Minority owners of closely-held corporations (in New Jersey) often put themselves in a position where they are cut off from access to the company’s books and records. When that happens, several things can occur, and few of them are good.
For example, majority shareholders who have unfettered access to the company’s finances often abuse their power by granting themselves impermissible benefits that are not related to their employment by the company, and are not proportionately shared with the minority shareholders. But when the minority shareholders do not even have access to reviewing (let alone controlling) the finances, the temptation for abuse can be too great for majority shareholders to resist.
In one case, the majority shareholders, knowing that no one was looking over their shoulders or reviewing any of the finances, took advantage of the situation by paying their child’s college tuition from the company. It was not until litigation commenced over other matters that these payments were discovered.
While this may not be happening in your company, the question really is – do you truly know how your company’s money is being spent? For investors starting a business today, it is critical that those who will be minority shareholders create a situation where they will at least be able to see the company’s books and records. It is extremely easy to set up online banking access with a “view only” mode, so any shareholder who is not allowed to see the banking transactions as they occur should ask themselves why they are being denied access. If your potential business partner will not grant such a basic right – even though such transparency is not a legal requirement – is he or she really someone you want to spend potentially decades in business with?
For those minority shareholders in existing companies who have been denied access to company books and records for years, it is never too late to ask for information. There is a limit to what information a shareholder is allowed to receive in New Jersey, although the right to review financial information is broader in an LLC than a corporation (due to a recent amendment of the New Jersey LLC statute). But there is nothing stopping a shareholder (or member of an LLC) from asking for financial information. If the request is denied, and the denial raises suspicions about the way money is being spent, an experienced shareholder dispute attorney can help you obtain financial records without necessarily filing business divorce litigation.
If that nagging voice in the back of your head is telling you that your days of being kept in the dark by your business partner should come to an end, you should probably listen to it.
I hear all the time from clients:
Don’t ever allow yourself to be cut off from access to books and records
Trust but verify
Temptation for abuse is strong in closely held company
Often only worse if given free rein
Set precedent early on