A minority shareholder is someone who owns less than half of the shares of a company. If you are in this position, you may wonder if you have any recourse if you get into a dispute with other shareholders in your business.
While minority shareholders do not have voting strength on their own, they can protect their rights through one or more provisions in the shareholder agreement.
Appointing representation on the board
Shareholders often have the right to appoint one or more directors, or any officers who make decisions for the business. Having representation at the highest levels of the company can safeguard your voice. So if someone disputes your appointment or voting power in an officer selection, you should review your shareholder agreement to know exactly what your rights are.
Safeguarding ownership percentage
Sometimes shareholders face a dilution of their ownership stake. A strong shareholder agreement should establish safeguards to prevent this from happening. One provision is having pre-emptive rights. This guarantees you the right to purchase any newly issued shares, which maintains your percentage of ownership.
Another provision is the right of first refusal. This makes sure that you receive an offer of any existing stock for sale so you can maintain your ownership percentage. Additionally, you may receive inclusion in any sale of the shares of the majority shareholder through piggyback rights.
Valuation and exit strategy
In the event your dispute cannot find resolution and you decide to leave the business, your shareholder agreement should allow you to receive a fair price for your shares. Otherwise, you could face conflict over the value of your share.
Private businesses may use different methods to value a stock, such as a comparative company analysis or a discounted cash flow formula. The agreement may specify the valuation method to appraise your shares.
Like any form of commercial litigation, a shareholder dispute may come down to how well the shareholder agreement protects the rights of its minority members. Shareholder agreements vary by company, so you may find additional protections that do not apply to other businesses.