How can one sell their shares in a business after getting sued?

Question

My mother is 51% shareholder in my father's company. She was a silent partner throughout the entire process, the only reason she was 51% shareholder was because my father wanted a certain tax exemption for minority women owning businesses. However in the midst of their divorce (which my father has made very ugly), she gave up her rights to the business. However, she recently received a notice that the company (as well as her personally) are being sued for $100,000. However she never made even one business decision in this entire business and she was a homemaker. In the divorce, she got the house however because of this business problem, they will attach the house as property.

I am looking to help her and I am unsure if hiring a corporate lawyer is necessary. Is there any way to mediate this situation without hiring a lawyer. And since she is being sued while she still is 51% shareholder of the company (even though the divorce was granted last year), does it matter if she sells her shares at this point or will she still be sued?

Answer 1

TL;DR: It is a $100.000 lawsuit. Talk to a lawyer. If getting out of lawsuits was as easy as acting through a company and selling it afterwards, nobody would ever get paid damages.

In addition to that, any answer will depend heavily on a lot of data that you do not disclose (location, kind of company, what is the basis for the lawsuit, etc.). Talk to a lawyer.

But, a couple of points to help you understand the situation:

the only reason she was 51% shareholder was because my father wanted a certain tax exemption for minority women owning businesses.

It does not matter the reason, she was the shareholder. And in fact, I would not publicly use that reason as an excuse before checking with a lawyer, because perhaps it could be considered fraud¹.

she gave up her rights to the business.

Exact wording of the agreement will be important for your lawyer. Did she return ownership of the stock? Or did she just agreed not to manage the business?

In C corporations, stockholders are only liable for the money invested (i.e., the value of their stock may drop to zero, but no one can sue them for more). In other kind of companies (unlimited companies), owners can be forced to pay (fully or partially) for the debts of the company.

does it matter if she sells her shares at this point or will she still be sued?

Who exactly is going to buy the stock? It does not sound like the company is publicly traded, but just a small operation. Unless her 51% is worth more than she is being sued for -or the buyer thinks that the lawsuit will fail-, people won't be interested.

Of course, it might be tempting to "forget" telling about the lawsuit to prospective buyers, but that probably will end with the buyer suing your mother when they discover that she has not fully disclosed the status of the company. Talk to a lawyer.

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¹But explain all of the details to your lawyer, s/he may make use of them and convince your father to take full responsability. And your lawyer will not inform the authorities. Talk to a lawyer.

Answer 2

However in the midst of their divorce (which my father has made very ugly), she gave up her rights to the business. However, she recently received a notice that the company (as well as her personally) are being sued for $100,000. However she never made even one business decision in this entire business and she was a homemaker. In the divorce, she got the house however because of this business problem, they will attach the house as property.

It isn't at all clear why anyone would have a legal basis to sue her for merely owning shares. Generally speaking, merely owning shares is not a grounds for liability, and any liability associated with owning shares would end when the shares were given up in the divorce. She should have a lawyer file an answer or motion to dismiss to that effect in the lawsuit and may be able to swiftly secure its dismissal.

Also, how do you know that they will attach the house as property?

Ordinarily that would not be permitted until the action related to the shares is concluded and then, only if she lost the lawsuit.

I am looking to help her and I am unsure if hiring a corporate lawyer is necessary. Is there any way to mediate this situation without hiring a lawyer.

A lawyer is absolutely necessary, even if there is a mediation. A lawyer tells you what it is reasonable to bargain for and settle for in mediation. Is there any reason why her divorce lawyer couldn't assist her in this matter?

Also, often the divorce settlement would require the husband who got the shares to indemnify and defend her (i.e. pay any damages and pay for her lawyer) in the event that she is sued over assets awarded to him in the divorce.

And since she is being sued while she still is 51% shareholder of the company (even though the divorce was granted last year), does it matter if she sells her shares at this point or will she still be sued?

It isn't clear from the facts if she does or does not own the shares. It sounds like the husband got the shares. If so, she can't sell what she doesn't own. If not, she can sell them but has a legal duty to advise any buyer of the pending litigation, unless a court order says otherwise. It sounds as if she has already been sued, so that is a moot point.

In practice, selling a closely held company is an exceedingly difficult thing to do at anything approaching fair market value of the shares, particularly if there is pending litigation.

Answer 3

$100,000, and a husband who caused trouble during the divorce, means you MUST get a lawyer. Hiring a lawyer is not just necessary, it is absolutely essential. Why are you afraid of hiring a lawyer?

If she is still 51% shareholder, and the business is being sued, then I expect the business to pay the cost. Sorry, dad.

Answer 4

Anyone can be sued for anything, and the above advice is very sound. Bear this post in mind:

Relevant Story

A doctor volunteered as a non-voting member of a board. He was sued and it went on for years before he was removed from the suit. In this case he had no control of the actions by the board and most of the decisions that lead to the suit were made prior to his membership.

However that did not stop the plantiffs.