You may remember Dan Price, the $70,000 a year CEO of Gravity Payments in Seattle. In 2015 he made the news when he slashed his salary to $70,000 a year and boosted his employees’ minimum starting salary to the same amount.
He recently rejoined the company as CEO. The company has some 10,000 customers and processes 13 billion in transactions annually having rebounded from a COVID induced dip.
Gravity Payments is a business success story . . . that almost ended in 2015. That was when Dan’s brother and co-founder, Lucas, sued him for shareholder oppression – a suit that could have caused the dissolution of the company.
It didn’t happen, of course. The Shareholder agreement, bylaws, and clearly delineated employment contracts saved it.
After three weeks of trial testimony, we’ve been left with a pitch-perfect example of how they did so.
Starting a Company
The two brothers started the credit card processing company in the early 2000s. It immediately did well and quickly grew. By 2014 it was valued at more than $80 million and had 130 employees.
About five years after they founded the company, when it was up and running and very profitable, Lucas decided he did not want anything to do with day-to-day operations anymore. He wanted to travel.
Shareholder’s Agreement (and more)
Over the course of a year, the brothers, each represented by independent counsel, hammered out several agreements before Lucas left. A shareholder’s agreement, employee contracts, a redemption plan and a commission agreement.
The company was restructured and under the agreements Lucas agreed to:
- Accept a 40% minority interest;
- No longer be involved in day-to-day management of the company;
- Receive $400,000 for his redeemed shares;
- Receive a nominal salary;
- Receive a fixed dividend;
- Be granted ‘certain corporate protections;
- Step away from the offices and travel.
Dan was appointed CEO.
Backseat CEO
Lucas may have gone on to travel but he never remained out of contact with Dan or the company for long. Within a year or so of the agreements, he began to consistently and loudly complain about virtually every major decision.
Dan’s salaries – before the $70,000 announcement – were tied to the growth of the company. That did not stop Lucas from complaining and objecting almost yearly. Around 2011 the company’s growth had outstripped the salary escalation clause. Dan, as CEO, awarded himself a raise.
Lucas went ballistic. He demanded that the company buy back his shares. They refused while inviting him to look for a potential buyer. He questioned the dividend payments. He demanded to be involved – as a director – in some of the day-to-day business decisions while questioning his brother’s actions.
He could not find a buyer for his shares. The company – and his brother – rebuffed all his requests.
Lucas brought a shareholder oppression action against Dan.
The Shareholder Oppression Action
Lucas claimed that Dan had awarded himself ‘excessive compensation’ while working against Lucas’s interests as a minority shareholder. Specifically, that he had improperly charged Gravity Payments for personal expenses while systematically excluding him from board-level decision-making.
Lucas sought to force the company to buy his shares. That would cost tens of millions and put the future of the company in peril.
The Court’s Decision
Remember the Texans’ playoff game against the Browns in January? The one they won 45-14. Remember some of the adjectives tossed around?
Well, they all apply to the final decision of the court. Except in this particular Seattle court, it wasn’t as close as the Texans’ game. It was a judicial blowout, one in which attorney fees and expenses were awarded to Dan.
The court rejected the allegations that Dan Price awarded himself excessive compensation stating that his raises “were a reasonable business judgment made in good faith.” The Judge went on to note, as well, that as CEO, he had the authority to manage that without the board.
As far as the other claims, the judge ruled that Dan’s decisions were “well within the bounds of good faith exercise of his business judgment.”
The deciding factor was the shareholders agreement – it had covered every item in-depth eight years earlier when it was negotiated. Dan and the company had adhered to it in every regard.
It was fair because Lucas had been represented by his own lawyer and it had been hammered out over a year with no coercion, pressure, or urgency.
The lesson here isn’t the example of a shareholder oppression action that was blasted out of court after a three-week trial. The lesson is in the preventative work the shareholder agreement provided.
Without the shareholder agreement, this could well have gone another way and become a thriving company and 150 employees could be out of jobs.
Protect Your Business: Prevent Shareholder Disputes with a Strong Agreement
Ensure your business is protected and avoid shareholder disputes before they arise. Our expert team is here to help you create comprehensive shareholder agreements that safeguard your interests and secure your company's future. Don't wait for a lawsuit to threaten your success - let's build a solid foundation together. Contact us today to schedule a consultation and start protecting your business.
