This whitepaper reviews Forensic Accounting Examination in a Minority Shareholder Oppression Case.

1. By definition, minority shareholder oppression cases are
complex to investigate. The minority shareholders cannot
control or in most cases even influence important decisions
that have an impact on the value of their stock. The
majority shareholders own the controlling interest in stock,
dominate the board of directors and special committees
and hold most, if not all, the important management
positions. In addition, the majority shareholders are most
often uncooperative. For this reason a forensic
accounting examination is frequently necessary to help
identify and document the issues of oppression against the
minority shareholders. The forensic accountant must rely
on information provided through interviews, analysis of
books and records, interrogatories, document discovery,
depositions and expert reports. A valuation expert is also
typically used to calculate the fair value of the company.
A forensic examination requires the application of
accounting principles and tax requirements to facts at issue
in a legal dispute. A forensic examination can be used to
help document areas of minority shareholder oppression
such as the following:
1. Excessive compensation and/or benefits paid to
the controlling shareholders
2. Personal expenses of the controlling shareholders
paid with corporate funds
3. Personal use of company assets and/or
employees by the controlling shareholders
4. Demonstrate the true financial condition of the
company, which many times is considerably better
than portrayed by the controlling shareholders
5. Board of directors merely rubber stamping
controlling shareholder decisions
6. Waste and dissipation by the controlling
shareholders
7. Restricting the payment of dividends
8. Buy back of company stock at a depressed price
below fair market value
9. Hiring family members and friends for
management positions
If the payment of personal expenses of the controlling
shareholders with corporate funds is not reported to the
IRS, it may be considered as tax fraud. For this reason, the
forensic accountant will examine the payroll tax returns of
the company along with 1099 forms and W-2’s to see if the
additional income has been taxed to the individuals. This
also holds true for the value of using employee labor
and/or other corporate assets for personal projects.
Dividends may be reduced under the pretense that the
company is in poor financial condition. Minority
shareholders are often not in a position to assess these
representations. When dividends are reduced, or stopped
all together, very frequently there is a corresponding
increase in compensation to the controlling shareholders
who occupy management positions. This allows the
majority shareholders to maintain and/or increase their
compensation at the expense of the minority shareholders.
An executive compensation expert may be useful to help
show that the compensation received by the majority
shareholders is above that which would be expected in a
similar company in the same industry and region.
Most often, minority shareholder oppression cases involve
smaller privately held businesses. Because of the limited
market for the stock, the majority shareholders are in
positions of power at the company and offer less than a fair
price to buy back the stock from minority owners.
By virtue of their position, the majority shareholders know
the real value of the company’s stock. However, without a
market for their stock the minority stockholders are often
forced to sell at much less than a fair price.
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FORENSIC ACCOUNTING, LITIGATION SUPPORT
Forensic Accounting Examination in a Minority Shareholder Oppression Case
CBIZ MHM, LLC ▪ 3 Bethesda Metro Center Ste 600 ▪ Bethesda, MD 20814
(301) 951-3636 ▪ www.cbiz.com/MidAtlantic

2. Forensic Accounting Examination in a Minority
Shareholder Oppression Case – Page 2 of 2.
During a forensic examination, documents such as general
ledgers, subsidiary ledgers, bank statements, emails,
vendor invoices, tax returns and financial statements are
reviewed and analyzed. This can become difficult because
the majority shareholders typically control the company
books and records and attempt to limit or deny access by
the minority shareholders. Analysis of these company
records helps the forensic accountant to uncover possible
acts that contribute to minority oppression. While the
forensic accountant cannot provide an opinion as to intent,
certainly patterns of behavior and negative trends can be
uncovered and reported. Emails, handwritten notes and
lack of documentation (board minutes, personal expense
receipts, financial statement disclosure, etc.) can help to
show the objectives of the majority shareholders.
Because of the deliberate lack of transparency and
disclosure by the majority shareholders, the forensic
accountant must act as a financial detective. In this case,
the accountant is testing to see if there is adherence to
generally accepted accounting principles (GAAP), the
federal and state tax laws and common sense.
One of the defenses that the majority shareholders use in
an oppression suit is the business judgment rule. Basically,
the controlling shareholders take the position that the
reduction in dividend payments or other questionable act,
was in the best interest of the company. They argue that
this was a fair, supportable judgment at the time. This can
be a slippery slope. The applications of GAAP, and in
some cases grey areas of the tax law, require the
application of judgment, estimates and common sense.
One of the roles of the expert forensic accountant is to
demonstrate to the court that the actions of the majority
shareholders were not prudent, demonstrated poor
business judgment in view of the real facts, lacked
substance and/or were injurious to the interests of the
minority shareholders.
Many times the forensic accountant makes use of
specialized software that aids in tracking the flow of funds.
The same software can also be helpful in developing
charts and exhibits for trial. One of the crucial requirements
for a forensic accountant is to distill very complex financial
information in to a clear, logically prepared report. This, of
course, must be supplemented with straight forward, easily
understood testimony at trial.
If the forensic examination report were viewed as a report
card for the majority shareholders, it might look something
like the following:
Subject Grade
Accounting and Financial Disclosure F
Accounting and Financial Transparency F
Adherence to GAAP & Tax Laws F
Proper Authorization for Corporate Acts F
Ethical Conduct - Overall Corporate Governance F
Destroying Minority Shareholder Value A
Metamorphosis A+
The “metamorphosis” is the act of transforming the
company into an alter ego of the majority shareholder.
Ultimately, there is no difference. They are one in the
same. The majority shareholders use corporate resources
and assets for their personal use and enjoyment. They
decide when there will be a dividend payment. They decide
when the company will be profitable. They decide when the
stock value will rise. It is the ultimate laboratory experiment
entirely controlled by the majority shareholders.
ABOUT THE AUTHORS
ABOUT CBIZ MHM Forensic, Litigation Support and Valuation Services (FLVS)
Our Mid-Atlantic FLVS group, under the leadership of Maurice Whelan, brings a combination of practical experience and in-depth knowledge in business and a variety of industries to
our work on your behalf in forensic investigation, commercial litigation, business valuation, damages, shareholder disputes, family law, bankruptcy, and due diligence cases. Maurice
Whelan has extensive experience in auditing and tax and has acted as a discussion leader in these subjects for the AICPA. Maurice has testified in Federal Court, State Court,
Bankruptcy Court and the International Tribunal in London, England.
FORENSIC ACCOUNTING, LITIGATION SUPPORT
Maurice J. Whelan, CPA, CFF, ASA, ABV, CVA
Maurice is the Mid-Atlantic Practice Leader for CBIZ MHM, LLC
Forensic, Litigation and Valuation Services. He was a
testifying expert in a recent minority shareholder case decided
in Virginia, Colgate, et al. v. The Disthene Group, Inc.
Case No. CL-11-117. Maurice can be reached at 240-396-2787.
MaryEllen Redmond, CPA, CFE, CDFA, CVA
MaryEllen is a manager with the CBIZ MHM, LLC Forensic,
Litigation and Valuation Services group. She has extensive
experience in fraud investigations, family law and valuation
cases. MaryEllen can be reached at 240-396-2781