Why do you need an experienced attorney for a minority investor when acquiring stock or investing in a small to mid-sized corporation in San Diego or anywhere California.  It is important to ensure corporate documents such as the shareholders’ agreement provide protections while preventing shareholder disputes and other distractions that will obscure the focus and unified effort of guiding the corporation to success.

What Are Some Important Issues to Consider as a New Minority Investor?

What are some important issues to consider as a new minority investor in a California corporation?  The Watkins Firm has more than 40 years of experience serving the business, science and tech, real estate and medical / healthcare communities here in San Diego and across California.  You are going to need an experienced attorney for a minority investor when acquiring stock in a California corporation.

The Right or First Refusal – This is similar to “pre-emptive rights.”  Usually, the right of first refusal requires shares which are sold by an existing shareholder must be offered to remaining shareholders based upon their percentage of ownership.  For example, if you owned 30% of the outstanding shares and another shareholder is selling their position, you would be offered the right of first refusal to purchase 30% of those shares.

Piggyback Rights – Another of the protections for a minority investor when acquiring stock is a variation of the “right of first refusal” relates to the sale of the majority shareholder’s interest.  The key here is to protect the minority position if the corporation is being sold.  Piggyback rights ensures that the minority shareholder has a right to be involved in the transaction and to sell their shares for the same value.  In some agreements, the piggyback rights verbiage requires the buyer in a stock purchase transaction to be financially able to acquire 100% of the outstanding shares of your corporation.  This protects the minority position and ensures they receive the same value and benefits of the majority shareholder’s decision making.

The Shotgun Clause – The “shotgun” clause is so nicknamed as it provides the right to buy shares or sell shares to another shareholder when a substantial dispute arises regarding corporate operations.  The shotgun clause should not specify a price (which can be used against you and your best interests) but should require the shares to be acquired at “fair market value.”

Duty to Protect Clause – It is not in the interest of a corporation in which you intend to purchase a minority interest for you to hold any interest in a competitor of the new company, or an entity that offers similar products and services offered by the company in which you intend to invest.  This important provision protects a competitor from attempting to purchase a minority interest to influence a competitor or gain inside information into corporate decision making and opportunities.  The typical clause for minority interests will not only apply to the time which a minority interest will own the corporation’s stock but for a specific period after the minority interests sells their interest.

40+ Years of Experience as an Attorney for a Minority Investor When Acquiring Stock in a California Corporation

The Watkins Firm has 40+ years of experience as an attorney for a minority investor when acquiring stock in a California corporation.

Pro-Tip: “The covenant of good faith and fair dealing is implied in all contracts. And then there are disclaimers. There are disclaimers and  limitations in most circumstances. They have some weight. So you have to take those seriously. And those are also put in place because investors need to be aware of the fact that there is a covenant of good faith and fair dealing. So it’s a complex area and it should be addressed. It’s addressed in the shareholders’ agreement and bylaws, what you can and can’t rely on, and often in much more detail than one statement

With that said, if you ask your lawyer or your accountant or your finance person, they’ll give you opinions, but it’s still your responsibility and it’s your job to do your own due diligence and to look into it. You can do a better job of your due diligence if you ask your CPA yes, and they can give you terms and help you with your search, what your EBITDA (Earnings Before Interest, Taxes, Depreciation & Amortization) is, how your accounting’s set up. Also, not just how much it can get.

What are your personal goals? When we have companies that we sell or buy, we take into account what our client’s goals are. Just like a certified financial planner, if you want to invest in a stock and you’re 33, you’re going to be put in different investments than if you’re 70, right? You don’t want to put your whole nest egg in there for the high risk stuff at different times in your life, or if you have a whole bunch of cashflow or very little. All those things are important to describing and advising a client on valuation. And also you can get a valuation expert to tell you what it is worth in the market. I see this a lot by the way, on valuation, people will sell their company and they won’t want to spend that $5,000 on the valuation expert because well, they know what’s best. Genuine insight and knowledge are the key to a solid and profitable investment.” – Dan Watkins, Founding Partner

These protections for a minority investor during a stock purchase will enhance the security of their interest and reduce the likelihood of a shareholder dispute.  If you intend to invest in or acquire a minority interest in a corporation we invite you to review our podcast Episode 40 – Keys to a Successful Stock Purchase Acquisition as well as the strong recommendations of our clients and contact the Watkins Firm or call 858-535-1511 for a complimentary consultation today.