Can a minority owner of stock in a closely held company sell his or her stock?
One of the common problems in a closely held company is that a minority owner’s stock is usually illiquid. This means that a minority owner of stock in a closely held company cannot simply call his or her broker and sell. In other words, there is no public market for the stock.
Moreover, even if there were a market for the stock, minority shares often have little value and lack any contractual rights that come with the shares. This is because a minority owner often has little power over management of the company and is not automatically entitled to distributions.
In addition, the controlling owners of a closely held company can often take advantage of minority owners by paying themselves salaries and bonuses as employees that drain the company from any distributions that would otherwise flow down to the minority shareholder.
Separate from the lack of a buyer’s market for minority shares, another hindrance to selling shares is that owners often have written agreements that place severe restrictions on the ability to sell the stock without the controlling shareholders’ approval. Thus, minority owners frequently find themselves in the position of being part-owner of a multi-million dollar business that provides them with few options to be bought out of their shares and no income from the shares.
This puts an onus on the minority owner to make sure to negotiate a fair shareholder or operating agreement with the other owners before investing in a closely held company.
Please Note: Rabin Kammerer Johnson provides these FAQ’s for informational purposes only, and you should not interpret this information as legal advice. If you want advice as to how the law might apply to the specific facts and circumstances of your case, please contact one of our attorneys.