Taking a Minority Position – Safeguards to Consider
If you are presently outsourcing a reasonable amount of business that is not a core market for you, you might want to partner with a company who does focus on this market. Partnering may mean making an investment in the partner company and becoming a minority shareholder. Some items you should consider before making this investment:
- Can the company produce the outsourced business with its present equipment and at a cost-effective price?
- What will be the makeup of the board of directors? When would management need to seek board approval for capital expenditures, management compensation, or other critical issues facing the company?
- What rights would you have to require the company to re-purchase your minority interest and in what time frame? What method would be used to determine the value of the minority interest?
- In the event that the majority shareholder would offer shares for transfer or sale to an outside party, would the minority shareholder have a right of first refusal to purchase those shares?
- If a sale by the majority shareholder to the minority shareholder was contemplated, how would the revenues that the company is receiving from the minority shareholder be valued?
- How would the minority shareholder receive any remuneration on an annual basis, i.e. management fees; dividends; etc.?
These are a few issues that should be pre-determined before taking a minority interest. The more issues that can be negotiated and agreed to upfront, the better it will be for all concerned.
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