Protecting a Minority Ownership in a Company

Without an agreement to the contrary, generally decisions in a corporation or a limited liability company are made according to a majority vote of its owners.  Therefore, there is a risk that the majority owner(s) will control all of the decision-making authority.

In order to avoid this, a minority owner needs to obtain a written agreement with the other owner(s) specifying that certain decisions require the consent of the minority owner.  The best time to obtain this agreement is prior to the purchase of the minority interest.  Once the funds to purchase the minority interest have been transferred by the minority owner, the minority owner will generally have lost all leverage to make the other owner(s) agree to such conditions.

Most likely the minority owner will need to pick and choose exactly which decisions will require his/her consent as the other owner(s) are unlikely to agree to the minority owner participating in all of the decision-making.  Major issues, such as, raising capital, adding other owners, diluting ownership interest, obtaining loans, granting guarantys, undertaking new business ventures, declaring dividends, setting salaries and bonuses, and electing officers/directors, may be of the most concern to the minority owner.  Of course, other issues may be of special interest on a case-by-case basis.

A qualified corporate law attorney can help identify the issues with the most sensitivity in the circumstances and prepare/review the necessary documents (such as, bylaws, a shareholder agreement, an operating agreement, or a membership agreement) to protect the minority owner’s interests.

If you have any questions regarding the above or need help addressing these concerns in your company, please contact me and I will be glad to assist you.

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