Page 38 - Southern Exposure - February '24
P. 38
Page 38, Southern Exposure
elder estate plaNNiNG
Considerations Before Becoming A Minority Owner
Submitted by Anné Desormier-Cartwright, Esq..
Becoming a minority minority owner, or equitable relief, such as requiring the Protect Yourself As A Minority Business Owner
owner in a business can give company to cease their specific oppressive actions. Trust is important, but trust that is not backed up by
you the opportunity to help Negotiating Stronger Minority Owner Protections written agreements will not get you very far if trouble arises.
a business grow and share It may be that a minority owner has their eyes only on Some of these problems may not be anticipated until they
in its success without the financial gain. But that goal can be in jeopardy if the majority arise. Others can leave you grasping at legal straws.
management responsibilities. owners find ways to spend and reinvest money that would As a minority business owner, you do not have to accept
Minority owners may be otherwise be distributed to the minority owner as profits. Profits the limited protections that state statutes offer. It is fully
brought in to facilitate growth, from a business sale cannot be guaranteed, either, if the sale within your power to negotiate more favorable terms as a
perform acquisitions, or is structured in a way that prevents minority owner payouts. condition of taking on a minority owner role.
achieve other strategic goals Minority owners also cannot count on the ability to sell their Before investing your time and money in a business
and often provide valuable ownership interest, since state law often limits the right to force venture, it is prudent to consult a lawyer. Our business
expertise in addition to the a company buyout. lawyers can help you solidify your expectations with legally
capital investment they make in the business. However, minority owners do not have to accept the limited enforceable documents. If you already have agreements in
However, because a minority owner owns less than 50 default rights they have under state statutes. An operating place, we can also advise you of your rights to bring a breach
percent of the business, and state business laws typically give agreement and a buy-sell agreement can include provisions of contract or minority oppression action. To discuss your
minority owners limited rights, the minority owner may be at that provide additional protections for minority owners. needs, please contact our office and set up an appointment.
the mercy of the majority owners. If a conflict arises and the Prior to obtaining a minority stake in a company, prospective Call our office today at (561) 694-7827, Elder & Estate
minority owner’s rights are infringed, they can file a lawsuit. owners should consider their expectations about the following Planning Attorneys PA, 480 Maplewood Drive, Suite 3,
Conflicts can also be prevented through a written agreement types of issues. Jupiter, FL 33458.
that modifies state law and more strongly protects the minority ● Level of involvement in day-to-day company management The content of this article is general and should not be
owner against oppressive conduct. In addition, under the new ● Decision-making authority regarding company changes, relied upon without review of your specific circumstances by
law that requires disclosure of beneficial ownership interests including the sale of the business or a merger or acquisition competent legal counsel. Reliance on the information herein
to the government. More to come in another article about ● Equity payments from company operations is at your own risk, as it expresses no opinion by the firm
reporting requirements. ● The ability to sell an ownership interest or be bought out on your specific circumstances or legal needs. An attorney
Minority Owner Rights by the other owners client relationship is not created through the information
Most companies have a small number of private owners and ● Distributions from the sale or dissolution of the company provided herein.
do not publicly issue ownership interests. Business entities such Initial expectations can be set during a discussion with To comply with the U.S. Treasury regulations, we must
as corporations, partnerships, and limited liability companies business partners, but handshake agreements do not go far inform you that (i) any U.S. federal tax advice contained
(LLCs) may have this type of ownership structure. A minority enough. The agreed-upon understanding between the minority in this newsletter was not intended or written to be used,
owner is an owner who owns less than 50 percent of the and majority owners should be in writing and signed. and cannot be used, by any person for the purpose of
business. They may, for example, invest $50,000 in a company Absent a written agreement that solidifies their rights, a avoiding U.S. federal tax penalties that may be imposed
in exchange for a 20 percent interest. Because a minority owner minority owner relies on the majority owners’ good faith. on such person and (ii) each taxpayer should seek advice
does not have a controlling stake in the business, however, Should that faith prove to be misplaced, a minority interest from their tax advisor based on the taxpayer’s particular
they have fewer rights than majority owners. Generally, in holder may realize – too late – how vulnerable they are to circumstances.
the absence of a written agreement that expands their rights, the majority.
a minority owner is only entitled to the following.
● The right to vote on certain matters, such as electing the
board of directors (corporation) or managers (LLC)
● The right to inspect company books and financial records
● The right to receive dividends from the business (if
there is a distribution of profits) and proceeds from the sale or
dissolution of the business
● The right to sue majority owners for breach of
fiduciary duty
Outside of these basic rights, minority owners may find that,
despite their investment in the company, they have little or no
ability to control the direction of the company and no right to
participate in daily decisions. If the minority owner is also a
company employee, they do not have the right to continued
employment if they are fired. They also lack the right to demand
distributions if the majority owner does not make them.
Oppression Of Minority Rights
The rights of a minority owner, while limited, can be
enforced based on state statutes that provide protections aimed
at preventing “minority shareholder oppression.” In addition,
although majority owners have nearly unlimited discretion over
how to run the company, they still have a legal duty – known
as a fiduciary duty – to not place their own interests above the
interests of the company and its minority owners. However,
depending on state law, the majority owner may owe fiduciary
duties only to the company and not to a minority owner.
Minority oppression may occur in situations such as the
following.
● The majority owner refuses to make profit distributions
when the company is profitable.
● The majority owners are excessively compensated.
● The majority owners dilute the voting rights or ownership
of minority owners.
● The majority owners unreasonably restrict the sale or
transfer of minority membership interests.
● The majority owners deny a minority owner’s access to
financial records.
● The minority owner is fired as a “squeeze play” to
eliminate their ownership interest.
Again, majority owners have a lot of leeway in how they Licensed and Insured
operate the business, and not all of these examples will rise
to the level of oppression in every case. To prove oppression,
it may be necessary to show that the actions of the majority
owner toward the minority owner not only interfered with
the latter’s interests, but also were intentional. Making this
determination requires a case-by-case analysis in accordance
with the relevant facts and state law.
A successful oppression lawsuit may result in the payment
of monetary damages, a court-ordered buyout of the oppressed