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The role and rights of minority shareholders

On Behalf of | Sep 16, 2021 | Uncategorized

Businesses in Florida and elsewhere start up with the help of investors who are often friends, associates and family member who put up seed money to get the enterprise off the ground. As the business grows, so too will the profits these initial shareholders through a percentage of ownership of the company through stock.

Unfortunately, because minority shareholders hold less than half of the company, their votes do not count for enough to sway a decision over issues that arise over time. For Florida investors, understanding how to protect your rights as a minority shareholder and maximize the influence that you have in the company will guarantee the value of your initial investment.

The shareholder agreement

The terms of the shareholder agreement can contain the necessary elements for the minority shareholder to protect their investment while ensuring their rights. Some elements of the agreement should include:

  • the right to appoint a director or group of directors gives the shareholder a measure of control in the business operations
  • a warrant of shares that lists the number of shares in the company and who owns them
  • pre-emptive rights to purchase new shares, as well as right of first refusal on existing shares
  • the right to buy or sell shares to another shareholder if an issue arises that the shareholder cannot resolve
  • piggyback rights to be part of a deal in which a majority shareholder sells shares
  • specification of the valuation method when the shareholder chooses to sell
  • approval of capital expenditures

In addition, companies usually require the shareholders to have a non-compete clause that prevents them from competing with the business while the shareholder is there and for a period of time after they leave.

Warding off minority shareholder oppression

When business relationships in a closely held corporation go bad, disputes that happen can result in minority shareholder oppression, giving rise to claims of squeeze-outs, employment termination, reduced compensation, or loss of voting rights. The opportunities for relief include claims for breach of fiduciary duty of the majority shareholder, as well as a derivative lawsuit or involuntary dissolution of the corporation.

A well-written shareholder agreement, however, can shield the minority shareholder from such oppressive actions while clarifying shareholder’s rights that also serve their interests.