Today’s post discusses shareholder issues, how to work with your investors. I also discuss how to get rid of unwanted shareholders. Shareholder issues can slow a company’s growth. Unwanted shareholders may vote against moves that could lead the company to profitability. There’s a few ways to work with investors who are impeding a company’s progress.
SHAREHOLDER DECISIONS
Let’s start out discussing shareholder decisions. Well-drafted Bylaws should contain a clear statement of on which operating issues shareholders have input. (See THIS BLOG POST for information about decision making in corporations).
Generally speaking, shareholders should only be making decisions about who the company’s directors are. They can also often vote on selling or liquidating the company (it’s their money, after all). Last, they may have a vote on whether to authorize additional shares in the company so the company can raise new money.
What I’ve seen, however, in both lawyer-drafted bylaws, and junk bylaws from the internet, is that shareholder roles in the company are not defined. That can be a big problem when shareholders, who do not participate in management, impede the progress of the business.
CHOOSE YOUR INVESTORS WISELY
Hire slow, fire fast. That goes for letting others have ownership in your business. If at all possible, get good shareholders who will support the business with money and advice, but otherwise stay hands off.
Related to this is never take fast money. I’ve seen it a dozen times. A business that is desperate for money takes the first cash available and gives up too much equity to get it. The new shareholder then tries to take over the company either by impeding its progress until the owner sells to the shareholder; or by slowly working his way into the daily and long term operations.
Plan ahead for needing cash in your business. Search around for investors who are either hands off, or who have some expertise in your industry. Have a plan for raising money including “ideal” investors. Then, you’re either not bothered by them; or you can have them advise you on business matters.
DON’T ACCUMULATE LOTS OF LITTLE SHAREHOLDERS
I’ve seen companies raise money piecemeal, $50,000 here, $10,000 there. Fast money raises when the company was desperate for cash. Eventually the company builds up a pile of a dozen or more shareholders. They become difficult to wrangle.
It may be your Uncle Bob who gave you $1,000 when you first started out and now owns .05% of the business, but wants to show up every day and stick his thumb in the pie. Another scenario, the business has a dozen small shareholders, but as a block they may own a big enough part of the company to cause trouble. Trust me, get a dozen people together and at least one will think s/he knows your business better than you do. And that’s the guy who will start trouble with the other shareholders.
GETTING RID OF EXCESS SHAREHOLDERS: BUYOUTS
Buyouts are one method to get rid of excess shareholders. Make them an offer. Simple as that.
That said, well-drafted bylaws should contain a provision allowing the directors to declare a buyout, and a price, and push that down onto the shareholders.
BYLAWS AND SHAREHOLDER AGREEMENTS
This is not necessary but if there are shareholder agreements, see what’s in them if you haven’t reviewed them in a while. The corporate bylaws may contain forced buyout provisions. I don’t generally include them in my “standard” bylaws because they take some custom drafting. Most startup businesses don’t have the funds to do that, and generally only have a few mostly-equal shareholders.
Shareholder agreements (or, for that matter, share subscription agreements) may contain some kind of “tag along / drag along” provision. This means that if there is a buyout event, the minority shareholders are forced into a buyout. That’s a simplified statement of a complex agreement. You get the idea, though.
CONCLUSION
Take care of minority shareholder issues from the get-go. Don’t let them fester. And as always with your business structure, try to plan ahead. We can’t plan for every issue that comes up, but we do know historically what’s likely to arise.
Call me for all shareholder questions in the Western North Carolina area, Asheville, Hendersonville, Waynesville, (312) 671-6453; or email at palermo@palermolaw.com.
Listen to my podcast on this and other business law topics at the link above or here on Spotify: BUSINESS LAW PODCAST
Other related blog posts are here:
WORKING WITH PARTNERS AND INVESTORS
INVESTING IN YOUR OWN BUSINESS
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