Protecting minority investors

The opportunities to engage and information that privately held companies extend to shareholders who are strangers are rarely extended to those who are relatives.

But it is naïve to think that a healthy, long-term relationship can be maintained when family members of a company are not given the protections that would be afforded to strangers.

In an article for US-based Private Company Director magazine, Chicago-based lawyer Henry C. Krasnow weighed up the treatment of majority and minority investors, specifically family investors, and found the imbalance in protections could prove detrimental to private business.

Krasnow says that prospective outside investors insist upon three protections when investing in a company:

  • Veto power over critical decisions.
  • An annual budget, annual meetings and quarterly financial reports.
  • The ability to exit.

He argues such protections create an environment that requires the majority to focus on the welfare of the business and discourages the temptation for majority owners to focus on their own well-being.

However, the majority owners’ reluctance to provide minority owners with these protections and the use of illogical emotional arguments to avoid the logic of their value might be a sign of resentment of their family member co-owners, he says.

“Such protections would be even better for family members whose judgement may be skewed by long-simmering family issues,” he says.

Krasnow adds that in a healthy business, details on budgets and financial statements should be available to all shareholders and failure to do so could lead to bitter family disputes. 

“Such disputes can take years to resolve, cost hundreds of thousands of dollars in legal fees and threaten the destruction of the business,” he says.

The full article can be found here.