HOW TO SURVIVE (AND THRIVE) AS A MINORITY OWNER
Most business enterprises are partnerships, giving entrepreneurs the ability to pool resources, funds, and skills as they build their companies. It is also common for partnerships to have passive investors who provide funding to the company, or employee-owners who fill critical positions in exchange for noncontrolling (less than 50%) interests. Before entering into such a partnership, it’s important to think through how you will fit into the company, including specifically the election and removal of management, rights to access information, and exit strategies. Planning and agreeing on these matters at the outset can save time and money for everyone involved.
Electing and Removing Directors or Managers
Minority owners should negotiate the right to elect some of the company’s directors or managers, and also have a say in removing those who are not acting in the best interests of the company. Having at least a few voices to represent the minority owners, even if they are outvoted, can be a key factor in protecting their interests. Investors and employees probably have maximum leverage at the beginning of the relationship when they are entering an enterprise, so these provisions should be negotiated and drafted up front into either the shareholder agreement or the operating agreement. These agreements can be prepared to give minority owners rights such as the ability to remove management in cases of misconduct, fraud, felony, or egregious nonperformance, and the right to call a meeting of directors or shareholders. The directors or managers in question can be prohibited from voting on matters that involve their own misconduct or wrongful behavior. Although it may be difficult to negotiate, any ability to act under these circumstances is worth fighting for.
Minority Rights: Inspection of Company Records
Most states have laws giving minority owners some control in inspecting a company’s business records. In Georgia, for example, corporate shareholders have the right to copy certain records during normal business hours at the company’s principal office upon request, including
• resolutions adopted by the shareholders or board of directors;
• names and residence addresses of all members of the board;
• minutes of all shareholders’ meetings;
• all communications to shareholders within the past three years, including financial statements; and
• names and business addresses of current directors and officers.
There are limits: written notice be given at least five business days before the date they intend to inspect and copy. Also, if they want to access information such as excerpts from board of directors or shareholder meetings, accounting records of the corporation, and the record of shareholders, shareholders have to show good faith and that the purpose for inspecting is proper and reasonably relevant. Owners have the right to petition a court, if the corporation does not respond or refuses to allow the inspection. Most importantly, corporations are not allowed to use their bylaws or articles of incorporation to limit or abolish these rights to inspect and copy.
Dispute Resolution and Buyouts
If a minority owner has the ability to get only some concessions from the majority when entering a partnership, a clear way to resolve disputes should be a priority. Often the value of a minority interest does not justify extended litigation. Consequently, some good options to agree to up front are
• a cooling off period before any party files a lawsuit;
• naming a neutral party trusted by all partners to serve as an informal mediator; or
• using binding mediation if all else fails.
Another alternative is to establish a buyout process that gives the majority owners a clear method of buying out minority interests if a dispute cannot be resolved. To be successful, a method should be as detailed as possible including specific timelines and most importantly a method for calculating the purchase price.
Although minority owners are at an inherent disadvantage, certain agreements can be made up front which will benefit both the noncontrolling and controlling parties and reduce the time spent by the company and management on these issues.
Business Insights is hosted by the Law Firm of KPPB Law (www.kppblaw.com).
Sonjui L. Kumar is a founding partner of KPPB Law, practicing in the area of corporate law and governance.
Disclaimer: This article is for general information purposes only, and does not constitute legal, tax, or other professional advice.
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