“I Built the Company, Too”: Don’t Get Pushed Aside After Achieving Success
Unfortunately, many business owners are sometimes not clear at all about what their legal rights are as a minority shareholder of a closely held company. Quite often, a founding owner will sometimes impart misplaced importance on the word “founder” as evidence of their legal rights. After all, if you are one of the ones who created the company, who could possibly have more rights than you?
Whether you are a founder or not, if you are a minority shareholder, you are not in control. When entering into a business relationship, it is crucial to remember that there is not much difference between owners who own 5% and those who own 49.9%. And there is no particular import to the fact that you helped found the company.
For many business owners, this simply does not make any sense. I was one of the ones spending sleepless nights on the office (or factory) floor getting things up-and-running. I was the one who created the processes used today. I was the one who hired the team! These may be valid points, but they have little bearing on your legal rights. For this reason, it is especially critical that you address buy-sell issues, and what happens upon an owner’s death at the outset in a written and signed agreement.
If you are a minority owner, and you trust the majority owner implicitly – as you started the company together – things may be fine as long as they continue to be the owner. But what if they gift their interest to one of their children? Or if they die and you are now business partners with their spouse (for purposes of this scenario… whom you never liked, and worse, who never liked you)?
The fact that you were there from the outset, and helped found the company, is a small comfort. Worse, it conveys no enhanced legal rights. You are now a minority owner with someone you may not know very well. Of course, as readers of this blog are aware, in New Jersey, those minority rights can be significant. If you are treated unfairly, or fraudulently, you might be entitled to a remedy that may include a buyout. But chances are, if you are one of the founding owners, the last thing you want to do is sell your shares. Depending on the circumstances, you might be able to be the one buying out the majority owner, if that is a viable option for you.
The most critical thing is to make sure your paperwork protects you. Even if you started the company with a bare-bones shareholders agreement that does not cover what you would like it to cover, it is never too late to update it. If you don’t have an agreement at all, it is not too late to negotiate one now. Take inventory now to ensure your document gives you the protections you need. Eventually, it may be too late.
Please do not hesitate to reach out to me at dcroberts@norris-law.com to discuss your rights as a minority shareholder.
About the Author – Business Divorce in NJ
David C. Roberts, Chair of the firm, specializes in complex commercial litigation, including fraud, trade secrets, and restrictive covenants, with a focus on business partnership and shareholder disputes in New Jersey. Known as business divorce litigation, these disputes often involve shareholder and LLC member oppression, embezzlement, owner freeze-outs, dissenter’s rights, and efforts to dissociate or expel an owner. Dave strives to resolve matters through mediation but is a seasoned trial attorney when needed. He frequently writes and lectures on minority shareholder disputes. With extensive experience representing both minority shareholders seeking buyouts and majority owners defending against such claims, Dave offers unique insight into the strategies and challenges of business disputes, particularly in family-owned companies.