Family Business Ownership Dispute Letters

Comprehensive guide to resolving conflicts over family business interests, inherited business ownership, and inter-generational succession disputes in California.

Family businesses combine the complexity of business disputes with the emotion of family conflict. When parents pass away, when siblings disagree about management, or when one family member feels squeezed out by others, the resulting disputes can tear families apart and destroy businesses. Early intervention through a well-crafted demand letter can sometimes resolve these conflicts before they escalate to litigation.

The unique challenge: Family business disputes involve both legal rights (as shareholders, partners, or beneficiaries) and family relationships. A demand letter must be firm on legal rights while recognizing that these are often people who will continue to be family - and ideally continue to work together.

Common Family Business Scenarios

Post-Death Inheritance Disputes

Parent dies, leaving business interests to multiple children. Common problems:

Active vs. Inactive Owner Conflicts

One family member works in the business full-time; others own shares but don't work there:

Generational Transition Disputes

Parent is retiring or has died; children disagree about succession:

Squeeze-Out Situations

Majority owners use their control to disadvantage minority family members:

Why Send a Demand Letter?

Purpose Why It Matters
Asserts legal rights Many family members don't realize they have legal rights as minority owners - your letter educates them
Requests information Shareholders and partners have rights to financial information; a formal demand starts the clock
Proposes solutions Often the first concrete proposal for resolution - buyout, restructure, mediation
Preserves relationships A private letter is less inflammatory than filing suit; leaves room for negotiation
Creates record Documents attempts to resolve before litigation, which courts appreciate

Key Questions to Answer First

Check for arbitration clauses: Many business agreements require disputes to go to arbitration rather than court. Review all governing documents for dispute resolution provisions before sending a demand letter or filing suit.

California Legal Framework

Corporation Laws

California Corporations Code governs closely held corporations:

Shareholder Inspection Rights

Any shareholder may demand inspection of:

The demand must be in writing, state the purpose, and be for a purpose reasonably related to the shareholder's interest.

Grounds for Involuntary Dissolution (§ 1800)

LLC Laws

California Revised Uniform Limited Liability Company Act (Corp. Code §§ 17701.01-17713.13):

Partnership Laws

Revised Uniform Partnership Act (Corp. Code §§ 16100-16962):

Fiduciary Duties in Closely Held Businesses

California recognizes heightened fiduciary duties in closely held businesses:

Jones v. H.F. Ahmanson & Co.: California courts have recognized that majority shareholders in closely held corporations owe minority shareholders a fiduciary duty of fairness. Majority cannot use control to benefit themselves at minority's expense.

Breach of Fiduciary Duty Claims

When controlling family members breach fiduciary duties, minority owners may sue for:

Valuation Standards

When disputes lead to buyout, valuation becomes critical:

Common Family Business Disputes

1. Information Access Disputes

Non-managing family members are denied access to financial information about the business they own.

Typical scenario: One sibling runs the family business. Others own shares but are never told how the business is doing, what they're entitled to, or how their shares are being valued.

Your rights:

Response: Formal demand for inspection with specific categories of documents requested.

2. Excessive Compensation / No Distributions

Controlling family member pays themselves large salaries and benefits, leaving nothing for distributions to non-working owners.

Typical scenario: Business generates $500K profit. CEO-sibling pays themselves $450K salary plus benefits. Other siblings who own 40% collectively receive nothing.

The problem: This effectively excludes minority owners from any return on their investment while majority takes everything through salary.

Your rights:

3. Squeeze-Out Tactics

Majority owners take actions designed to force minority out on unfavorable terms.

Common tactics:

Your rights: California courts provide remedies for freeze-out of minority shareholders in closely held corporations. You may have claims for breach of fiduciary duty, and potentially involuntary dissolution.

4. Buyout Valuation Disputes

Family agrees someone should buy out others, but can't agree on price.

Issues that arise:

Resolution approaches:

5. Related-Party Transactions

Controlling owners direct business to companies they own or benefit from personally.

Examples:

The problem: These transactions transfer value from the business (and all owners) to the controlling owner, diluting minority's value.

6. Disputed Inheritance / Succession

Parent dies and children disagree about business ownership or management.

Common issues:

Resolution Options

Buyout

One family member (or group) buys out others' interests.

Pros: Clean break, allows business to continue

Cons: Often difficult to agree on price; buyer may not have funds

Structured Distributions

Agree to regular distributions to all owners proportional to ownership.

