Welcome to the AMM Law Blog, a tool to help you keep up to date on current legal developments over the broad spectrum of our practice areas. We welcome your comments and suggestions to create a dynamic forum that will be of interest to readers and participants.
As a business lawyer, I have spent years counseling small to mid-sized companies across a wide range of industries. I have advised clients on routine to complex business legal issues that arise during the start-up stage through operation and growth stages, and have structured many exit strategies and created successful succession plans in various ownership documents. What I love best about providing sound legal guidance to business owners through the life cycle of their business is helping them solve issues that arise both from a legal perspective and also from a financial perspective. Helping clients navigate through contractual, employment, finance, IP protection, and other daily issues so they can focus on achieving their goals of growth, maximization of profits, and sustainability, all while minimizing their potential for risk and exposure is a vital objective in my practice.
I have recently been invited to participate for the next several weeks as an advisor in an exciting new local event – The Spark Bowl. Co-sponsored by Delaware Valley University, it’s Small Business and Entrepreneurship Center and the Central Bucks Chamber of Commerce, this event is a local competition aimed at fostering innovation, growth, and entrepreneurship. At the First Annual Spark Bowl event to be held on December 11th, students and local entrepreneurs in and around Bucks County will “pitch” their businesses plans to Spark’s judges, who will select a winner who will receive prizes and benefits to include monetary funding as well as access to expert advisors. The contest will be judged by experienced investors who have a desire to support innovation and economic growth and prosperity within the local community. As part of DelVal’s experiential learning program, DVU student teams will work with final contestants to prepare for the competition under the guidance of DelVal faculty and SBEC advisors. Professor William Viel of DVU’s Business and Information Management Department is the Director of the SBEC. It is quite a valuable resource to this community to have such an incubator right here in Central Bucks. Please click here to learn more about The Spark Bowl at Delaware Valley University.
After many years of working with business owners, some who were successful, and some who were not, it seems evident that the best predicator of sustainable business growth and success is: planning by asking the right questions up-front; creating detailed business plans and product or service models; determining the expected demand for their product or service in a low or highly competitive market; understanding both traditional and non-traditional financing alternatives; putting together the right team of professionals to help them produce, deliver and promote their business and its products/services; dealing with operational challenges and various levels of legal compliance properly, all while being willing to assess weaknesses and promote strengths.
The Spark Bowl has inspired me to remind my clients to think about why they are doing what they are doing, as they work through the day-to-day challenges (legal and otherwise) of operating and sustaining a business they built and love.
Good Luck to all the participants on December 11th!
Many an article or blog post concerns minority shareholder rights, shareholder oppression or shareholder “freeze out”. As business and litigation lawyers, we are always mindful of the rights between and among business owners, what can and cannot be done in furtherance of those rights and the legal mechanisms applicable to the exercise of those rights. We frequently write on the strategies available to a minority shareholder such as examination of books and records, claims of breach of fiduciary duty and the potential for appointment of a corporate receiver or custodian.
This is not that article.
The fact is, being a minority shareholder means that, by definition, there are often things you simply cannot control. A shareholder or member in a business entity who possesses less than a controlling stake must have reasonable expectations as to the rights attendant to such ownership and understand the limits of such rights so as to make informed decisions concerning the investment of time, energy and money in pursuit of the collective enterprise.
Let’s start with who owns the remaining shares in the company. In the absence of an agreement to the contrary, the majority shareholder is free to transfer the majority (said another way; controlling) interest in the company without the consent of the minority. A transaction can result in a change in control such that the minority shareholder suddenly works for someone entirely new. While a minority shareholder can enjoy “dissenter’s rights”, such rights are applicable in very narrow situations specified by statute. In fact, in the absence of a prohibition, the stock in a business entity is readily transferrable, just like on an exchange, if a buyer and/or seller can be identified.
Internally, a minority shareholder can find it difficult to impact the direction of the business. Depending on the by-laws of the entity and, frankly, the will of the majority, a minority shareholder may or may not have a voice on the board of directors and thus may not possess a vote on material decisions such as the persons who will fulfill critical roles in the executive branch of the business such as the officers of the corporation. More importantly, a minority shareholder may not have input on the financial operations of the company including distributions, financing arrangements, major purchases of inventory, equipment or talent. All of which can dramatically affect the annual bottom line.
Even employment is not guaranteed to a minority in interest. In the absence of an agreement to the contrary, the employment of a minority shareholder may simply be at will in the same way as the sales force, the administrative assistants or the custodian. Certainly, terminating a minority’s employment could be one of the factors argued in a freeze out, but in the absence of other factors, termination of employment alone may not give rise to a cause of action. Certain courts have suggested continued employment may be implicit in a “founder” but those situations are few and far between and a plaintiff/minority shareholder must be prepared with more to argue than the end of employment if freeze out is alleged.
In business, like politics, being in the minority means sometimes you are powerless to immediately change the course of the company. Sometimes, a group of shareholders can band together to pool their collective influence for their mutual benefit. Other times, the best strategy is to become the majority even when the acquisition of additional shares comes at an unnecessary or unanticipated cost. Under any circumstances, rights afforded to the majority are not constrained solely because a minority shareholder does not agree with a particular course of action.
As a litigator, I am often contacted by minority shareholders who are frustrated by their lack of control or influence. While the law offers certain protection for holders of such minority interests, those remedies are factually limited and are often unsatisfactory even if granted in full after significant expense in litigation. Certainly an appropriate agreement outlining the respective rights and obligations can change the analysis. Business owners should consider, and plan for, what rights their stake in the company provides.