Archive for May, 2012
Can You Buy Out a Majority Business Partner?
A minority shareholder will most often seek a buyout as a judicial remedy. However, in some instances, the minority shareholder may want to be the purchaser instead of the seller. Although this is never easy, it is possible, depending upon the particular facts.
If you have a chance of being the purchaser of the majority’s interest, by definition you have been successful in demonstrating that the majority shareholders engaged in wrongful conduct. Often the question becomes, just how wrongful was the conduct?
A skilled attorney should focus the court on how improper, non-business expenditures robbed the company of various opportunities. For example, it’s easy to say the majority shareholder should not have spent $500,000 on an addition to his Aspen vacation house. But, if the focus is placed on the fact that YOU would have spent the $500,000 on a particular investment that would have grown the company and created more jobs, you can position yourself as more deserving of owning the company, even though you are currently a minority shareholder.
The manner in which employees are treated can be critical, too. Showing that employees prefer you to the majority shareholder and are more likely to remain employed if you take over can be a factor in your favor. This is especially effective if they so testify, since the judge will know that they are taking risk by doing so.
It is of course easier to present yourself as the person who deserves to own the company if you have been an active participant for years, while the majority shareholder has been winding down his involvement. Anything you can do to facilitate this process, and make the transition more readily apparent, will help. The more responsibilities you have, the stronger your claim to wind up with the company. I have seen at least one majority owner who was satisfied to force the minority owner to do the lion’s share of the work for a fraction of the majority owner’s inflated salary. After we consulted, the client decided that, instead of filing suit right away, he would do the extra work for a year to bolster his claim that he, not the majority stockholders, was the one vital to the success of the company.
It worked, and the client wound up owning the company, much to the majority shareholder’s chagrin.
You have decided that the problems you are having with your business partner are so bad that you have to file litigation against him. As discussed in prior postings, the remedy in such a case is often a buy-out. Either the court will order that you will buy out your business partner, or that he will buy you out. (This is also often the remedy when minority shareholders sue for shareholder oppression, or when one 50/50 shareholder sues the other.) When a new client hears that these are the potential outcomes, the inevitable question is – how can I make sure of one outcome over the other?
In other words, one business partner may want to be the purchaser, and another may want to be the seller, but very few have no preference at all. More often than not, when business owners feud, the preference is to remain in control of the company and not be the one forced to sell. In such a case, strategizing how to become the one who gets to keep the company becomes critical.
Certain things are fairly obvious. For example, shareholder oppression cases in New Jersey are almost always decided by a judge rather than a jury. Therefore, the more you position yourself as the “good guy” in front of the judge, the more likely the judge is to like you and see you as deserving of whatever relief you are seeking. Maybe. But there is much more to it than this.
What will influence the Court far more is whatever the court considers to be in the best interest of the company. For a company with only two shareholders and no other employees, there are fewer considerations. But for a company with several employees depending on the company for their livelihood, the court will often look to whichever owner is in the best position to keep the company in business and succeeding.
By the time you see a lawyer, it may be too late to change anything, and whatever has happened up to that point is already etched in stone. For example, if you have allowed your business partner to make most of the decisions while you sat by passively, there is very little time to change this once litigation commences. Therefore, seeing an attorney as early in the process as possible is key.
All too often, a new client comes to me stating that he has been having issues with his business partner for years, but that some recent action was the “last straw.” By that point, it is too late to strategize and put yourself in the best position to try to obtain the result you seek in the eventual litigation. The earlier you identify problems in your business relationship and seek legal counsel, the greater your ability to affect the outcome. Such a strategy requires foresight, and may cause you to see a lawyer before you would prefer. But it may be better than effectively rolling the dice to see which one of you winds up with the business that you both created.
In my next posting, I’ll examine how a minority shareholder (as opposed to a 50% shareholder) can position himself or herself to be the purchaser in a forced buy-out, rather than the one forced to sell.