What would Gordon Gecko do?
January 19, 2011 10:04 AM   Subscribe

I own a percentage of non-voting shares in a company. What are the possible ways that the other shareholders can, effectively, get rid of me?

(I know Zero about finance, accounting, or money so forgive me for being a total boob here).

I was given the gift of an equity stake in a private company by way of a number of non-voting shares. Until now, I have done nothing with the shares and have remained uninterested in the business. But! The management is changing soon and I, knowing absolutely nothing about these things, am worried that the new person in charge will do something to get me out. This person also has a number of non-voting shares.
(I do want to keep my equity stake.)
What are the ways to, effectively, 'oust' a non-voting shareholder from a private company (above-board and/or downright sneaky)?
What steps should I be taking to protect my interest?
posted by anonymous to Work & Money (8 answers total)
IANYL, and this is not legal advice. You should consult a lawyer in your jurisdiction--or, if different, a lawyer who is expert in the laws of the jurisdiction in which the entity is organized.

There are a number of things that one could conceive of the owners doing, such as a "squeeze out" merger (in which the company merges with another and they get shares in the new business and you get cash); a recapitalization of the company in which you get cashed out; depending on the organizational documents, they may have a call right to redeem you; you might get caught up in a "drag along" provision (if in your docs) in which they sell to a friendly party and you are required to sell at their price; or they could just freeze you out and never pay you anything until you just beg to sell them your shares.

Many/most jurisdictions have laws that protect minority shareholders, particularly in the context of closely held companies (i.e., small number of shareholders, often with shareholders actively involved in the business). Sometimes, these rules will protect you against the machinations in the previous paragraph. A competent lawyer will be able to tell you what your rights are. However, you may find that the law allows you to be pushed around more than you'd like.

Again, IANYL, this is not legal advice, and you need a competent business lawyer to understand your rights. Good luck!
posted by Admiral Haddock at 10:24 AM on January 19, 2011

Issue new shares, diluting the old, until they are a teeny fraction of the company. The beneficiaries of this plan receive extra shares to maintain their percentage ownership.
posted by zippy at 10:26 AM on January 19, 2011 [2 favorites]

Well, they can't do much really. Typically when a shareholder is "ousted" from a company this happens when other shareholders work together to vote that person or their nominees off the board. They then no longer have any say in how the company is run. But your shares are already non-voting.
If you have a concrete reason for believing that they might try something sneaky, then you should contact a lawyer in your jurisdiction.
posted by atrazine at 10:29 AM on January 19, 2011

Yeah, Ok. There are a lot of things that they could theoretically do if they wanted to get rid of you as a shareholder. Most of them:
a) Involve them giving you money for your shares (too bad perhaps, but not unfair)
b) are illegal virtually everywhere
posted by atrazine at 10:32 AM on January 19, 2011

See Gur Fbpvny Argjbex (rot13, spoiler-ish) for an example of what Zippy is talking about.

It can happen, but it's a pretty rare case. Are you a current employee? Any specific reason why the new mgmt would think you'd be a liability?

Most often, the new management will simply do nothing since your shares don't vote. They might make an offer to buy you out.
posted by mkultra at 10:32 AM on January 19, 2011

Dilution is common, by the way, when a company seeks new investment. It is not, by itself, evil, as post-investment, your shares should go up in value, even as they decrease as a percentage of the total, if the company's prospects are good and the management decent.

Evil (or, sometimes,just a consequence of the company being in a terribly weak position) is when dilution occurs to the point that your shares are so diluted they are at homeopathic levels.

One ex-employer did this. The original shares were diluted to perhaps a hundredth of their original amount, without the company's value increasing by more than, I don't know, maybe 20%.

So let's say an original share was worth $1. Post dilution, it's worth 1.2ยข (if I did the math right).

You might see this happen where the company seeks investment under supremely unfavorable terms. You might also see this where the board and CEO seek to gain at the expense of previous employers and investors (the latter if they did not get anti-dilution terms).
posted by zippy at 10:54 AM on January 19, 2011

"A number of non-voting shares" isn't much info to go on, but presuming it's a tiny portion of the total issued shares, a change in management is a perfect time for you to ask about selling yours.

Valuing these shares is not that easy. Consultants make a fair amount of money valuing small businesses and there isn't a flat formula for what a share is "worth". In publicly traded stocks, it's relatively easy to grab a value, because the market incorporates emotional factors and growth prospects into the value. Those factors in a small company aren't so easy, and if 'goodwill' shows up on a balance sheet anywhere, it's an asset for sure, but not one you can reliably convert to an arbitrary value. Ten accountants would come up with eleven answers.

If the business is actually making a profit, and has for some time, you can ballpark its value based on an income approach (using income statements). If it has a lot of assets, you can ballpark a value based on its net worth (a balance sheet approach).

Whatever the value is is what you you are willing to take and they are willing to give.

If you are on good terms with the principals, perhaps you can approach them with the idea of buying your part out. Have a number in mind, but not a hard and fast number.

Minority shareholders do have a lot of rights in a lot of jurisdictions, and if you think you want to stay involved, then you can look into what they are and how your interests can be protected. Generally, though, if you are living with mistrust, you are better off being a former shareholder than an insecure shareholder.

Good luck.
posted by FauxScot at 11:17 AM on January 19, 2011

We don't have the most important part of the information necessary to answer this: where is the company registered? That being said, Admiral Haddock's advice is good: get a lawyer.
posted by Joe in Australia at 9:08 PM on January 19, 2011

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