LOS ANGELES, CALIFORNIA - 06/28/2017
Los Angeles-based law firm Axis Legal Counsel has achieved a successful settlement on behalf of a minority shareholder client in a dispute with former business partners in the Los Angeles manufacturing industry. "It was a very satisfying resolution," said managing attorney Rabeh Soofi. "The litigation was long and emotional, with many ups and downs, but in the end, we were able to deliver the justice that the client had been seeking all along," Soofi said. "It's a great feeling," Soofi added.
The lawsuit was brought after the partners in control of the business ejected the minority shareholder out of the business and cut off all income and profits being paid to the shareholder, taking the position that the minority shareholder was owed nothing. The lawsuit alleged that the controlling business owners breached fiduciary duties, engaged in self-dealing and conflict-of-interest transactions, raided corporate assets, and engaged in fraud. After intense litigation, the case recently settled for a confidential sum.
“It was definitely a tough battle to fight because it felt like the other side was doing everything in its power to prevent my client from succeeding,” said attorney Rabeh Soofi. There were many thousands of pages of records, uncooperative witnesses, and the other side had engaged in ongoing efforts to intentionally conceal what they were doing with the Company’s assets, according to Soofi. “Fortunately, after a couple of key pivotal points in the lawsuit, the door to settlement opened, giving our client a fair resolution to the dispute after many years."
Soofi says business divorces can be ugly, especially when business partners don’t always get along. In many cases, there are factions within the business and a partner who has friction with the others can be at risk of being simply thrown out of the company. “Whether it is a squeeze-out, freeze-out, or other action that is taken against the minority shareholder, it all refers to the same thing – a partner is cut out of the business with no consideration for his or her rights or what they contributed to the business, whether that was capital, labor, sweat equity, goodwill, or otherwise,” says Soofi. “Controlling business owners often mistakenly believe that if they just fire a business partner, that person is out of the business for good and they can simply carry on as though nothing happened. It doesn’t work that way,” Soofi said.
When business owners break up, the biggest dispute is usually over the business’s assets and who is entitled to what. This often requires an assessment of the business’s financial condition, to determine the business’s assets, liabilities, and how much of the business the minority shareholder is entitled to, and on what terms. According to Soofi, this can be much more complicated than it sounds. “These cases generally involve some of the worst cases of financial malfeasance that you can imagine,” said Soofi. “They tend to be like those cases you read about in the news, in which the controlling business owners keep wildly inaccurate financial records that intentionally underreport the income the company is making, dip into a corporate cash slush fund whenever they want, divert the business’s revenue streams towards ventures that have nothing to do with the business, and use business money to buy themselves expensive personal purchases, lavish meals, and exotic vacations.” These misdeeds are par for the course in business dispute between founders or former partners. “It’s shocking what people think they can get away with,” says Soofi.
Determining how much the minority shareholder is entitled to often requires investigating the financial records of the company to ascertain the true financial condition of the company. “These cases generally involve tons of financial records, and in many cases, they are not proper accounting records kept in accordance with generally accepted accounting principles. It’s usually a big hairy mess,” says Soofi.
Disputes involving international business owners or multi-national businesses, which are common in cities like Los Angeles, can pose unique problems as well. “In cases involving international clients, it is often that the financial records are not in English and more importantly, not kept in a way that reflects any recognizable U.S. accounting practices. They tend to be maintained to reflect the accounting system common to the home country of the controlling business owner, and these can be vastly different from how business accounting is done in the U.S.” says Soofi. “In those cases, we tend to bring in translators, interpreters, and sometimes, bilingual accounting professionals from the business’s owner’s home country help unravel how the books were kept so we can decipher what was happening with the business’s finances, and whether wrongdoing occurred.”
Soofi says the key to successfully resolving shareholder disputes and shareholder derivative cases is experience and meticulous investigation. “It definitely takes a lot of patience and dogged determination in conducting a proper investigation, but experience with financial malfeasance is priceless. Most lawyers do not even know how to read a balance sheet or understand how double-entry journals work, so experience and a keen eye is a crucial part of effectively litigating these types of disputes,” said Soofi. “Depending on how clever the controlling business owners or their accountants were in concealing or misreporting the business’s financial transactions, it can be easy to miss red flags or other indicia of fraud,” said Soofi. “Small details are crucially important because they can have a huge effect on the valuation of the business as a whole, which affects the share the minority shareholder is entitled to.”
Based out of Los Angeles, California AXIS Legal Counsel practices in the area of business/corporate litigation and transactions, entertainment, and intellectual property, serving clients throughout California and from 22+ countries internationally in California matters. Axis represents shareholders, members, partners, and other business owners involved in a dispute involving the majority owners, shareholders, members, or partners of business entities, providing aggressive representation of clients in claims alleging theft, conversion, breaches of fiduciary duty, self-dealing, violations of the duties of loyalty and candor, the misappropriation of business assets, corporate raiding, and numerous other related claims. Axis Legal Counsel’s managing attorney Rabeh Soofi is ranked as one of the “Top Women Lawyers of Southern California” by SuperLawyers Rising Stars, and Axis has been recognized as one of the “Top Business Law Firms” by Finance Monthly magazine.
For more information, contact [email protected] or (213) 403-0130.