Pros: Keeps family together, provides return to all owners

Cons: Reduces capital available for business; ongoing relationship required

Sale of Business

Sell to outside party and divide proceeds.

Pros: Clean break, market-based valuation

Cons: May not get full value; ends family legacy; tax consequences

Mediation

Neutral third party helps family reach agreement.

Pros: Preserves relationships, creative solutions possible

Cons: Requires good faith from all parties; non-binding

Litigation / Dissolution

Court resolves dispute through involuntary dissolution or damages.

Pros: Forces resolution; protects legal rights

Cons: Expensive, time-consuming, destroys relationships

Evidence Gathering

Family business disputes require financial documentation and evidence of the controlling parties' conduct.

Ownership Documents

☐ Articles of incorporation / Articles of organization

☐ Bylaws / Operating agreement

☐ Shareholder agreement / Membership agreement

☐ Buy-sell agreement

☐ Stock certificates / Membership interest records

☐ Stock ledger / Capital account records

☐ Transfer records

Financial Records

☐ Annual financial statements (3-5 years)

☐ Tax returns (corporate/partnership returns)

☐ K-1s issued to owners

☐ Bank statements

☐ Profit and loss statements

☐ Balance sheets

☐ General ledger

☐ Records of distributions to owners

Compensation Evidence

☐ Salary history for controlling family members

☐ Bonus records

☐ Benefits documentation

☐ Expense reimbursements

☐ Auto allowances / company vehicles

☐ Retirement plan contributions

☐ Comparison to market rates for similar positions

Related-Party Transaction Evidence

☐ Lease agreements with family members

☐ Vendor contracts with family-owned companies

☐ Loans to or from family members

☐ Consulting agreements

☐ Comparison to arm's length terms

Meeting Records

☐ Board meeting minutes

☐ Shareholder/member meeting minutes

☐ Written consents

☐ Notices of meetings

Information Demand Strategy

Statutory Inspection Demand

For corporations, your demand under Corp. Code § 1601 should:

Proper Purpose Examples

If Inspection Is Refused

You may petition the court for order compelling inspection. The court may also award attorney's fees if the refusal was without justification.

Valuation Considerations

Methods to Propose

Issues to Address

Demand Letter Templates

Template 1: Demand for Books and Records Inspection

Use when: You're being denied access to financial information about the business.

Re: Demand for Inspection of Corporate Records [Company Name] Dear [Officer/Controlling Shareholder]: I represent [Client Name], a shareholder of [Company Name] holding [X]% of the outstanding shares. Pursuant to California Corporations Code § 1601, [he/she] hereby demands inspection and copying of the corporation's books and records. SHAREHOLDER STATUS [Client Name] is a shareholder of record, having acquired [his/her] shares [describe how - inherited, purchased, gift, etc.] on or about [date]. [He/She] currently owns [number] shares, representing approximately [X]% of the outstanding shares. PURPOSE OF INSPECTION [Client Name]'s purpose in requesting this inspection is to: 1. Evaluate the current value of [his/her] shares 2. Determine whether the corporation is being properly managed 3. Verify that [his/her] ownership interest is being fairly treated 4. Assess whether distributions are appropriate given corporate earnings 5. Evaluate potential sale of shares or other options These purposes are directly related to [his/her] interests as a shareholder. RECORDS REQUESTED [Client Name] requests inspection and copying of the following records: FINANCIAL RECORDS (for the past 5 fiscal years): • Annual financial statements (balance sheet, income statement, cash flow) • General ledger • Monthly or quarterly financial reports • Bank statements for all corporate accounts • Tax returns (Forms 1120/1120S/1065 and all schedules) • K-1s issued to shareholders • Records of all distributions to shareholders COMPENSATION RECORDS: • Salary, bonus, and benefits paid to all officers and directors • Employment agreements • Expense reimbursement records for officers • Vehicle and equipment provided to officers CORPORATE RECORDS: • Shareholder ledger showing all current shareholders • Minutes of all board and shareholder meetings • Written consents in lieu of meetings • All contracts exceeding $[amount] • Leases and real property records • Loan agreements RELATED-PARTY TRANSACTIONS: • All agreements with shareholders, officers, directors, or their family members • All transactions with entities owned or controlled by insiders INSPECTION LOGISTICS [Client Name] [or his/her representative] is available to conduct the inspection at the corporation's principal office beginning [date - at least 5 business days out] or such other date as is mutually convenient. [He/She] is prepared to pay reasonable copying costs for documents [he/she] selects. RESPONSE DEADLINE Please confirm the inspection date within 10 days. If you believe any requested documents are not subject to shareholder inspection, please identify them and state your legal basis. CONSEQUENCES OF REFUSAL Corporations Code § 1603 provides that if the corporation refuses to permit inspection without justification, a shareholder may seek a court order compelling inspection, together with attorney's fees and costs. [Client Name] hopes this matter can be resolved cooperatively. Please contact me to arrange the inspection. [Attorney Name] [Contact Information]

