Question

Read the following scenario.

A family-owned business can have special complications. The line separating family relationships and legal responsibilities can be unclear. It is important for directors, officers, and owners of a family-owned business to be aware of the issues to avoid misunderstandings and unintended liability and to preserve familial relationships.

You are a consultant advising a "mom and pop" grocery store owned by Jeff and Joan, a married couple, and their two adult children, Martha and Henry. The grocery store operates under a subchapter S corporation. Jeff and Joan as a couple own 70% of the corporation's shares, and Martha and Henry each own 15% of the shares. Jeff, Joan, and Martha are directors of the corporation, and Henry is the corporation's chief executive officer (CEO).

Create a client memorandum (memo) addressing the following:

Explain the legal duties that Jeff and Joan, as majority shareholders, have to Henry and Martha as minority shareholders. What are their duties to Henry (an owner) as directors of the corporation?

Define the types of ethical duties Jeff, Joan, Martha, and Henry have to each other as owners of the company. What about as family members?

Provide suggested steps the family can take to abide by their legal duties as directors and officers, yet still preserve relationships between family members.

Answer 1

Legal duties of majority shareholders
majority shareholders have the obligation of good faith and duty to obtain best interest of the organisation and to the minority shareholders
majority shareholder controls organisation and the director control the day to day operation. The majority shareholders are the controlling shareholders and they must be aware of the power and not misuse their power.

Duties of Henry as director of the company
The director is in charge of management of company business, to make strategic and operational decision of the company and to ensure that company fulfills its statutory obligations.

Types of ethical duties that Jeff, Joan, Martha, and Henry have to each other as owners of the company

• Duty to maintain confidentiality
• Duty of note making secret profit
• duty of using companies assets in best interest of company.
• Duty of not permitting conflict of interest.
• Duty of working in best interest of company

steps the family can take to abide by their legal duties as directors and officers, yet still preserve relationships between family members

• The family must make conscious decision to maintain distance between business and their private life
• Have dispute resolution procedure in place
• Rules to protect confidential information
• rules on transferring share including transfer of shares when a shareholder dies.