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
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