LLC legal challenge what do we do? | Hacker News Reader

LLC legal challenge what do we do?

14 pointsiambateman18 comments

Two friends and I started a public library technology company in 2014. We are collectively majority shareholders but in 2020, we turned operations over to another shareholder, who is paid about $80k/year and has about 25% of shares. Total revenue is holding steady at ~250k/year.

In 2021, he issued an amendment to increase the number of allowed shares to dilute us out of ownership. We voted it down.

Two weeks ago, he sent out another amendment for the same thing but this time it “passed” because of new shares which he was not authorized to issue.

We are not on friendly terms with him, to say the least, but we also aren’t interested in taking over operations ourselves.

Is there anything we can do? Any advice is welcome.

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* Get a lawyer (that is not his lawyer)

* Fire him (after talking to your lawyer, so check all the details)

* Was he hired in 2020 or in 2014? Make a giant sign that says "4 Years with a 1-Year Cliff"

I feel like you shouldn't even need a lawyer for this... just make sure you communicate to him in writing that nothing he did was legally binding, there have been no new shares issued and he has no control of the company.

If he decides to sue, _then_ you can get a lawyer. But IMO it's just a waste of money otherwise... do you need a lawyer every time a crazy person does something delusional?

You definitely need to fire him though. And if you don't want to take over operations, then you either need to find someone else who does, or go along with this crazy guy's plan (because otherwise _nobody_ would run the company right?).

This is bad advice in general, but it's especially poor advice given the fact that the "crazy person" is running the company. OP needs to lawyer up immediately before (more) damage can be done.

Other people are saying "get a lawyer" ... you're not going to need a lawyer, but multiple lawyers. One for you, one for the LLC, one for each of the shareholders, etc.

It's possible this situation sits right on the boundary of "costs too much to fix". That would suck.

I've been in similar sitations. I once spent a week calling up lawyers, getting no response. I took the hint.

In a different state, I got some very good free legal advice (about 5 minutes worth), which was "there isn't enough money at stake to persue this."

So good luck with the lawyer thing - it might work out.

If you can't get legal advice, consider filing a criminal complaint. Start with federal agencies. Personally, I'd start with the US Secret Service (forging shares), be prepared to be referred to another agency.

This is helpful, thanks. That's the tough thing...The three of us collectively have six kids under the age of 5, and it's hard to think how much time and energy it will take to make a legal claim.

One of the shareholder's wife works for a federal agency...I'll talk to him about the criminal idea...thanks for that!

Pursue the lawyer route too! Just make sure to ask “is it worth it?”

It’s possible this can be cleared up quickly. His lawyer might say “stop breaking the law, and acknowledge they own the company.”

If he doesn't have a majority of the vote on his own, the only way it could have passed is if your other friend voted in favor of it, as the issuance of new shares/equity in an LLC requires a vote if the shares were not already authorized.

I'm guessing that the guy probably decided to waive some of his salary in exchange for equity-based compensation (possibly by increasing his salary, which wouldn't require a vote, and then swapping the monetary increase for shares of equivalent value, which also wouldn't require a vote if the shares were already authorized)...

When you talk to a lawyer about this, make sure to have a copy of your capital (/equity) table, and all resolutions about the authorized number of shares, and any documents you have related to the actual issuance of shares or capital.

Don't fire him or do anything else of that nature until you talk to a lawyer, as any sort of action could be construed as retaliatory and you'll want legal advice about that to make sure you do it the kosher way.

You need lawyers involved, but one of the most important things here is going to be what the LLC agreement actually says (is there a written LLC agreement, or when you formed the company did you default to statutory LLC provisions)?

As an aside, you and some other posters are talking about this as though this is a corporation (shares, shareholders, etc.) but the specific type of entity (corporation, limited liability company, limited partnership, etc.) and how it is governed matters in a scenario like this.

I agree with the other poster who said this may fall into the category of “too expensive to fix.” If you’re dealing with a bad faith actor who has the means to keep throwing legal spaghetti against the wall to see if something sticks, unfortunately they can make the cost-benefit analysis to turn against you pretty easily given the sums you’ve said are involved and the other priorities in your life.

Good luck. I hate to see bad behavior rewarded.

This sounds like the scene in The Office where Michael Scott says "I Declare Bankruptcy".

Just because you declare it, doesn't make it so.

In general, in LLCs, there are rules around amendments to the operating agreements for the company. It is likely very cut and dry as to whether passing the amendment is allowed under the operating agreement. Courts generally frown upon amendments that are specifically passed to disenfranchise other investors.

The question is - is it worth it to you to go after them, in court or via counsel, to reverse the amendment and manage the business? If not, it may be better to work through a buyout and call it a day. They be more receptive to this than having you sue them and end up losing.

(EX - Forget the amendment, bad actor pays you each $100k for your shares and you are out.)

(Disclaimer - Not a lawyer, you should get one, not legal advice.)

SEEK LEGAL COUSEL

First, get a lawyer, do what they say.

Second, find a replacement ASAP, as you won't be able to continue like this. Don't fall into the trap of "it will somehow work out".

I’m having trouble understanding how that second amendment passed. The first one didn’t so the total number of shares didn’t change, right? So how did he get the second one through, legally speaking?

Not at all trying to argue here, I’m trying to understand how this all works. It sounds like he just spoofed his way into diluting your shares which will fall apart in 5 minutes before a judge, should be an open and shut case but given the other comments here, it’s clearly not, which means I’m missing something.

I don't believe it passed legally but anyone can send an email saying "my amendment passes", which is what happened. He's betting that we won't challenge.

Can you sabotage the company asymmetrically, so that you and your two friends can get it back to 250k a year whereas the troublesome shareholder cannot? Can you vote to direct all profits above cost to a charity, and then offer to buy him out? Can you start a restructuring of the platform itself and then leave it half finished until this other party decides to pursue other scams?

Parasite

Out of curiosity, what is his perspective? How does he rationalize trying to do this and the purpose

I imagine his thinking is... he's the person running the business, if anybody is a parasite, it's surely the majority shareholders who do nothing day to day!

Yep, this has been his line. To him, he's been running "what should have been a nonprofit anyway"..."basically on his own for several years"..."what right does anyone else have to my company?"

Except it's not a nonprofit, and he is paid to do a job. :D

Jeez what a disaster

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