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Rakhi Vasavada
Rakhi Vasavada, Financial Advisor
Category: Finance
Satisfied Customers: 4546
Experience:  Attorney and Financial Expert. Have specialization in Financial Laws.Practice experience of over 13 years
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Dear Sir/MadameI had an inquiry that I would like to know

Customer Question

Dear Sir/Madame I had an inquiry that I would like to know whether Owner 2 has breached a clause within the shareholders agreement by committing a conflict of interest against Owner 1. See case scenario below:

* Owner 1 (Founder & CEO) has set up a company in 2010 and in doing so has already made multiple capital expenditures in acquiring all of the company physical assets.

* Owner 2 (CFO: with a MSc. Finance and Investment) has since become a 50% shareholder of the company in 2013 and in doing so has agreed to invest capital (henceforth the “Bootstrap Funds”) into the company. Less than 5% of this Bootstrap Fund has been used as a capital call during a 20 month period. -

* Asset Depreciation: If Owner 2 (CFO) over this 20 month period fails to include any depreciation (the decrease in value of assets (fair value depreciation)) on assets in the company profit/loss accounts, what would the financial effect be on Owner 1 who has solely invested into all of the company assets, and would this failure of including depreciation on the profit/loss accounts be positive or negative for Owner 1?

I look forward to your response

Submitted: 3 years ago.
Category: Finance
Expert:  Rakhi Vasavada replied 3 years ago.
Dear Friend,

Hello and welcome. Thank you for providing an opportunity to assist you.

From what I understand from your question, it would be negative for the compnay as well as its owner who has made the capital expenditure.

In event of failure of providing for depreciation (which is generally made from the profits) results into artificially higher profits. This may further translate to higher and improper distribution to the shareholders.

The biggest negative would be that at the time of replacement of asset, the company will have no funds to buy and replace the assets. For the owner, it would be a temporary gain as though non-inclusion of depreciation may result into higher distribution of profits, the other benfits to the compnay gets totally wiped out.

I am sure this would help.

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Warm Regards