While minority shareholders might own less than half of a company, that doesn’t necessarily mean majority shareholders get to make all critical decisions on their own. There are powers that come into play for businesses of all sizes that are designed to protect minority shareholders’ interests and their initial investment. Maximizing their control can lead to selling or claiming majority ownership down the line.
Look for the following
Each company’s business plan is set up a little differently, but here are some important details to examine:
- Director and officer rights: The ability to help pick the right director and officers helps ensure that a company is in good hands. Ideally, directors and officers should understand the perspective of the minority owners as well as the majority owners.
- Know who owns how much: The agreement should include a list of how much of the company each shareholder owns.
- Preemptive rights: This entitles minority shareholders to the right to buy any new shares that may be issued.
- Right of first refusal: Similar to the above, this focuses on the sale of existing stock.
- Piggyback rights: This ensures that minority shareholders are included in any deals made by majority shareholders to sell their stock.
- Valuation of shares: A fair and clear valuation method of all company shares can help avoid disagreements down the line.
These agreements can be complicated
Legal contracts can solidify agreements, but that does not always mean they protect the best interests of all parties involved. Minority shareholders should have an attorney review all agreements, even for small or family-owned companies. Taking this precaution can help avoid frustration, regret or legal action over the direction of a company and the health of shareholders’ investments.