When a Business Leader Acts like the Business is their Personal Property, Trouble Soon Follows
Recently, Seven Sushi, a popular Minneapolis restaurant found itself in the news for all the wrong reasons in a local CBS news article: Seven Restaurant’s Main Owner Sued. The CEO and large shareholder is being sued by many of the other shareholders over allegations of breaches of fiduciary duty, including using company funds and assets as though they were his own, paying himself large sums of money but not paying investors, falsifying financial records and refusing to provide information to investors, among other alleged misdeeds.
Not knowing the details of the case, I cannot speak to the allegations, but I can say that Minnesota law in general prohibits acts by a board member or officer (and often even a majority shareholder) that involve unfair self-dealing. It is unlawful use company funds like a personal piggy bank. More broadly, every director and officer owes their company a “fiduciary” duty, usually considered equivalent to the duty of a trustee to administer a trust. These duties can even apply to a majority shareholder if they are active in the governance of the business.
A number of legal doctrines may be implicated in these cases:
- Breach of the fiduciary duty of loyalty
- Breach of the fiduciary duty of care
- Conversion (converting company funds to personal use)
- Fraud (against the company)
- Tax Fraud (against the government)
- Breach of Minnesota law dealing with providing company information to shareholders
- Breach of Minnesota law dealing with unfair behavior towards minority shareholders
- Piercing the Corporate Veil
- Breach of Minnesota law dealing with shareholder distributions
Using Company Funds for Personal Purposes
Directly taking company funds for personal purposes is almost always problematic. Writing a check from the company account to pay a personal mortgage, loan, etc… raises many issues and creates that possibility that the limited liability protections built into a corporation or LLC entity would be set aside, known as piercing the corporate veil. Even paying an officer, director or majority shareholder for other work provided (or alleged to have been provided) needs to be handled carefully, as such a transaction needs to be approved by the non-interested members of the board of directors or otherwise entirely fair to the company and the other shareholders.
One well-known example was Enron CFO Andrew Fastow using LJM Cayman L.P., a company owned by Mr. Fastow, to collect management fees from Enron. This company siphoned millions of dollars into Mr. Fastow’s pocket. Enron purportedly authorized this, claiming this arrangement did not “adversely affect the interests of Enron.” However, this self-serving corporate structure came under close scrutiny when creditors and shareholders were defrauded by Enron. But it doesn’t take a major corporation to engage in such activities, even small companies can find themselves in these situations, sometimes even innocently because the business owners are not aware of the problems that can be created.
Shareholders have a variety of rights when a director, officer or majority shareholder acts inappropriately, and conversely, companies have rights when minority shareholders try to inappropriately manage a business, something that they have no right to do simply by being a shareholder. You can learn more about these rights and duties, including how to enforce your rights, in these articles: