Gigax v. Repka: Firing a Fellow Shareholder
Can’t Be Done Without a Reason
Removal of shareholder in close corporation must be
based on "legitimate business reasons". In this case
was not done for legitimate business reasons because



Each shareholder had experienced a decline in profitability at
some point since formation of company
Decline in terminated shareholder profitability not necessarily
directly attributable to him
Failure to inform terminated shareholder of dissatisfaction
Ohio Close Corporation Shareholder
Heightened Fiduciary Duty Rule
Under Ohio law, owners of small businesses with only a
few shareholders, members, or partners have a
“heightened fiduciary duty” toward one another.



Applies no matter how small the ownership interest of the
minority shareholder is
Means that controlling shareholders DO NOT have ability to
run the company in ANY way they see fit
Must have “legitimate business purpose” when taking adverse
action toward fellow shareholder
Obligation of Controlling Owners
“Majority shareholders owe minority shareholders a
fiduciary duty, whereby the majority shareholders owe
minority shareholders good faith, loyalty, disclosure, and
an obligation to refrain from self-dealing. Absent a
legitimate business purpose, majority shareholders in a
close corporation owe a duty to all minority shareholders
not to utilize their majority control to their own advantage
without providing minority shareholders with an equal
opportunity to benefit”
- Mulchin v. ZZZ Anesthesia, Inc.,
2006 Ohio 5773, 2006 Ohio App. LEXIS 5757
(6th App. Dist. – Erie Cty)
Heightened Fiduciary Duty Rule



Fiduciary duty is greater than obligation of fairness
implied in arms-length transactions
Requires one to promote the collective, long term
interest of the Company
Forbids promotion of limited personal short term
interests
What About LLC Members?


Although it is not completely clear in all cases, courts
generally apply the “heightened fiduciary duty” to LLCs
as well
Some authority exists that fiduciary duty can be reduced
or possibly eliminated through an express provision in
the LLC Operating Agreement. McConnell v. Hunt
Sports Enters,, 724 N.E. 2d 1193, 1215 (App. Dist.
1999) ("a contract may define the scope of fiduciary
duties between parties to the contract.")
Why Are the Rules Different?

Shareholders in privately held close corporations have a
different set of expectations and vulnerabilities than do
shareholders of publicly traded companies


All owners are likely to be very involved with the business on a
daily basis. Minority owners often expect to draw a salary which
is often a defacto dividend.
If the corporation is structured as a Subchapter-S corporation, as
many close corporations are, shareholders are obligated to pay
taxes on their pro rata share of the Company’s income, even if
no dividends are paid out or the shareholder is fired from his job,
thereby losing his source of income.
Why Are the Rules Different?

Exiting a bad investment in a close corporation isn’t as
easy as calling a broker. It may be extremely difficult, if
not impossible, for the unhappy shareholder to recoup
what in many cases is a personally huge investment.



No readily available market exists for the ownership interests.
There may rights of first refusal or other restrictions on
transferability.
Valuation of the ownership interest can sometimes be difficult,
especially in “knowledge work” based business with few tangible
assets or inventory.
Why Are the Rules Different?
Voting control gives the controlling shareholders the keys
to corporate machinery and a degree of control and
influence greater than generally wielded by any one
shareholder in publicly traded companies
Part III: The Application
of the Rule
Miller v. McCann,
1997 Ohio App. LEXIS 5778 (1st App. Dist.-Hamilton Cty)



Ronald McCann owns 75% of AOS and is Company’s
President; Ken Miller owns 25%
McCann’s wife Delores works for AOS at a 1991 salary
of $30,000
From 1992-1995, compensation increases
Year
Base
Bonus
1992
$30,000
$8,000
1993
$30,000
$14,000
1994
$40,000
$25,000
1995
$54,000
$75,000
Miller v. McCann

McCann’s daughter Karen worked part-time for AOS
during the Summer, but needs additional money for
school
 AOS pays Karen unearned bonuses of $500-$700 a
month totaling $25,000