Template 2: Excessive Compensation / Distribution Dispute

Use when: Controlling family member is taking excessive pay while others receive nothing.

Re: Breach of Fiduciary Duty - Excessive Compensation and Failure to Distribute [Company Name] Dear [Controlling Shareholder/Officer Name]: I represent [Client Name], a [X]% shareholder of [Company Name]. This letter addresses serious concerns about your conduct as the controlling shareholder and chief executive officer. THE PROBLEM [Client Name] has received no distributions from the company despite [his/her] substantial ownership interest. Meanwhile, you have paid yourself compensation far exceeding reasonable market rates, effectively extracting all company profits for yourself. Based on information available to us: COMPENSATION YOU HAVE TAKEN: • Salary: $[amount] per year • Bonus: $[amount] • Auto allowance/vehicle: $[amount] • Other benefits: $[amount] • Total annual compensation: $[amount] COMPANY FINANCIAL PERFORMANCE: • Approximate annual revenue: $[amount] • Approximate annual net income before owner compensation: $[amount] DISTRIBUTIONS TO OTHER SHAREHOLDERS: $0 THE DISPROPORTION For a company of this size in this industry, reasonable CEO compensation would be approximately $[amount] per year. You are taking approximately $[amount] more than reasonable compensation annually. This excess - which should be profit available for distribution to all shareholders - flows entirely to you. [Client Name]'s [X]% ownership entitles [him/her] to [X]% of distributable profits. Instead, [he/she] receives nothing. LEGAL VIOLATIONS Your conduct constitutes: 1. BREACH OF FIDUCIARY DUTY: As a controlling shareholder and officer, you owe fiduciary duties to minority shareholders. Paying yourself excessive compensation while making no distributions breaches your duty of loyalty. 2. SELF-DEALING: You are on both sides of the compensation decision, voting yourself a salary that leaves nothing for other owners. 3. OPPRESSION OF MINORITY: Your conduct has the effect (if not the intent) of freezing out minority shareholders from any return on their investment. DEMAND [Client Name] demands: 1. REDUCTION OF COMPENSATION: Reduce your total compensation to a reasonable market rate of approximately $[amount] annually 2. RETROACTIVE ADJUSTMENT: Return to the company $[amount], representing excess compensation taken over the past [X] years 3. DISTRIBUTION POLICY: Implement a policy of distributing at least [X]% of net profits to shareholders proportionally 4. IMMEDIATE DISTRIBUTION: Distribute $[amount] to all shareholders, representing [Client Name]'s share of profits improperly retained 5. FINANCIAL TRANSPARENCY: Provide quarterly financial statements to all shareholders ALTERNATIVE: BUYOUT If you are unwilling to operate the company fairly for all shareholders, [Client Name] is willing to discuss sale of [his/her] shares at fair market value. Any such valuation must normalize your compensation to market rates. DEADLINE Respond to this demand within 21 days with either: (a) Acceptance of the demands above; or (b) A reasonable buyout proposal; or (c) An alternative resolution proposal CONSEQUENCES If we do not receive a satisfactory response, [Client Name] will: • File suit for breach of fiduciary duty • Seek appointment of provisional director • Petition for involuntary dissolution under Corporations Code § 1800 • Seek damages including return of excess compensation [Attorney Name]

Template 3: Buyout Demand

Use when: You want to exit the family business and be bought out at fair value.

