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Not All Stock Is Created Equal

Shareholders and members of small, privately held companies face what appears at first blush to be a daunting task in trying to realize their share value.  Minority equity owners of businesses typically lack the necessary control to effect a sale of the company or to run the business on a day-to-day basis.

All is not lost, however.  A recent decision in Virginia, Colgate, et a v. The Disthene Group, Inc.,  85 Va. Cir. 286 (2012), has reminded shareholders, members, and other equity owners of the reality that privately-owned companies are often quite valuable, but sometimes are run for the sole benefit of majority shareholders and with a disregard for, or even aversion to, the rights of minority shareholders.  Some of the hallmarks of such shareholder oppression were reviewed in the Disthene decision, among them: withholding dividends, paying excessive compensation to control group family members to avoid having distributable profits, withholding records of financial performance or delivering inaccurate P&L reports, and offering share buy backs at deflated, below value prices.  More aggressive tactics can include tying up capital in non-producing, undervalued assets, disposing of assets to related entities for nominal or “book” values, and engaging in complex mergers or re-capitalizations that reduce or eliminate minority interests.

Shareholders and other equity owners of businesses are entitled to sufficient information to value their interests.  If you see these and other signs of oppressive conduct, you need to get expert advice promptly.  Before signing or agreeing to amend a shareholders’ agreement or an operating agreement, you need to understand its effects on your ownership and management rights.  We might be able to help.

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Disclaimer:  This firm only offers legal advice to clients, and the facts of a particular situation usually drive the legal advice we give to clients.  This message is not intended to be legal advice appropriate for all situations.