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Ignoring Corporate Formalities — A Source of Business Ownership Disputes

On Behalf of | Dec 24, 2017 | Business Litigation

Buffington Law Firm’s business and corporate trial attorneys have successfully litigated numerous business litigation cases in which the central issue was the question as to who a corporation’s stockholders actually were. At first impression, one might think that there should always be an obvious answer to this question. Surely the person or persons who started the company are the owners. In practice, this question is sometimes far from clear.

Most corporations, and most employers for that matter, are small businesses – entities with perhaps fewer than 30 employees and often only one or two owners. It is remarkably common for such businesses to neglect corporate formalities. Often these businesses do not hold Board of Directors meetings, no minutes are kept, they do not have an annual Shareholder’s meeting, and not uncommonly some small businesses do not enact corporate By-Laws or even get around to issuing stock. In California, the Articles of Incorporation do not require that the original shareholders be designated and named to the State. So stock never actually gets issued and the question of who the owners are remains undocumented. Such formalities often seem like make-work activities unrelated to the corporation’s real job of providing services or manufacturing and/or selling products. As one client once told me, these corporate formalities appeared to him to be “just make-work for lawyers.” Sometimes a small business will grow into a much larger business, all the time neglecting the corporate formalities that document the corporation’s ownership and governance.  This is an invitation for trouble.

There is an adage in the corporate litigation world that “corporate formalities are not important until they are.” When corporations (or for that matter Limited Liability Companies or other similar entities) ignore these formalities there can be an unlimited potential for corporate strife and expensive litigation. Buffington Law Firm’s corporate trial lawyers have repeatedly represented business owners in situations where the question of who are the owners of the corporation was very much in dispute. Sometimes family members who helped out when the corporation was formed will come forward and allege that they are the true stockholders and owners of the corporation. Other times people who lent money to the corporation in its early stages will file a lawsuit asking a Court to declare that this money was really equity – a purchase of the corporation’s stock shares. Such claims can represent a very great danger to the corporation’s true owners and require a vigorous litigation defense.  Litigation of this sort is rarely inexpensive.

If you are involved in a dispute involving corporate ownership and governance, we invite you to contact Buffington Law Firm’s corporate litigation team for a free legal consultation. You will speak to an actual experienced corporate litigation attorney, and the call is completely confidential.