Re: Demand for Buyout of Ownership Interest [Company Name] Dear [Other Owner(s)]: I represent [Client Name], owner of [X]% of [Company Name]. [He/She] wishes to exit the company and demands that [his/her] ownership interest be purchased at fair value. BACKGROUND [Client Name] has owned [his/her] interest in the company since [date], having [inherited it from [Parent]/purchased it/received it as gift]. For [X] years, [he/she] has been a [passive owner/employee/etc.]. REASONS FOR EXIT [Client Name] wishes to liquidate [his/her] investment for the following reasons: • [Select applicable reasons: No distributions despite profitable operations] • [Inability to participate in management decisions] • [Disagreement with current direction of the company] • [Personal financial needs requiring liquidity] • [Breakdown in family relationships making continued ownership untenable] RIGHT TO EXIT [If buy-sell agreement exists:] The Buy-Sell Agreement dated [date] provides for [describe buyout provisions]. [Client Name] hereby invokes [his/her] rights under that agreement. [If no buy-sell agreement:] Although no formal buy-sell agreement exists, [Client Name] has the right to exit [his/her] investment. If the remaining owners are unwilling to purchase [his/her] interest at fair value, [he/she] may seek involuntary dissolution under Corporations Code § 1800, triggering buyout rights under § 2000. VALUATION [Client Name]'s [X]% interest should be valued at fair value - [his/her] proportionate share of the entire enterprise value - without minority or marketability discounts. Based on preliminary analysis, [Client Name] believes the company's enterprise value is approximately $[amount], making [his/her] [X]% interest worth approximately $[amount]. This valuation is based on: • [Briefly describe basis - multiple of earnings, comparable sales, etc.] • Normalization of above-market compensation currently being taken • [Other adjustments] [Client Name] is prepared to engage a qualified business appraiser to determine fair value if necessary. PROPOSED TERMS [Client Name] proposes the following buyout terms: 1. PURCHASE PRICE: $[amount], representing fair value of [his/her] [X]% interest 2. PAYMENT TERMS: [Options:] a. Lump sum at closing; OR b. 20% down, balance over 5 years at [prime + X]% interest with monthly payments 3. SECURITY: If financed, secured by company assets and personal guarantees of remaining owners 4. CLOSING: Within 60 days of agreement on terms 5. RELEASES: Mutual releases of all claims RESPONSE Please respond within 30 days with: (a) Acceptance of this proposal; (b) A counter-proposal; or (c) Commitment to engage in good-faith buyout negotiations If we cannot reach agreement, [Client Name] will pursue involuntary dissolution and exercise buyout rights under Corporations Code § 2000. [Attorney Name]

Template 4: Post-Inheritance Dispute

Use when: Parent died and siblings disagree about inherited business interests.

Re: [Decedent Name]'s Interest in [Company Name] Demand for Accounting and Fair Treatment Dear [Sibling Name]: I represent [Client Name], your [brother/sister] and co-owner of [Company Name] following the death of [Parent Name]. CURRENT SITUATION When [Parent Name] passed away on [date], [his/her] ownership interest in [Company Name] passed to [describe distribution - e.g., "equally to all children" or "according to the terms of the trust"]. As a result, [Client Name] now owns [X]% of the company. You own [X]% and [if others, describe]. Since [Parent's] death, you have continued to operate the company. However, [Client Name] has received no information about the company's operations, finances, or [his/her] interest. CONCERNS [Client Name] has the following concerns: 1. NO FINANCIAL INFORMATION: Despite [his/her] ownership interest, [he/she] has received no financial statements, tax documents, or other information about the company. 2. NO DISTRIBUTIONS: [He/She] has received no distributions despite the company's continued operation. 3. UNKNOWN COMPENSATION: [He/She] does not know what compensation you are taking or whether it is reasonable. 4. NO INVOLVEMENT: [He/She] has not been included in any decisions about the company [he/she] partly owns. 5. [If applicable:] PRE-DEATH CONCERNS: There are questions about transactions that occurred before [Parent's] death that may have affected the value of the estate's interest. FIDUCIARY DUTIES As the managing owner, you owe fiduciary duties to [Client Name] as a fellow owner. These include: • Duty to share financial information • Duty not to self-deal or take excessive compensation • Duty to operate the company for the benefit of all owners • Duty of loyalty and fair dealing DEMAND [Client Name] demands: 1. FULL ACCOUNTING: Complete financial statements for the past [3] years, including: • Income statements, balance sheets, cash flow statements • Tax returns • Bank statements • Records of your compensation and benefits • Records of any distributions 2. ONGOING INFORMATION: Monthly or quarterly financial reports going forward 3. DISTRIBUTION POLICY: Establishment of regular distributions to all owners 4. GOVERNANCE: Inclusion in significant business decisions 5. [If applicable:] INVESTIGATION: An accounting of all transactions between you and the company (or [Parent]) in the year before [his/her] death RESOLUTION OPTIONS [Client Name] is open to discussing various resolutions: • Continued joint ownership with fair governance and distributions • Your buyout of [his/her] interest at fair value • [His/Her] buyout of your interest at fair value • Sale of the company to third party • Other arrangements that fairly compensate all owners DEADLINE Please respond within 30 days with the requested financial information and a proposal for how to treat [Client Name] fairly going forward. [Client Name] would prefer to resolve this as family rather than in court. But [he/she] will protect [his/her] legal rights if necessary. [Attorney Name]

