What are the strategies and protections for a minority investor when acquiring stock or investing in a small to mid-sized corporation in San Diego or Southern California. It is important to prevent shareholder disputes and other distractions that will obscure the focus and unified effort of guiding the corporation to success.
The Right or First Refusal – This is similar to the “pre-emptive rights” discussed in yesterday’s post. 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.”
Non-Competition or Non-Compete Clause – It is not in the interest of a corporation in which you intend to purchase a minority interest for you to compete against the products and services offered by the company. 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 non-compete 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.
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 the strong recommendations of our clients and contact the Watkins Firm or call 858-535-1511 for a complimentary consultation today.
