When a private company is being sold, it is necessary for its minority shareholders to be mindful of protecting their own individual interests when diverging from the controlling shareholder’s interests. Because the controlling shareholder of a private company that is being sold often takes the lead in managing legal counsel, the interests of minority shareholders are not always adequately protected. In situations where it is possible, a minority shareholder should retain independent legal counsel to ensure their requirements are integrated into the bigger picture of the transaction narrative.
Who is considered a minority seller?
A minority seller is a person or entity who owns less than 50% of the equity of a company that is being sold. The degree of control and power a minority seller of a private company holds in a sales process is often directly proportionate to their stake. Minority sellers in a private company M&A can include:
- Founders, C-suite executives, and other professionals with an equity stake
- Family members or other parties who own a small portion of shares
- Angel investors or independent sponsors
- Advisors and contractors receiving equity compensation
The necessity of independent legal counsel for each of these parties arises in situations where the minority seller does not have control over the equity of the company and therefore does not control the sales process.
By way of example, take a Founder-CEO who had, in the past, sold most of his/her ownership to a private equity fund. If that fund's decision is to sell to a new buyer, like a continuation vehicle, the Founder-CEO might be pressed to engage in another equity rollover or agree to new terms of employment, including restrictive covenants, that differ from those they agreed to with the initial private equity buyer. Here, the interests of the minority seller and the controlling shareholder can diverge. Such misalignment calls for independent legal representation to ensure fair treatment and an equitable outcome.
The Value of Independent Counsel
Legal counsel for minority sellers should not just be viewed as a “good idea” but rather a sound business practice. By retaining the services of an experienced M&A attorney, minority sellers equip themselves with specialized knowledge across various transaction issues and structures. Such independent advisors will scrutinize the proposed terms and recommend how it compares with market standards—all the while protecting and serving the specific interests of their minority stakeholder client.
Independent counsel brings valuable insights into understanding sector-specific trends and precedents that can add weight to the negotiating position of minority shareholder sellers. Independent counsel is better positioned to navigate the delicate interplay among personal risk tolerances, ongoing roles, and broader company objectives.
Moreover, independent legal counsel can help minority sellers to raise issues without risking their relationships with their other shareholders, which can lead to more favorable agreements for the minority shareholder seller. Given that the circumstances of each individual shareholder frequently differs, the provision of legal advice should be tailored to the unique concerns and needs of the minority seller client.
Key Considerations for Minority Sellers
There are factors that may suggest a minority seller should retain separate legal counsel, such as the:
- Complexity of the proposed transaction
- Minority shareholder’s current and future role in the company
- Need to agree to an equity rollover, especially on terms that differ from those of a controlling shareholder
- Possible effects on the minority shareholder’s equity value and terms of employment
- Issue of proposed restrictive covenants or non-compete clauses
- Challenges associated with alignment (or lack thereof) with controlling stakeholders' interests
- Possibility of receiving inadequate information about the deal process and terms
On the other hand, simpler transactions may not necessitate the need for independent counsel. If the minority seller is simply receiving cash consideration for all their equity on the same terms as the controlling seller and they are not interested in continuing to work in the target company’s industry post-closing, then the minority seller may have interests that align well enough with the controlling seller such that independent counsel is not needed.
Of course, once a minority seller determines the need for independent counsel, then the next question is: who should serve in that role? It is best to retain an experienced M&A attorney who has a long track record of representing both buyers and sellers in M&A transactions. M&A transactions are not the same as equity financings, debt financings, outside general counsel advisory services, or non-corporate work. It is important to ensure your counsel understands the intricacies of M&As and market terms specifically, as well as the best ways to exert influence in a transaction process where the minority seller’s negotiating leverage may be limited.
The Role of Legal Counsel
Within these high-stakes transactions, independent legal counsel acts in different capacities, including as a/an:
- Advocate and negotiator for a fair rollover, earn-out, employment agreement, and restrictive covenant terms
- Deal structure strategist who can identify the potential risks and opportunities inherent in the transaction
- Advisor who identifies any tax structuring considerations specific to the needs of the minority seller
By engaging separate legal counsel, minority stakeholders can level the playing field across negotiations, often leading to a more equitable outcome. This approach not only protects individual interests but also usually contributes to the overall success of the transaction by addressing potential conflicts early in the process.
The greater the complexity of the M&A transaction, the more valuable the protection of minority interests will be. Safeguarding minority sellers is more than just protecting personal interests, it’s about making sure that their ownership is treated equitably across the inevitable transformation that the M&A will cause.