McCann doesn’t tell Miller about bonuses and doesn’t
offer to provide a similar benefit for Miller’s kids, saying
“The payroll records were open to Ken. He could have
seen it himself.”
Miller v. McCann


“The unearned bonuses to the McCann children are clearly benefits given to the
majority shareholder, McCann, and not shared by the minority. These bonuses
present clear evidence of a breach of a fiduciary duty and a preferred dividend. “
“As for the salary of Delores, there is some evidence that her 1995 compensation
consisted of bonuses that she did not earn and that may have been awarded to her by
Ronald McCann to reduce the company's profit margin for tax purposes.
While there is also evidence that this use of bonuses was a company practice that
Kenneth might have benefited from himself, we hold that there was sufficient evidence of
record for a jury to consider whether a component of Delores McCann's 1995 salary
constituted a preferred dividend.”

“Similarly, we hold that there was sufficient evidence to go to the jury on whether McCann
converted the gas grill, the massage chair, and the fencing, although these claims seem
trivial in the context of this case.”
Obvious Cant’s




Employing family members at unjustified high salaries
Giving family members special perks such as company
car, golf membership if they wouldn’t receive in similar
position elsewhere
Siphoning off earnings through exorbitant salaries and
bonuses
Using Company funds to buy personal items
Obvious Cant’s





Cannot compete with company
Cannot usurp its commercial opportunities
Refusal to declare dividends
Refusal to distribute earnings as bonuses or retirement
benefits
Removal as director or officer
Obvious Cant’s




Similar businesses pay President $300,000
Company has high profits and can afford to pay as much
as $700,000
OK?
NO, excess profits must be distributed to all
shareholders as dividends
Problematic Situations




Employment Termination
Involuntary dissolution of corporation
Chilling effect on operational freedom
Restrictions on sale of company
Effect on Exit Strategies – “Fair Cash Value”

By statute, minority shareholders in a Ohio corporation
have the right to demand the “fair cash value” of their
shares upon the sale of the corporation or substantially
all of its assets. Ohio Revised Code 1701.85

This becomes important if the corporation is struggling and the
minority shareholder believes the majority stakeholder is selling
out for too little.
Effect on Exit Strategies – “Fair Cash Value”


Receipt of any extra “premium” payment for the
control a majority owner’s ownership share provides
may also be successfully attacked in some cases.
It can also be an issue if the majority owner is
perceived to be getting a “juicy” consultant
arrangement with the new owners.
Effect on Exit Strategies

Should the majority owner wish the company to
repurchase some of his ownership interest, it is no
longer as simple as writing the check.


Now the new co-owner must have the same opportunity to have
the company repurchase a similar proportion of his ownership
interest.
Also difficult to eliminate small ownership stakes at a
later date
Stock Wars: Kelly v. Wellsville Foundry, Inc.,
2000 Ohio 2667, 2000 Ohio App. LEXIS 6287 (7th App. Dist.-Columbiana Cty)





In 1987, Charles Gilmore purchased 400 shares of
Wellsville Foundry
Gilmore’s stock purchase gives him a 80% ownership
interest in Wellsville Foundry.
Remaining 20% ownership interest held by Gerald and
Lois Kelly
Kellys also own a nearby competitor foundry.
Gilmore is President, Treasurer, and as majority
shareholder, is entitled to appoint the Board of Directors
Kelly v. Wellsville Foundry, Inc.

April 1987 - Gilmore gets Board of Directors to authorize
issuance of 2000 additional shares to Gilmore at 50
cents each or a total purchase price of $1000

Kellys were never informed of this transaction or given
any similar opportunity to purchase additional shares

Effect of the additional shares was to dilute Kellys’
ownership interest from 20% to 4%
Kelly v. Wellsville Foundry, Inc.



August 1987 - Gilmore causes a reverse stock split to
occur, leaving the Kellys with fractional shares
Gilmore’s alleged “legitimate business reason”: as
shareholders, the Kellys would be entitled to certain
proprietary information that they would then use to
compete with the Company and therefore needed to be
eliminated from the ownership of the Company
Company Board of Directors approved a valuation of the
fractional shares and a procedure for repurchasing them
Kelly v. Wellsville Foundry, Inc.:
Thou shalt not dilute out fellow shareholders

Holding: Satisfaction of the “business purpose” rule rather than
mere “fairness” is required for valid reverse stock split in close
corporations.