Template 5: Minority Oppression / Squeeze-Out

Use when: Majority owners are taking actions to freeze you out or diminish your interest.

Re: Oppression of Minority Shareholder - [Company Name] Dear [Majority Shareholders/Controllers]: I represent [Client Name], a [X]% shareholder of [Company Name]. This letter demands that you cease your oppressive conduct toward [him/her] and that you remedy the harm you have caused. PATTERN OF OPPRESSION Since [date/event], you have engaged in a systematic campaign to squeeze [Client Name] out of the company on unfavorable terms. Your conduct includes: 1. TERMINATION OF EMPLOYMENT On [date], you terminated [Client Name]'s employment with the company without cause. This eliminated [his/her] only source of return from [his/her] ownership, since [he/she] relied on salary in lieu of distributions. 2. ELIMINATION OF DISTRIBUTIONS Although the company remains profitable, you have ceased making any distributions to shareholders. Instead, you [describe how majority extracts value - excessive salary, related-party transactions, etc.]. 3. EXCLUSION FROM INFORMATION You have refused to provide [Client Name] with financial information about the company [he/she] partly owns, despite [his/her] repeated requests. 4. EXCLUSION FROM DECISIONS Major company decisions are made without notice to or input from [Client Name], including [describe specific decisions if known]. 5. LOWBALL BUYOUT OFFER You offered to purchase [Client Name]'s interest for $[amount], which is [X]% of fair value based on [describe analysis]. This offer appears designed to pressure [him/her] to sell cheaply rather than fairly compensate [him/her]. LEGAL VIOLATIONS California recognizes that majority shareholders in closely held corporations owe fiduciary duties to minority shareholders. Your conduct violates these duties: • Freeze-out tactics that deprive minority of any return on investment • Self-dealing through excessive compensation • Exclusion from information minority is legally entitled to receive • Using majority control to benefit yourselves at minority's expense This conduct provides grounds for: • Involuntary dissolution under Corporations Code § 1800 • Damages for breach of fiduciary duty • Court-ordered buyout at fair value under § 2000 DEMAND [Client Name] demands: 1. Cease all oppressive conduct immediately 2. Reinstate [him/her] to employment [if desired] at prior salary and position 3. Make distributions to all shareholders proportional to ownership 4. Provide complete financial information as demanded separately 5. Either: a. Purchase [his/her] shares at fair value (not less than $[amount]); or b. Commit to treating [him/her] fairly as a minority owner going forward DEADLINE Respond within 21 days with a concrete proposal to remedy this situation. CONSEQUENCES If you continue your oppressive conduct, [Client Name] will: • File suit for breach of fiduciary duty and minority oppression • Petition for involuntary dissolution • Seek appointment of provisional director • Request court-ordered buyout at fair value without minority discount • Seek damages for harm already caused Your treatment of [Client Name] has been unfair. Choose now whether to remedy it voluntarily or have a court order you to do so. [Attorney Name]

Caught in a Family Business Dispute?

I help family members protect their ownership interests in businesses. Here's what I can do for you:

  • Review ownership documents and advise on your rights
  • Draft and send demand letters for information or buyout
  • Pursue claims for breach of fiduciary duty
  • Negotiate fair buyouts and valuations
  • Handle dissolution proceedings when necessary
  • Coordinate with business valuation experts
  • Mediate between family members when possible
  • Litigate when necessary to protect your interests
Typical costs:
• Document review and strategy consultation: ~$450
• Demand letter for records inspection: ~$450
• Demand letter for buyout or fair treatment: $450
• Books and records inspection: ~$240/hour
• Buyout negotiation: ~$240/hour
• Litigation: ~$240/hour

Schedule a Consultation

Book a paid consultation to discuss your situation.

Email: owner@terms.law