What Do You Do When Minority Means You
A recurrent theme in smaller, privately held companies, is the minority owners’ ability to liquidate their ownership interests and quit the company. Under existing agreements, minority owners may only recover that value on the occurrence of significant company events such as a proposed merger, or a sale of key company assets. Also, company agreements typically preclude the sale of such interests to outsiders. Consequently, minority owners may be waiting for years before they can recover their stock value.
Minority owners have leverage they can apply at the outset of the business relationship to secure more favorable agreements. They may be the energy and talent that make the business a success in the first place. While majority owners may provide the funding to secure a larger share of the profits, there would be no success at all without the minority’s efforts. The minority can apply leverage at the outset and negotiate terms protecting them.
In short, when reviewing language defining the rights and responsibilities of all company owners, analyze the terms carefully. Even then, certain risks are often not disclosed. For example, even if the company is required to buy back a minority owner’s stock interest under internal agreements, majority owners may attempt to claim a “minority discount,” arguing minority interest holders may not recover the full value of their interest because the interest is not marketable and they have no control over the entity.
Such discounts can be significant, often aggressively stated in the 35 to 40 percent range. Advance planning can avoid this and other unanticipated and adverse treatment by the majority owners. Even when existing agreements favor the majority, minority owners may still protect themselves. They have a statutory right in certain contexts to obtain the non-discounted value of their shares. They can invoke the reasoning expressed in the Delaware and Washington cases, that they are not “willing and ready sellers on the open market.” To the contrary, minority owners may be unwilling sellers with no bargaining power, and their interests should be valued as a proportionate share of company value without any discounts at all.
Sound legal counsel at the outset of any business relationship can translate into significant cash value at the end of it. Even when minority owners find themselves “oppressed” and at the end of the business relationship with negligible or no internal protections, strong legal advocacy can level the scales and help them recover the full value of their interests.
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