“Imposition of the business purpose rule is necessary to protect
the interests of the minority shareholder. Adopting a fairness
test would permit a majority shareholder in a close corporation
to eliminate a minority shareholder based on nothing more than
a whim as long as the corporation complied with the statutory
formalities and offered the minority shareholder a fair value for
their stock.” At *14
Can I Fire a Shareholder Employee Who
Doesn’t Work and Play Well with Others?
YES

Priebe v. O’Malley, 89 Ohio App. 3d 8, 623 N.E. 2d 573 (9th App. Dist –
Medina Cty) ([Myron] was not producing sales and … was not working well with other
employees. Other evidence existed on the record that [Myron] was converting corporate
property to personal use, that he was not working full daily hours, and that he threatened
to shut down the company… )

Duggan v. Orthopaedic Institute of Ohio, Inc., 365 F. Supp. 2d 853
(N.D. Ohio 2005) – removal of shareholder employee from role as President,
but allowing him to continue as shareholder and employee was based on
legitimate business reason) (Defendants give several reasons for their decision
to terminate the plaintiff; namely, that he was over-extended, refused to delegate
work, failed to share information, had poor people management skills, and
treated [Company] employees in an abusive manner. “)
Can I Fire a Shareholder Employee Who
Doesn’t Work and Play Well with Others?
NO

Gigax v. Repka, 83 Ohio App.3d 615, 615 N.E.2d 644 (2d App. Dist
Montgomery Cty. 1992) (Termination of fellow shareholder employee
requires “legitimate business reason” and specific articulated issues)

Thomas v. Fletcher, 2006 Ohio 6685, 2006 Ohio App. LEXIS 6590
(3d App. Dist. – Shelby Cty) (“While the parties had some disagreements
regarding the corporation, the Fletchers and Thomas continued to operate
the business and the business continued to function.”)
Thomas v. Fletcher, 2006 Ohio 6685, 2006 Ohio
App. LEXIS 6590 (3d App. Dist. – Shelby Cty)

Fletcher brothers James
and Patrick and John
Thomas are shareholders
in a close corporation
known as Wingers
operating a restaurant/bar






All three participate in the
management of the
business and receive a
salary.

Thomas
James
Patrick
40%
35%
25%
President = Thomas
Vice President = James
Corporate Secretary =
Patrick
Thomas v. Fletcher




Landlord wants to sell the property on which the
restaurant/bar is located
Company has an option to purchase. Brothers Fletcher
don’t want to do the deal
Thomas goes ahead and does the deal himself by
establishing an LLC solely owned by Thomas.
The new Thomas LLC becomes Winger’s new landlord.
Thomas v. Fletcher



In 2002, the lease comes up for renewal and is renewed.
Subsequently, there is further negotiation between
brothers Fletcher and Thomas LLC about additional
renewal term upon expiration of lease in 2007, but the
parties are unable to reach agreement.
Brothers Fletcher fire Thomas from his position at
Wingers.
Dueling Fiduciary Duties?

Thomas sues, challenging his termination on grounds of
breach of fiduciary duty.

The Brothers Fletcher counterclaim on the same basis,
saying Thomas should have renewed lease on more
favorable terms

Who is the majority shareholder?
Brothers Fletcher say ….

Thomas was
“unproductive, did not
work well with others,
was disruptive by
threatening to sue and
his attitude and conduct
was abrasive,
condescending, abrupt,
and intolerable.”

Thomas failed to
negotiate the lease
renewal in good faith
•
•
•
Wingers was suffering
financial hardship
Thomas initially threatened
not to renew the lease at all
Thomas proposed
unreasonable rent increase
for renewal
Thomas v. Fletcher

Court of Appeals upheld grant of summary judgment in
favor of Thomas

Brothers Fletcher had no “legitimate business reason” to
terminate Thomas.



