Important Considerations for the Minority Investor

Charles J. Duffy, III
Phone: (954) 522-3636
Fax: (954) 331-2505


If you are going to invest in a business and you are not going to own enough equity to provide you a majority controlling interest in that business, there are important points to consider when making that investment. For example, can the other owners: (1) issue additional equity without your consent; (2) decide to make a mandatory capital call; or (3) drag you along in a sale transaction approved by the majority without your approval? A minority investment is rarely static. If you do not have the right to approve the issuance of additional equity you can see your equity interest in the business significantly reduced if additional equity is sold over time. Mandatory capital calls may not be an issue if all parties have similar resources, but if not, you should consider any potential penalties for failure to meet a capital call and make the required equity investment. For example, the failure to make a mandatory capital call may result in dilution of your equity interest, a loss of voting rights, a forced loan at a default interest rate or even a call right on your equity at a percentage of your equity interests fair market value.

Minority investors are typically subject to drag-along rights. When drag-along rights exist the majority of the other owners can force you to sell on the same terms and conditions they sell to a third-party.

If the majority investors have drag-along rights, you should request tag-along rights, so you can at least choose to participate in a sale by a majority of the owners. The question you should have now is how do I protect myself? The answer, in part, is through a negotiated agreement with the other owners at the time of your investment that protects you from these issues.

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