Concerns as a minority shareholder

by smallbizthrowaway543. Posted on Sep 13, 2020    3    6

Hey everyone, hope this is the right place to ask this.

My mom is a minority shareholder in a family business. We just found out that an employee has embezzled ~$1mm over decades operating as head of the company's accounts payables and receivables. The company is run by my uncle, and he isn't interested in pressing charges and has seemed less concerned about this than other shareholders. As such, most shareholders have a long overdue interest in the company's financials and management.

I work in consulting / finance and have always believed this company to be incredibly mismanaged. The extent of this mismanagement and potential corruption goes deeper than this one instance.

I'm wondering what documents we should ask for in order to dig through and get a better understanding of the business, and to what extent my mother, as a minority shareholder, has the right to ask for / demand information. I would greatly appreciate any advise and input. My current thinking is that my mom should request an outside valuation and sell her ownership, but I'm not sure if she can even do that as a minority owner.

My starting data request is the following. Any input or guidance would be appreciated. Thank you!

  • income statements
  • balance sheets
  • cash flow statements
  • statement of shareholder equity
  • company tax returns
  • a current view on company capitalization table
  • overview of company bank accounts and balances
  • information on company operating structure


JDinSF 1

Any evidence to support this allegation? Recommend a consultation with a business attorney before acting on it. This can be a complex issue and could irreparably harm family relationships.

  smallbizthrowaway543 1

No evidence on any illegal activity from my uncle, but confirmed the other employee was embezzling. I agree with you- that's why we're trying to handle this tactfully. I suspect he's embarrassed and wants to downplay, but not wanting to report to authorities is definitely a red flag.

shittyCEO 1

Had 2 admins embezzle about $70k combined and got detectives involved both times. $1m I can't imagine NOT wanting to get authorities involved. That scream red flag at me but you never know.

For my 2 incidents detectives and representatives from the bank came to make copies of a ton of shit. Forged checks, processes, reviewed vendors, etc.

As a minority shareholder she should be in her right to ask for company financials and get an outside audit.

In my eyes if your uncle blocks that he's doing something wrong could be embezzling or just hiding the shame of mismanaging it.

BigSlowTarget 1

She can likely sell her ownership if she can find someone to buy. An outside valuation (AND AN AUDIT) are probably a good idea.

I would add:

- Name of the company accounting/auditing firm.

- Customer list and sales by customer

- Financials related to COVID (PPP, cancellations, nonseasonable surges or collapses in demand)

- Employee list, salaries, years with the company and organization chart (might be in your operating structure ask)

- List of off-balance sheet liabilities (often leases but some funky contracts might be in there too, patents as well but they are hard to value)

- Backlog of business if there is one (i.e. if orders have been received but it has been impossible to meet them and they are waiting for product)

- List of people with signing authority over those bank accounts

- Annual budget (lol, ok probably not going to get this one but ask anyway)

Realistically you are probably going to have to ask for a subgroup of these things but they are possibles to think about. Each one tells you a few different factors about the company.

  smallbizthrowaway543 2

Appreciate it. My uncle has offered to buy her out.

looking4euterpe 2

My immediate thoughts: if your uncle isn't interested, he may very well have been in on it.

Your mother may lack standing to get the police involved. But she can still get something done - it is highly unlikely that the embezzling employee paid taxes on the money. Assuming the company/employee is in the US, she can alert the IRS - they even have a specific form for that purpose. And if they make a recovery, she can even receive a reward.