The ownership or interest of less than 50% of a business is called a minority interest. It means that you will have a minority stake in an enterprise where one person owns a majority interest.
You will be in a better position to protect your interests if you know the existing dangers of minority ownership of a business. You should seek advice from a Connecticut business lawyer to help you understand the consequences of acquiring a company’s minority ownership.
What Are The Rights of a Minority Interest Owner
Unless otherwise stated in a contract, under Connecticut business law, you have the following rights as a minority owner of a business:
- If the business is dissolved or sold, after all affairs are settled, you get your proportionate share of the profits
- If there are proceeds to be distributed, you are entitled to a percentage of the distribution
- You are entitled to request an accounting, which is your limited right to examine the financial records and the books of the business
- You have the right to file a lawsuit for breach of fiduciary duty against the majority owner if they have been engaged in unacceptable misconduct
- If you have suspicions that the majority owner is deceiving you, you should immediately consult a business law attorney to help you protect your rights and recover your losses.
Minority Owners Issues
A minority owner has to deal with day-to-day severe operational issues when someone else has the majority control.
Distribution Of Profits
A minority owner has a limited right to demand distributions from an operating business. Majority owners usually avoid the distribution of profits to minority owners. They find ways to spend the profits, such as paying high salaries to themselves or their family members, leasing luxury cars, pre-paying expenses, or setting up a basis to reserve a high amount of money for future costs, so that none is left to be distributed. If the costs are presented to be reasonable, the minority owner will not be able to demand a share in the company’s earnings.
Management Decisions
As a minority owner, you do not have a right to play a part in the decision making of business management. If the majority owner makes decisions that you believe are bad for the company’s interests, the only thing you are allowed to do is try to persuade them otherwise. However, they are not obliged to consider your advice.
Cashing Out Your Interest
If you decide to cash out your interest and use your money, otherwise, again, your rights are limited. Connecticut law may allow you to force the business to buy your interest out. However, these rights are limited.
Share Of Profits When The Business Is Sold
If the company is entirely sold, the minority owner should be entitled to a share of any transaction profits. Nevertheless, a majority owner can form the sale to avoid paying anything to the minority owners.
How Can Minority Owners Protect Their Interests
Majority owners have by law unlimited discretion upon making decisions on how to run their business. An experienced Connecticut business law attorney can help you draft a shareholder agreement that can protect your rights as a minority interest owner. Your concerns about protecting your interests should be addressed in this operating agreement when acquiring a minority interest to avoid unpleasant results.
If you are willing to acquire a minority interest in a company, you should consider your expectations from this action. Depending on your expectations, you may include provisions in your agreement that will protect your rights. These provisions may concern your involvement in day-to-day management operations, your participation in making important decisions, like selling the company, your payments and distributions if the business dissolves or is sold, and your right to cash out your interest.
You should discuss all these matters with your eventual business partners and conclude your common expectations from this cooperation.
Contact A Business Law Attorney
When you are ready to make a deal and become a minority owner in a business, your next step should be to visit a Connecticut business law lawyer. When your discussions with your future business cooperators have concluded mutual understanding, you should put it down in writing.
You should hire a business law attorney to draft your agreement. Going to a lawyer will cost you money. Nevertheless, it will be much less than having to pursue your rights in court afterward.
Call us today at Aeton Law Partners for a free consultation.