Start-up Company

[BariNice]

I have invested in a start-up company that is having serious financial difficulties. There are approximately 130 share holders who purchased stock at prices varying from $0.28/share to $1.75/share. The board of directors has decided to try to sell a portion of the company to raise cash to pay off financial obligations and hopefully return at least a portion of the shareholders' money. There are some members of the board who propose paying back the shareholders according to the dollar amount they invested. In other words, if Mr. Smith invested $100 at $0.28/share, he would be entitled to $100. And if Mr. Black invested $100 at $1.75 per share, he also would be entitled to $100 even though he has considerably fewer shares than Mr. Smith. Others believe the share holders should be paid on a per share basis with all shares being treated equally. All share issued are Common Shares. Is it legal to treat different investors differently?

[This message has been edited by BariNice (edited May 28, 2000).]

 

[Tracey]

No. The BOD can decide to treat different classes of stock differently, but have to treat all common stock shares the same. The BOD is confusing a partnership windup with a corporate windup. Partners in a partnership or LLP get paid according to their contributions. Stockholders get paid according to the number of shares they own. Any attempt to deviate from this rule is a breach of fiduciary duty and subjects the BOD to personal liability to the shareholders who boutgh at $.28/share. NOTE: if the bylaws state this policy is OK, you need to consult a corporate attorney and show her a copy of the bylaws and articles of incorporation.

If the BOD insists on paying according to contribution, it had better get a written opinion letter from an attorney saying that's OK, so they can at least sue the attorney for malpractice when they lose their houses. Be sure to see the malpractice insurance policy and verify that it's paid.

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This is not legal advice and you are not my client. Double check everything with your own attorney and your state's laws.