March 18, 2021 Articles

Tips for Handling Fraud and Related Malfeasance in Closely Held Businesses

Practical advice and guidance on how to identify, litigate, and prevent these issues.

By Todd Campbell

Closely held businesses provide a ripe environment for fraud and other kinds of related malfeasance. In this context, a closely held business is an entity whose shares are held by a small number of stockholders, some of whom generally work for the business and are frequently family members, and whose shares are generally not traded on the public stock market. Often, closely held businesses are organized as limited liability companies but can also be corporations or limited partnerships. Fraud-related wrongdoing is regularly an issue in legal disputes involving closely held businesses. This article provides a high-level description of the dynamics of these types of disputes, reflects on some examples of these types of situations, and offers guidance and advice on how to handle such situations.

Typical Scenario

When fraud and other types of similar malfeasance related to a closely held business are litigated, such claims are typically part of or within a minority shareholder oppression case. Generally, the minority shareholder asserts that he or she is somehow being treated unfairly by the majority or controlling shareholder. Often, by the time the minority shareholder engages a lawyer related to his or her claim, the minority and majority shareholders have had a complete falling out, are no longer able to work together, need desperately to negotiate a fair buyout of the minority shareholder’s interest in the business, and effectively enter into a business divorce allowing all parties to go their separate ways.

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