Another Close Corp Question

If there is a three member board and each one is also an officer (President, Vice President and Secretary)… at a board meeting, they can fire an officer correct?  If two out of the three don’t like one of the officers……  But of course, that still means, that person that got fired would still be a member of the board since it is the shareholders that vote for the board. Which is essentially the same people here. The shareholders and the board (close corp).

Sorry if my question is confusing. Just seems like it is going to be going around full circle here. The board fires an officer, yet that person fired is still going to be on the board since they have enough stock to keep themselves on there.

How do we in the real world get that person out? We would just have to somehow get his shares? Buy them out?

I represented a guy once who owned one-third of the stock and was a vice president of the corp getting a huge salary.   The other two decided to fire him as VP and take away his salary.  This was a non-close corp state – and in any event there was no shareholders agreement.   After he was fired, his salary stopped.  He got to go to BOD meetings but was out voted obviously on everything.  He had no right to be involved in the operations of the business, only to vote at BOD meetings on all consequential decision.  If it had been a state that recognizes close corps, the two bad guys would have had to establish that they fired him for reasonable business reasons, not just to get rid of him because they didn’t like him any more.

Your question is why a good lawyer is needed at the beginning of the new busijness relationship.  To make sure they have thought through how this is going to work.  Especially as to surviving spouses.

Question re Partnerships

From a student:

I understand that partnership is “An agreement b/w two or more persons to carry on a business TOGETHER for a profit.” I also understand that within the meaning of the word “persons” in the partnership definition it includes that person can be “persons, corporations, LLC’s, etc.” Thus, this indicates that when we have a corporation issue on a hypothetical, it means that we may also have a discussion of partnership.

What is confusing me though is the fact that partners are liable for partnership debts and I cannot understand how this fact about partners being liable for partnership debts would go on a discussion about corp and partnership. So, who is liable for the partnership debt in a corp/partnership hybrid question?

Answer:  Suppose two corps decide to do business together, perhaps to run a food truck, or build a building or develop software.  At that point there are three entities, the two corps and the partnership.  Any debts that arise in the course of running the food truck etc would be a liability of the partnership; the partners of the partnership would be liable for the debts.   Continue reading

Question re Close Corps

Question from a student

Regarding Closely Held Corp.
Where there is a question of salary/compensation for a board member, would there be a discussion of Interested Director Transaction?

Compensation of a board member is clearly an interested director transaction.  Remember though that all that really means is – is the transaction fair to the corp?  There cannot be a safe harbor exception because the board cannot step out of the room – there will be no one in the room! Continue reading