Despite having a lower stake than the primary stakeholders, minority shareholders have rights and responsibilities that carry over to the business divorce process. They are legally protected against unfair treatment as well as capable of using their vote to veto certain decisions.
Both minority and majority shareholders should understand these powers and responsibilities as they maneuver the complex process of business divorce. Potential challenges involving voting rights, operational decision-making, and buy-sell decisions can be mitigated with specialized legal expertise.
Who Are Minority Shareholders?
Minority shareholders are those who have an interest valued less than 50% of the business’s total equity. This contrasts with majority shareholders, who by definition have interests at or above 50%.
Since they have minority interests, also known as “non-controlling interests,” their powers are limited. They cannot outvote the majority shareholders in significant decisions.
However, minority shareholders have certain rights, such as contractual and distribution rights and the right to vote on decisions that impact stock futures. Since business divorces often result in sales, buyouts, or hierarchy changes, minority shareholders must understand and express their legal rights to prevent being superseded.
Legal Protections for Minority Shareholders
During a business divorce, minority shareholders are protected by law from unfair or prejudicial actions by majority shareholders. This includes the right to have their minority interests bought out in the event of the business’s dissolution.
To guarantee transparency, minority shareholders have a legal right to access the organization’s financial statements and records. Additionally, when owners separate as a result of a business divorce, depending on the language of the controlling agreement, minority shareholders may exercise the buy-sell agreement to increase their share.
Rights to Fair Valuation in a Business Divorce
Minority shareholders have a right to a fair valuation of their share in the business; using a third-party for the appraisal can avoid insider conflicts. A proper valuation process should include the per-share value of the company’s enterprise value, including any minority or marketability discounts.
The buy-sell agreement in a business’s operational contract will enumerate the responsibilities of the majority shareholders to assess minority stakes and prevent unfair exclusions.
Protection Against Squeeze-Outs
During the divorce process, majority shareholders may try to marginalize minority shareholders by preventing them from expressing their contractual voting rights or changing the buy-sell rules to work against them.
Exclusions or “squeeze-outs” can be avoided with a careful review of the shareholder agreements. An expert attorney can review the relevant documents and protect minority shareholders during the divorce process.
Minority Shareholder Veto Powers
Minority shareholders have veto rights in certain situations as denoted by the shareholder agreement. Major decisions like mergers and acquisitions can be influenced or prevented by minority shareholders even without majority control.
Veto powers can influence the outcome of business divorces but only if minority shareholders understand and exercise these rights.
Resolving Disputes as a Minority Shareholder
Alternative dispute resolution (ADR) methods can help minority shareholders assert their rights and resolve conflicts with majority owners. ADR processes such as mediation and arbitration allow a specialized business divorce attorney to represent minority interests without resorting to litigation.
While minority shareholders can take legal action to assert their contractual rights in court, they should consider this as a last resort. Alternatively, they should partner with experienced legal counsel to arbitrate their rights with the majority shareholders.
Key Considerations Before Entering a Business Divorce
Before entering a business divorce, minority shareholders should make these key considerations to guarantee that they assert their rights during the divorce process:
- Existing agreements, such as shareholder, operating, and stakeholder agreements
- Exit strategies, such as buyouts and sale options
- Financial impact, or how the divorce process will impact future operations
Reviewing these considerations with a specialized attorney can help minority shareholders strategize their roles and work for their best interests.
Steps to Safeguard Minority Shareholder Rights Before a Business Divorce
Follow these steps to make sure that minority shareholder rights are upheld during the process:
Negotiate Protective Agreements: Doing so early can help set clear terms for how shareholder agreements will be upheld during the process, potentially preventing future disputes.- Monitor Company Actions: Track the majority shareholders’ decisions and dealings to avoid being blindsided by significant changes or being denied voting rights during the process.
- Recognize Rights: By consulting with legal professionals, minority shareholders can better understand their legal rights and duties and advocate for their best interests.
Protect Your Minority Shareholder Rights with KPPB LAW
Minority shareholders have significant legal rights and powers during the business divorce process, including veto rights. To prevent majority shareholders from diluting or ignoring minority shareholder responsibilities, speak with an experienced business divorce attorney for legal protection and advice.
Contact KPPB LAW today and schedule a consultation to learn how our expert legal advice can help minority shareholders advocate their interests during a complex business divorce.