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I'm thinking about a hypothetical scenario.

Let's say someone wants to buy out your company (LLC if it matters) for $1 million.

Let's say you annoy the buyers by requesting some equity in the company, and they give you your equity, but only $100k cash instead, and the next day they liquidate and dissolve (yes, I guess they're losing money, so it seems stupid to do this, but let's say they're mega rich and have money to spare).

Are there any legal clauses that can be added to a contract to prevent someone from just screwing you over by dissolving the company that you have equity in the next day to "screw you?".

I guess the nature of a buy-out is that they bought your company, so they can just do whatever they want at that point unless you're on the board and have significant voting power (in fact, maybe that's the only way to prevent such a scenario - by retaining voter power).

A bit contrived perhaps, but curious about this.

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    What do you mean "annoy the buyers by requesting some equity in the company"? If you sell a company you no longer have any equity in it. Do you mean selling less than 100%?
    – Greendrake
    Commented Aug 23, 2022 at 3:08
  • @Greendrake oh, I guess I did. I meant you let someone else basically manage it and take over operations, but you still request some equity to make some percentage of their profits. Maybe that's not really what a buyout is though
    – pushkin
    Commented Aug 23, 2022 at 3:13
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    I think you are thinking about a "hostile takeover" scenario. This only works on publicly traded stock companies whose majority of stock is distributed over a large number of private and institutional investors. In that case the person doing the takeover buys up all all that small stock by offering a price far above market value for it. But it doesn't work if there are more than 50% of stock in the hands of people who don't want to sell. And if the company isn't a stock company, then it does not work at all.
    – Philipp
    Commented Aug 23, 2022 at 6:40
  • companies worth less than a million are rarely ever stock traded at a stock exchange but only sold "hand to hand". And in other notes: if the buyer is aggrieved, they could just fire you, as you are just an executive now, if you are no longer wanted.
    – Trish
    Commented Aug 23, 2022 at 8:53

3 Answers 3

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More of a comment than an answer, but I do need the extra space:

Your numbers make no sense

If the company is worth $1,000,000 and you get paid $100,000 and equity, you should still own 90% of the company.

For the rest of the case, let's assume you got paid $900,000 and got 10% equity.

You do not lose anything

When the company is liquidated, as a stackholder you are entitled to your proportion of the proceeds. So the management gets $1,000,000 for the actives of the company, and you get the 10% of that, $100,000 for your stocks, getting a total sell value of $1,000,000 (*1).

If you annoy the buyers, what happens is that there is no sale

A contract must be done to the satisfaction of both parties. Your buyers are not forced to agree with you. If your conditions are "annoying" to the buyers, they will just refuse them. If they agreed to the sale, then those conditions were not that annoying to them.

If you do not want someone else taking control of the company, do not sell them your company

You get money, you give them rights. Your rights as a shareholder are protected by law, but you have given them the ability to decide what is best for the company.

Complaining about this would be like selling me your car, and then complaining about the color I want to use to paint it.

*1 of course there may be inefficiencies, costs... incurred with liquidating the company, so it might be no 100% perfect.

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  • I think the important detail here is that companies do not have an intrinsic "worth." Their worth is defined by what they sell for (or what shares sell for). So if you sell 90% of the company for $100k, then the company is by definition worth $111k. If you as the owner think the company is worth $1M, you would be ill advised to agree to sell 90% for $100k. Commented Sep 25, 2023 at 17:25
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Controlling shareholders of a company have a fiduciary duty to other stockholders (see the section on controlling stockholder/company in the reference). That is, their decisions must be guided by the legitimate interests of the other stock holder, they can't privilege their own outcomes, or maliciously torpedo the interests of the other stockholders.

If you think they have deliberately made bad decisions just to screw you, you can sue them for breech of their fiduciary duty. Of course their defense can be that they made decisions for perfectly rational reasons that respected their fiduciary duty, but simply turned out badly. You'd have to provide evidence that the decisions were reckless and/or malicious.

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    Your link to fiduciary duty days “ In certain circumstances”. Board members and controlling shareholders have done duties to the company but not necessarily to other shareholders. I think the company should spend the money it has in the bank developing a new product. My fellow shareholder with more voting power thinks we should liquidate. We liquidate. Commented Aug 23, 2022 at 5:01
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First be aware they don't have to liquidate the company. They can just sell its business as a going concern or sell its assets, leaving the company still there, but (in effect) a pointless shell.

Or just run it down. Not sell stuff. Price things non profitably. Try a joint venture or branch into a new thing that fails dismally. As a minority shareholder/stakeholder without an executive directors role and majority vote, you have no way to prevent valid but poor decisions. (Although in liquidation law they need to be able to show the liquidator they acted reasonably as directors).

Ways to stop this:

The classic way to control disposal and transfer is to have different classes of share, or unusual powers and restrictions in the legal constitution of the company (the name for this varies according to country).

So for example, you may have a new type of share that has no profit share, no votes, but has a board position, a right to be notified of all board votes, and carries 99% of voting rights on any vote related to substantial restructuring, sale, disposal, transfer or liquidation of the business. Get a good lawyer to cover all the possibilities if you can.

Or you could have the constitution amended so that any activity of that kind requires 100% shareholder/stockholder approval.

Or the sale contract could say they may not dispose etc within X years.

Or the sale contract has a pre-emptive right of first refusal at a fair price to be determined by an independent expert on sale/transfer. (This doesn't prevent loss on liquidation)

The other things all need a guaranteed directors seat with controlling vote, to cover day to day commercial decisions. If you sell, thats unlikely.

The problems you have are:

  1. do you really mean to bind them and their descendants for eternity? If not, how many years? When is it "long enough" to let them sell if they get unable to run it.
  2. There are many many ways to ditch a business. Are you sure your terms block them * all * ?
  3. Will anyone want to buy your biz, if they can't treat it as theirs once bought?

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