Considerations for minority equity interest owners.

• Author: Weiner, Evan D.

Investors with a minority equity interest in closely held companies require a variety of legal protections relating to the general operations of the business. These owners typically have limited control over the management of the company, as they often do not have enough voting power to influence actions the company may take.

In addition, these investors most likely will not have a real market in which to sell their equity, and accordingly, should provide themselves with an adequate exit strategy upon the occurrence of certain events or after a certain amount of time has passed to ensure some return on their investment.

While there are many areas of protection that minority interest investors should consider, the following will focus on several standard protections, often called "minority protections," as well as several methods of equity redemption, these investors should consider as potential exit strategies.

Minority Protections

There are several ways minority investors in closely held companies can ensure that they are able to participate in overseeing the material operations of the business and have a voice in making other significant business decisions. Typically, a minority owner may ask for a board seat or board observer rights, which would give the investor significant participation in the operations of the business.

However, simply having a seat on the board usually will not allow a minority investor to obtain sufficient control to influence the decision-making process. As a result, these investors will often demand language in the company s operating agreement or shareholders agreement that requires approval by the minority investor before the majority owner or the company can take certain material actions.

These protections are generally designed to protect against the company incurring significant liabilities or other major transactions without a minority investor's consent. These provisions can also help protect against poor business management decisions, and may result in preserving the value of the minority owner's investment.

Transaction Protections. Minority investors may want approval rights relating to material transactions of the company. These transactions could include: a sale of the company (by asset sale, stock sale, merger, liquidation or other corporate transaction); any acquisition by the company of the stock, assets or business of another entity; any investment by the company in another entity; or the formation...