Description

As a general rule, unless the written agreements state otherwise, a minority owner has only three basic rights in a closely held company: (1) the right to vote for the board of directors (in the case of a corporation) or the manager (in the case of an LLC); (2) the right to review the books and records of the company upon request; and (3) the right to receive dividends or profit distributions from the company if they are declared.

When minority owners have claims for misconduct by majority owners, these claims most commonly include (1) breach of contract, (2) fraud, and (3) breach of fiduciary duty. Typically, these common law causes of action do not permit the trial court to award the minority owner with the remedy of a buyout of their minority interest. While some states have enacted statutes that permit an oppressed minority owner to seek equitable remedies, including a buyout at fair value, the remedy for these claims is typically the recovery of actual damages.

The best advice for minority investors is simply this: before investing in a private business, minority owners should try to negotiate for rights including a buy-sell agreement with a put option. A buy-sell contract often provides investors with the right to obtain a buyout of their minority ownership interest in the company at a future time, under certain circumstances, and often at a predetermined valuation.

Listen as our expert panel discusses minority owner rights in private companies, what to include in a buy-sell agreement before investing, and best practices when considering a claim against majority ownership.