You may have fewer rights than you think.

Many new businesses are formed hastily, or with little thought given to what may happen when the owners disagree. Too often when there is strong disagreement, those in the minority are frozen out or left chasing those in control. What to do? Plan ahead. Have those uncomfortable discussions about what to do if someone becomes ill, dies, or you simply no longer agree on the direction of the company, and put it in writing. This is essential because there is nothing in the law in Pennsylvania that requires the majority shareholders to buy out a minority shareholder who wants to get out of the company.

So what do you do when and your partners (that's what you often call each other) no longer get along and you have no written plan for parting ways? If you are working in the business, you can walk away and kiss all your hard work and cash goodbye. No one wants to do this. Rather, a departing shareholder wants the fair value of his interest in the company or may wish to continue in the business, or in a similar one.

If you are involved in running the company, you cannot go out and start up a new, competing business or go to work for a competitor. It would be a breach of your duty of loyalty to the company and would invite a lawsuit that will sap the resources of all involved. This is nearly always the case, unless, however, you have disclosed to the board of directors what you plan to do, and the board has no objections. The board, however, is controlled by the majority shareholders, so consent to your plan to compete is unlikely to be given and your plan is likely to be thwarted.

Majority shareholders often feel that they can outmaneuver the minority shareholders in various ways, such as physically locking the minority shareholder out of the business, cutting off access to books and records, or by forming a new company and rolling over all the assets of the existing company into the new one, shedding that pesky minority shareholder in the process. Any of these tactics are not that easy to pull off, and also invite a lawsuit from the minority shareholder. The majority shareholders have fiduciary duties to the minority shareholders and to the company to receive fair value for any transfer of assets from the existing company to the new one. The majority must also give notice to the minority of any transfer of substantially all of the assets of the company, and a minority shareholder has the right, if he acts quickly, to go into court to be paid the fair value of his interest in the company.

If, however, the majority shareholders simple decide to turn their backs and continue the business without misbehaving or selling the company's assets, there is nothing a minority shareholder of a Pennsylvania company can do to compel the majority to disgorge the fair value of the minority shareholder's interest in the company.

A minority shareholder is just that -- in the minority, not in control. If you have not thought ahead and entered into a written agreement outlining the parameters for extracting yourself from the company, your options are limited, and the cost to all involved may be far more than anyone expected.

MacElree Harvey
17 West Miner Street
Post Office Box 660
West Chester, PA 19381-0660
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