Minority Shareholder Barriers to Sale
If you don't own 100% of your company, you should assess whether you have some shareholder-related issues that could hinder a sale. First, if the parties choose to effect the sale by purchase of stock, any minority shareholder could hold up the deal if you don't have agreements in place that force them to accept terms agreed to by the controlling shareholders. This is because buyers almost always want to buy 100% of the outstanding stock. They don't want to become partners with someone they don't know. They also want to own all the stock to maximize the money they can make with the investment.
If a minority shareholder refuses to accept sale terms negotiated by the controlling shareholders, many buyers will just back away entirely. Getting the holdout(s) to agree to the deal quickly becomes YOUR problem. Enticing a minority shareholder to go along with you can become costly. It's just too easy for him or her to hold out until you start offering to pay a premium. Any premium paid comes out of YOUR take.
How can you find out whether you have the legal right to "drag along" minority shareholders in a stock sale transaction? If the selling entity is a corporation, such a provision could reside in Articles of Incorporation (aka Certificate of Incorporation), bylaws or shareholders agreement (if one exists). If the selling entity is an LLC, check out both the articles of organization and the operating agreement.
Second, minority owners can hold up asset sale transactions if a so-called super-majority provision exists in your governing documents. In most states, a simple majority of the outstanding shares is all that is required for the shareholders of a company to approve a sale of all, or substantially all, of the assets, but that can be changed (usually only a higher approval percentage can be required) in the governing documents. If your governing documents do not stipulate a higher threshold, you're clear. But if yours stipulate, for example, that a 75% vote is necessary, then you could have a problem if the consenting shareholders own less than that.
Where can super-majority provisions exist? The same places as "drag along" provisions. If the selling entity is a corporation, look in the Articles of Incorporation (aka Certificate of Incorporation), bylaws or any shareholders agreement. If the selling entity's an LLC, look in the articles of organization or the operating agreement.
Copyright © 2010 by D.L. Perkins, LLC. All rights reserved under International and Pan American Copyright Conventions. Reproduction, in any form, in whole or in part, is prohibited without written permission from an officer of D.L. Perkins, LLC. Issn. No. 1556-2026. Vol. 6, No. 3
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