Disputes arising out of investment agreements are unfortunately a common issue. Where problems arise from investment agreements, they usually involve certain officers of the company not abiding by their fiduciary duties owed to the investor. Officers of a company, especially in small or closely held corporations, begin to freeze out or operate in their own interest at the cost of the other investors.
This can take many forms. One example is self-dealing, where an officer makes deals on behalf of the corporation with himself or with other companies the officer has a connection with. Another example is maintaining excessively large amounts as retained earnings for several years rather than paying dividends. Another game played that breaches the fiduciary relationship is when the majority shareholders as officers of the corporation begin to pay themselves excessive salaries. This is done so that capital can be removed from the company without having to pay all shareholders.
Conflicts of interest also arise in conjunction with investment agreements. Officers’ decisions need to full disclose the conflicts prior to the corporation acting.
Investors are sometimes kept in the dark as to the happenings of the corporation. Depending on the business form, investors have rights to inspect business records and this also becomes an issue in investment agreement litigation.
Another investment agreement issue that arises often in Silicon Valley is dilution of a shareholder’s stake in a company. This often happens when a company seeks to obtain investors and does so at the expense of earlier investors.
If you have issues related to investment agreements you would like to discuss, feel free to call an attorney at the Law Offices of Ara Jabagchourian, P.C. to set up a meeting.
