Shares were never issued, Can you still be an Owner?

If a small business corporation never issued shares to you, can you still be an owner/shareholder of that corporation?  Yes, you can still be a shareholder of that corporation, if you have good other evidence that shows that you became a shareholder at one point, but it will be more difficult to prove in court.

In an ideal world, you would have a share certificate, a shareholder agreement and/or the books and records of the corporation would clearly reflect that you are a shareholder and how much of that corporation you own. By statute, a corporation is required to keep those kinds of records and keep them correct and complete, see BCL § 624 a.  Courts have confirmed that share certificate and those books and records are “prima facie” evidence of the facts stated therein in favor of the plaintiff in any action or special proceeding against such corporation or any of its officers, directors or stockholders.

Imke Ratschko Small Business Lawyer

For legal advice, call 212 2531027 or contact me here.

If you are not mentioned in those books and records, but the other shareholders are, you can still overcome the presumption.  It doesn’t mean a slam dunk for the other shareholders trying to prove that you are NOT a shareholder.  Despite that, courts have said that the books and records are not conclusive, and evidence may show that someone other than the record owner of the stock is the beneficial owner.

Unfortunately, many very small corporations get formed without adherence to any corporate formalities.  Two or more people run the business for years and never question who is how much of an owner or who is a director and who is not.  There may be an understanding somewhere, but nothing is done according to how it is envisioned by the New York Business Corporation law.

What evidence can be shown to prove share ownership?

If you don’t have formal evidence of your share ownership as mentioned above, how else can you show it?  Courts have long said that the fact that an individual does not have any stock certificates or that none were issued does not preclude a finding that the individual has the rights of a shareholder. Where no stock certificates were issued, the court must consider other evidence to determine the validity of an individual’s claim of ownership of the corporation.

What sort of evidence are they talking about?

It could be your testimony that you understood yourself to be an owner because you contributed services or money, experience, or intellectual property to the corporation.  See BCL § 504 a. Your expectation was that you received shares in return.  That you formed the corporation together with the other shareholder.  That the other shareholders showed by conduct that they considered you an owner.  That you never received a salary from the corporation, despite providing services.

The corporation’s accountant’s testimony about whether you were considered an owner (if he is friendly to your position).  The testimony of other people who regularly dealt with the corporation and what they understood you to be.

Any documents that make the above look believable or independently show that you were an owner, such as tax forms that reported you as a shareholder. Liquor license applications or other permit applications that showed you as an owner.  Bank statements that show your money going into the corporation’s account. Loan documents that show you as an owner.  Business cards that were used with the other shareholder’s consent and show you as an officer of the corporation.

If you have to prove share ownership, you bear the burden of proving your case by a preponderance of the evidence, which means that the evidence that supports your version of the facts. must be more believable to the judge or jury than the evidence opposed to your claim. This does not necessarily mean a greater number of witnesses or documents.  If the evidence is equally balanced, the court would determine that you failed to meet the burden of evidence and your claim would be dismissed.

When does it become necessary to prove share ownership?

Once the disputes start festering among the owners, the question may become important.  For example, the other shareholders may dispute that you own any equity in the corporation…”oh, he was just an employee or independent contractor, never an owner.”  Or they distribute profits of the corporation and shortchange you compared to what you thought you owned of the corporation.  If you want to get access to the books and records of the corporation, you have to be a shareholder, see § 624 BCL.  If you want to sue for the dissolution of the corporation over deadlock, you have to be a 50% shareholder, see  § 1104 BCL. A lawsuit based in oppression of a minority shareholder requires you to be at least a 20% shareholder, see § 1104-a BCL.

Imke Ratschko Small Business Lawyer

For legal advice, call 212 2531027 or contact me here.

How can you prevent being in this situation?

When forming a corporation with other people, stick to all required formalities.  This requires proper initial resolutions that issue shares to the shareholders and share certificates.  If you acquire shares in a corporation later, make sure it is properly documented in writing and you receive share certificates.  It is possible that a corporation does not have share certificates, so-called uncertificated shares, but in that case, your share ownership has to be clearly documented in the corporation’s books and records.