The difference between owning 50% of your company and owning 51% is great.\u00a0 But the difference between owning 50% and owning 49% could be catastrophic, despite the significant remedies available to oppressed minority shareholders in New Jersey.<\/p>\n
After reading the other articles on this site, one comes away knowing that minority owners have significant rights in New Jersey (at least, that was my goal).\u00a0 A shareholder who is taken advantage of by majority owners can file an action for damages and various other remedies, including a potential buyout of his shares.\u00a0 However, such an action is expensive, time consuming, disruptive to the business, and should only be resorted to when all other options have been exhausted.\u00a0 There is simply no substitute for retaining a majority, or at least a 50% interest, in your own company.<\/p>\n
This advice may seem obvious, but it is amazing how many business owners bring in investors, giving up shares in their company (sometimes even a controlling interest), without thoroughly exploring whether there was any way they could arrange for bank financing.\u00a0 Whether it\u2019s because the owners do not want to pay anything other than the lowest interest rate available, or because they don\u2019t want a bank to know all of their business, the reasons behind this reticence to become beholden to a bank is not uncommon.\u00a0 Sometimes, a company truly cannot get a bank loan.\u00a0 However, resorting to alternate methods to raise capital can have dire consequences.<\/p>\n
In one company, the founding shareholders owned 60% and 40%, respectively.\u00a0 The majority owner gave away a 5% interest to three separate investors (15% in total), reducing his interest to 45%, but raising almost $1 million for the company in the process.\u00a0 He thought that he had a responsibility to \u201chis company\u201d to do this, even though the 40% shareholder refused to give up a single share. The former majority shareholder believed he was protected because he remained the single largest shareholder.\u00a0 Plus, he took a long-term note back for the value of the shares that he \u201csold,\u201d so that he would be repaid years down the road, when the company was sold.<\/p>\n
Of course, it is obvious where this story is going \u2013 at least on this website.\u00a0 Once the new shareholders \u201cganged up\u201d on him with the 40% owner, and he was outvoted 55%-45%, his world had changed.\u00a0 He could no longer dictate the direction of the company that he had run for years.\u00a0 Nor could he set his own compensation.\u00a0 At first, he was a minority shareholder without a remedy, because not everything that majority shareholders do that the minority disagrees with is actionable.\u00a0 And when the new majority coalition finally went too far and engaged in action that he could sue over, it was hardly a day to celebrate.\u00a0 An unceremonious firing, followed by two years of litigation, led to a multi-million dollar buyout that certainly did not leave him destitute.\u00a0 However, while he may be a rich man today, he would much rather have remained in charge of his \u201cown\u201d company, with the opportunity to see what it could have achieved under his stewardship.<\/p>\n
The worst part is, when I asked him why he didn\u2019t just borrow the money the company needed from the bank, he confided that the interest rate was too high.\u00a0 Well, at least he saved that.<\/p>\n
The point is, while minority shareholders (and now, LLC members) do have significant rights in New Jersey, those rights are no substitute for control.\u00a0 So, if you ever find yourself on Shark Tank, don\u2019t take the money, unless you deparately need it and have no other alternative, if the \u201cShark\u201d is asking for 51% of your company.\u00a0 It will probably turn out worse than you can imagine.<\/p>\n","protected":false},"excerpt":{"rendered":"
The difference between owning 50% of your company and owning 51% is great.\u00a0 But the difference between owning 50% and owning 49% could be catastrophic, despite the significant remedies available to oppressed minority shareholders in New Jersey. After reading the other articles on this site, one comes away knowing that minority owners have significant rights […]<\/p>\n","protected":false},"author":17,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[15,2],"tags":[72],"coauthors":[],"acf":[],"yoast_head":"\n