Hi all
Will appreciate your views. (May edit this for grammar/ readability later)
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A friend (Mr Y) entered into a shareholding arrangement with their elder brother (Mr X - who happens to be 10 years senior and old school in ways)
X was seeking funds to start a business and Y offered to enter. Y thought this a fantastic opportunity as there would be absolute good faith and trust between brothers and that this arrangement is a non brainer deal.
X has 70% shares whilst Y has 30%
Both X & Y have rights to inspect business accounts/ finance record and be a seperate bank signatory.
X would be running the business day to day whilst Y has the option to do the same or be passive (Y opted the latter)
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10-11 months down the line - it has occurred to Y that X is running the business in questionable means (such as mixing personal finances with business finances using the company bank account; such as there are a lot of unexplainable losses (since everything is sold at a profit); such as changing his mind on when dividens may be payable; such as repeatedly lying or not keeping word; such as not sharing company accounting data/ performance etc when requested (and if shared it’s in an incomplete questionable manner)
Upon realising this, Y decides (with X knowledge/ consent) to prepare with a lawyer a shareholder agreement since Y didn’t think one is required from the onset (since both are brothers and would have the best interest and trust of the other)
Y, upon presenting X with the shareholder agreement doc, and days later requesting for the shareholder agreement draft feedback - X decided out of no where that they can’t “work together” anymore and wants to buy Y out of the business.
Y, shocked to learn this, feels betrayed by X. And refuses to be bought out/ refuses to sell their shares.
Y proclaims to X that Y has not benefited anything from the business (and only X did to date). If X doesn’t want to work things out, then X should liquidate the business and both go separate ways.
Y accuses X for being non transparent and not able to keep to their word. X accuses Y for being difficult to work with (and finds Y to be too questionable/ distrusting)
X instead comes back to Y and offers that the way out is for X to sell their share to Y instead, following an audit of the company. however Y doesn’t want to by X out.
X then just goes silent/ refuses to engage further and basically proceed to ghost/ ignore Y.
Y is frustrated but decides to did a a little onto whatever he can find. Y upon digging into public records of the company - finds out that the company still states the that 100% shares belongs to X. Y does not share this fact with X - at least not yet.
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What rights to you think Y has in this situation and what can the do should to protect themselves?
Y feels like he’s being squeezed or frozen out of the business unfairly and unjustifiably. Y invested this business in good faith and trust in X - and counted on having this business as a means to passive income.
Y also hesitates to sue X because it will devastate the family ties of the larger family of both X & Y
Y feels the business is potentially lucrative and seems to on the upward trend despite the incomplete or shady records.
Y feels that they will miss out if they withdraw or be coerced out from the business. Y feels that they should persevere with the matter at hand in the interest of reaping the business benefits later - that maybe the situation may improve with time off for both X & Y from each other.
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Y is asking how to proceed forward and What would be their rights?
What do you think is happening here in this situation?
What would you do if you were Y in this situation?
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My suggested Poll options (please add if you think of any helpful ones)
Y to sue X regardless to consequences of family bond and claim their original investment (since Y isn’t registered by X in public records as a shareholder.)
Y to back out and accept loses as a result of audit. (Y feels they will resent themselves as time goes because of this decision.)
Y to back off for now and wait to see what X does. If X doesn’t really want Y, then X should take care of the matter.
Other (please chime in and suggest)
If it's brothers and Y wants in still, then X should propose to Y that Y becomes a ghost partner with no say in the business at all and have their 30% put in writing. Then if the business is ever sold, Y will get his 30%, if there's dividends and X gets $70,000 then Y will get $30,000. Why should X care at all if Y gets his 30% of profits. Y can inspect the books at his own expense without interfering with the business to make sure he isn't getting screwed. Y made his investment and should be able to enjoy the benefits of that. It wasn't a loan, it was a cash investment for a share of the business. X should be happy for his brother to profit from his investment, that 30% investment helped the business grow, and I'm sure Y did offer some kind of value when managing it. Should probably get a lawyer to write a standard agreement with no loopholes that would let X screw Y, like rolling all profits into a salary for X or somewhere else that indirectly benefits X over Y.