Negotiating a Business Divorce with the Majority Owner

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Negotiating a Business Divorce with the Majority Owner

Usually, minority investors in private companies lack contractual exit rights that require a majority owner to purchase the investor’s shares in the business.  In cases where the viability of the business is threatened by an inept or corrupt majority owner, a minority investor needs to seriously consider their options for obtaining a business divorce.

The first step for an investor is to be sure you have a complete understanding of your rights.  This can be done by examining the company’s governing documents and financial records.  In Arizona, shareholders and LLC members have a right to examine certain records so long as the demand is made in good faith and for a proper purpose. The investor must make the request in writing and provide advance notice.  The investor should also consider retaining experienced outside counsel to assist in the process of seeking and examining these records.

If an investor has a contractual exit right, he or she should trigger that right once it is discovered that actions by the majority owner are endangering the viability of the company. If an investor has no contractual exit right, he or she will need to be realistic when it comes to negotiating a buyout. 

It is not uncommon for majority owners to deeply discount an investor’s interest value, since there is usually no ready market for the sale of that interest.  In this situation, it is best to be pragmatic.  While the investor may have to walk away with a reduced price for his or her shares, it is usually a better option than continuing to remain in business with a majority owner who is sinking the ship.

If the majority owner refuses to purchase an investor’s interest in the company, the investor will need to make a decision on whether or not to pursue other legal remedies, including litigation.  The company’s governing documents should be examined to determine if there are limitations to pursuing legal claims.

When you are facing any type of business dispute, you need an experienced Arizona trial attorney to obtain the best possible result. Contact Williams Mestaz, L.L.P., at (602) 256-9400 to speak with us about your case.

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