While there were disagreements, the business
continued to function
Thomas did eventually renew the lease and no
evidence that Wingers wouldn’t be able to pay rent
required
“Assuming arguendo, that Thomas had a fiduciary duty to the
corporation as a minority shareholder, no facts exist
demonstrating Thomas breached any fiduciary duty.”
Part IV: The Solution
Employment Agreements
A fellow shareholder-employee may be terminated without
cause and for any reason if he or she has signed a written
employment agreement which allows that.

Cruz v. South Dayton Urological Associates, Inc.,
121 Ohio App.3d 655, 700 N.E.2d 675 (2d App. Dist.-Montgomery Cty) (“When
Cruz [signed an employment agreement which] agreed that SDUA could
terminate him without specification of cause, he… waived his right to argue
that the Defendants breached their fiduciary duty to him because they lacked a
legitimate business reason for their action.” )
Buy-Sell Agreement



Perhaps the most important method to protect your
financial and business interests while being fair to your
employee-owner
Proven method of establishing fair and rational solutions
to many sorts of disputes that can arise among owners
concerning their respective ownership interests and their
value.
Useful for placing other reasonable restrictions on
transferring the ownership interest to anyone else, e.g.
rights of first refusal
Buy-Sell Agreement

A Buy-Sell Agreement deals with different situations in
which it becomes necessary or desirable for someone to
give up their ownership interest.
 Typically, it includes a procedure for the departing
owner to receive the value of his investment in the
company without crippling the company.
 It also offers a reasonable alternative to requiring
expensive resolution through the courts.
Buy-Sell Agreement – Triggering Events
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Involuntary Termination of Employment
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Termination for Cause
Termination for Good Reason
Retirement
Resignation from Employment
Death or Permanent Disability
Removal as Officer or Director
Happening of Particular Events
Occurrence or Nonoccurrence of Benchmarks
Close Corporation Agreement

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Another equally useful agreement is a Close Corporation
Agreement. Under Ohio law, corporations with only a
few owners may choose to be a “close corporation”, but
must do so in writing with a Close Corporation
Agreement. Ohio Rev. Code §1701.591
No similar affirmative effort is required for limited liability
companies or partnerships, but an Operating Agreement
or Partnership Agreement can address many of the
same operational and governance issues as a Close
Corporation Agreement.
Close Corporation Agreement

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Allows shareholders to vary and discard many of the
legal formalities otherwise imposed on corporations.
Allows shareholders to be more specific about how they
will treat one another. This can be helpful if a question
later arises as to whether a shareholder’s “fiduciary duty”
to the company and other shareholders has been met.
Contents of Close Corporation Agreement
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Respective voting rights of owners
Circumstances giving rise to the right of one or more
shareholders to dissolve company
Conditions of employment of owners
Management authority
Payment and timing of dividends
Permissibility of transactions with shareholders (e.g.
leases)
Can include Buy-sell provisions, including redemption
provisions
Close Corporation Agreement Formalities

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All shareholders (including your new employee-owner)
must sign the Close Corporation Agreement.
Adoption of Close Corporation Agreement must also be
recorded in the Company’s official minutes.
Agreement must specifically reference the statute
authorizing close corporation agreements. Ohio Rev.
Code §1701.591
Very important that the Company’s stock certificates
carry a legend indicating the existence of the Close
Corporation Agreement.
What’s Next?
What’s next?

Presence of small ownership stakes may restrict
controlling shareholders’ options even more in the future

A growing number of states have started focusing on the
minority shareholder's "reasonable expectations“
 looking at transaction from perspective of minority
shareholder rather than the motivation for the majority
shareholder's action

more favorable to minority shareholder
What’s next?

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
Inviting someone into the ownership of your company is
an important step.

Strategic reasons

The “right thing to do”.
Whatever the motivation, you can and should do it in a
way designed to minimize the possibility of
misunderstandings or outright disputes later on.
Taking this step also has the additional benefit of
protecting your financial interest in the company and
your continued ability to influence or control its business
affairs.