Materiality thresholds/blocking rights for minority shareholders
June 07, 2024
by a searcher in Denver, CO, USA
Looking for a bit of feedback on minority shareholders rights during a transaction.
I'm currently negotiating an LOI for a business with a sizable seller note###-###-#### %). The business is a c-corp with 75% of shares held by the majority shareholder and 25% by a minority shareholder.
I've been exclusively dealing with the majority shareholder and I'm now getting feedback from seller counsel that the minority shareholder may have the ability to block (or at least make the transaction substantially more difficult) on account of the size of seller note. The crux (I think) is that the minority shareholder will ultimately receive a lower price-per-share (PPS) at close, while the majority shareholder will receive a higher PPS due to the incremental cash extracted over time as the seller notes are paid off.
I'm familiar with drag along and tag along provisions but not yet clear to me if either of those exist in current governing docs. So, I'm what I'm trying to better understand is if:
1. If minority shareholder objects, can a majority shareholder still unilaterally jam the current structure through?
2. If not, is there a threshold below which the majority shareholder can effectively drag along the minority shareholder with a unilateral decision? (What seller counsel is suggesting but I'm trying to parse whether this is simply an attempt to lower the seller carry).
(I acknowledge I may not have shared enough – or even know enough myself – to elicit informed replies, but nonetheless wanted to put it to the community for input).
from Creighton University in Los Angeles, CA, USA
1. If there are no minority protection provisions, the majority shareholder (holding 75% of shares) can likely approve the transaction, including the seller note, without minority consent.
2. If minority protection provisions exist, there may be a threshold (e.g., supermajority vote) preventing the majority from forcing the minority to accept the deal. This threshold varies based on specific provisions.
Governing documents often include "drag-along" rights, allowing the majority to force the minority to join a sale under certain conditions, like receiving the same price per share. "Tag-along" rights let the minority join a sale by the majority on the same terms.
Without knowing the details of the governing documents, it's hard to say if the minority can block the deal. Their objection suggests possible minority protections. Reviewing the governing documents would give you a better understanding of the minority's rights and negotiating leverage regarding the seller note structure. I'm happy to chat if you have further questions, you can email me at redacted
from University of Notre Dame in New York, NY, USA
That being said, if both drag and tag rights exist, then yes, the majority holder can cram the sale on the minority holder, but if the minority holder has tag rights, they are allowed to participate in the sale pro rata with the majority holder usually at a pre-negotiated "minimum" price per share. It could complicate things for the seller if that price per share is higher than the terms the seller plans to sell on since it would effectively dilute the majority seller with respect to the proceeds from the sale.
I work on a ton of deals with independent sponsors, so drag and tag rights come into play often (much more so than self funded search deals)... happy to chat about deal specifics -- DM me or shoot me an email redacted