A Shareholder Oppression Case From Ireland
The Rose of Tralee is the largest summer festival in the Republic of Ireland. In 2014 a US based businessman, Dick Henggeler, “paid €800,000 for a stake in the company behind the Rose of Tralee following the death of his daughter, a former contestant.”
He also moved to Tralee, bought a hotel and became, with his Irish-born wife, a staple of the community and the festival.
Henggeler has just filed a shareholder oppression lawsuit in an Irish court claiming that not only was he “taken advantage of” but his ownership virtually erased by a group of majority shareholders who do what they please, have never held a board of directors meeting, and refuse to provide any accounting or to open their books.
In many ways, a model shareholder oppression complaint. In others, a perfect illustration of what a lack of communication and initial agreements will almost certainly, inevitably, wrought.
An Investment in a Closed Corporation . . .
. . . but what kind of investment?
Henggeler just wanted to give some solid "financial support to the festival." His daughter had been a big part of it before her tragic death from a brain tumor when she was in her early 20s. It was a way to remember and honor her while ensuring that the festival would be financially solvent enough to carry on for years.
He originally tried to make it a gift. The company explained that they could not legally take donations. They said that he could contribute in two ways: by ‘investing’ in the company and by buying the Fels Point Hotel in Tralee, the festival’s base.
He and his wife bought the hotel, valued at €4m at the time, and renovated and relaunched it as The Rose Hotel in 2016.
Henggeler then put “€800,000 into the company in two transactions in2014 and 2015.”
‘Put in’ is not, you may have guessed, a legal term of art. It’s as nebulous as the suggestion he “invest in the company.”
Henggeler was then given – as far as we can figure out right now, the details are very sketchy – 31% of the company. Or so he was told. There was no agreement, no statements, nothing. Henggeler gave money, the company told him that he was a 31% owner. It seems that the company treated his payment as the gift he originally intended and their bestowal of stock as some kind of reciprocal gift.
There things stood for a few years.
Investing in a Closed Corporation – How it Should Have Worked
A quick aside before we get back to the story. When you decide to invest in a closed corporation there are a number of steps you and the company need to take before a dime is transferred.
First, the investor has to do their due diligence. That includes reviewing the company’s financials and business plans. At a minimum. The company, of course, is obligated to provide them. /p>
Then, the terms of the investment must be memorialized in a comprehensive shareholder agreement. This must:
- Clearly define shareholder rights, responsibilities, and ownership percentages.
- Outline procedures for decision-making, dividend distribution, and dispute resolution.
- Include provisions for buy-sell agreements to facilitate exit strategies.
- Consider including provisions for valuation of shares and dispute resolution mechanisms.
None of this was done either before or after Henggeler transferred the funds. It appears that since the parties already knew each other well and Henggeler, of course, was enamored with the festival, they felt comfortable with a handshake.
Among the issues raised in the lawsuit is Henggeler’s claim that he was never given any paperwork when he put money into the company, nor, when he informed he owned 31% was he shown the valuations used to calculate how that number was arrived at.
Shareholders and Corporate Governance
Henggeler states that while he understood he would not be involved in day-to-day operations, he was assured he would be kept abreast of major decisions and would be involved in indecision-making to develop the festival.
He was not.
Another allegation in his lawsuit is that no board meetings were held by the company. None.
At some point over the last two years, Henggeler questioned some corporate decisions – that he was frozen out of – and began to “develop concerns about financial issues.” He hired Grant Thornton to review the company’s financial statements.
Or he would have had the company provide them with access to them. The company stalled for well over a year and was still stalling when the suit was filed in July.
Needless to say, the right to look at the corporate books and financials is a fundamental right of a shareholder in a closed corporation.
Fraud or Use of Sales Proceeds?
One piece of financial information he did manage to get: less than €100,000 of his full investment benefited the festival. The bulk of his investment, €600,000 was paid out directly to the other shareholders. The company’s managing director used €550,000 to pay off his mortgage and personal debts.
The company acknowledges that its shareholders did indeed use the funds. They say that Henggeler’s payments were not an investment in the company “but rather for the acquisition by him of 31pc of its shares from existing shareholders.”
What the Shareholder Oppression Suit Seeks
Henggeler is asking the court to require the company to turn their books over to the forensic accounting firm he has already hired. He is also asking that the court recognize that his shareholder rights were oppressed, and it orders two of the company’s directors to sell all their shares to him. They currently own 61%.
A shareholder oppression case that just shouldn’t be. Almost $900,000 was handed over to a company without any due diligence by the investor. A man who had sold his computer company to Raytheon for millions of dollars prior to this transaction.
Communication was almost nonexistent when it came to anything ‘corporate.’ The company was, at best, cavalier in its relationship with Henggeler. They failed in every duty they owed him.
We’ll be sure to report back as this case goes forward. It will be interesting to see how the High Court of Ireland views and weighs these facts.
Protect Your Investments and Ensure Your Shareholder Rights
If you're considering investing in a closed corporation or have concerns about your shareholder rights, it's crucial to have the right legal guidance from the start. Don’t let miscommunication or lack of due diligence put your investments at risk.
Contact us today to schedule a consultation. Our experienced team can help you navigate shareholder agreements, protect your interests, and avoid situations like those described above. Your peace of mind is just a call away.
