/>iMajority owners of private companies are empowered to exercise control over their businesses, but if they disregard the valid concerns of their minority partners, they may sow the seeds for a divisive business divorce in the future. The typical business owner is focused, decisive and driven to succeed. These characteristics are admirable, and they work best when paired with an approach to company governance that provides minority partners with transparency and some participation in decision-making. This post identifies three governance controls that are designed to help majority owners maintain goodwill with their business partners while keeping the company on track for continued success.
Adopt Governance Controls That Strike a Reasonable Balance
The majority owner’s gut instinct is to preserve unfettered power over the company, but insisting on this all-powerful, exclusive approach may undermine the owner’s goals and needlessly create conflict with and distrust by co-owners. Fortunately, adopting a more balanced approach to governance will not unduly tie the majority owner’s hands, and it will provide transparency and protections that are desired by the company’s minority partners.
The governance controls that strike this balance will be set forth in corporate bylaws, in the LLC company agreement, or in written procedures adopted by the company’s board of directors or managers. These controls will provide for limits on the majority owner’s authority as explained below.
- The governance controls will specify limits on the majority owner’s power to act in the capacity as CEO or president without obtaining approval from the board or managers. For example, with approval, the majority owner may not be able to: (i) direct the company to enter into the sale or purchase of assets above a certain dollar limit, (ii) enter into any self-interested transactions with the company for loans, sales, or purchases, or (iii) enter into contracts to sell or issue any stock of the company. Ultimately, given the owner’s majority ownership, the owner should be able to overcome opposition to these proposed actions from the board or managers, but it will first require a discussion with these other participants in the management of the business.
- Similarly, to limit conflicts and dissension, the majority owner should not seek authority to set his or her own compensation, bonuses or the issuance of any additional interests in the company. All of these should require the involvement and vote of the board or managers, and in some cases, a vote of the other owners. The board and managers may also decide that the majority owner is not permitted to set the compensation or bonuses of any other officers and that these compensation decisions need to be a topic of discussion and vote by the full board/managers.
- Finally, the decisions regarding the hiring and firing of employees may also need to be subject to approval by the board/managers. If the majority owner is hiring family/friends and firing all naysayers who express any opposition to the majority owner’s views, this will lead to morale issues and may well create disputing factions within the company. The better practice is to require the majority owner to seek/obtain input from the board or managers regarding employment decisions.
Create a Culture of Transparency in Management
Providing transparency has been referred to as the key antidote for partner conflicts. Keeping significant owners in the business informed of major decisions by management will go a long way toward building trust, and it will also help all the co-owners feel connected to and supportive of the company’s direction under the majority owner’s leadership.
To achieve this type of internal transparency, the majority owner will want the company’s governance documents to provide for the following:
- A well-run company will hold regular meetings of boards/managers, as well as and owners (shareholders or members). The minimum would be annual meetings, but boards/managers in particular should meet more often to provide consistent management oversight and to avoid allowing major problems to fester. Owners’ meetings could be held semi-annually if having quarterly meetings is viewed as too burdensome.
- In addition to holding regular meetings, the company will also want to provide financial reports to owners on a consistent periodic basis. The bare minimum would be to issue these reports annually, but to achieve the goal of healthy transparency, it is advisable to issue these reports on a quarterly basis, if not more frequently.
- The final transparency point is to provide prompt notice to owners when major variances or problems arise. For example, most private companies issue dividends or distributions each year to all the owners to cover their “pass through” income tax liability. If there are problems that will require the company to retain an unusual amount of earnings and issue a smaller amount of dividends/distributions than is customary, notice of this reduced payment should be provided as soon as possible. This will alleviate the problem of a sudden, unwelcome development for the owners that is presented to them with no advance notice.
Provide for Meaningful Participation in Governance
The last governance control procedure for majority owners to put in place is to provide co-owners with the opportunity to participate in the company’s governance in a way that is not perfunctory. This is a due process concern, because minority partners will never have the right to direct or control the management of the company, but they should have participation rights.
More specifically, minority partners should be able to bring items up for the full board or managers to consider, and they should have the opportunity to vote on matters of substance. This will require that certain procedures are established before and during governance meetings to ensure that all owners can exercise these rights. These procedures are reviewed below.
- All board/manager meetings should be scheduled in advance, and agendas for each meeting also should be circulated listing the items for discussion and vote by the members at the meeting.
- The board/managers should outline company goals, review the progress that has been made in achieving the goals and provide an overview of the current challenges the company is facing.
- When minority partners request that items be included for discussion at the meeting, they should be added to the agenda as appropriate.
- Minutes should be prepared of each meeting and circulated before or at the meeting for approval by the board, managers or owners.
Conclusion
Companies that create and maintain a strong management consensus are built to last, and they will weather the storms that inevitably come their way. By contrast, a majority owner who wields governing power by giving short shift to the interests of the company’s other co-owners is setting the stage for discord that may lead to a business divorce. While a business divorce that results in the removal of minority partners from the business is rarely fatal to the company, it is likely to create a significant internal distraction, and it may also be negative for the company in its dealings with clients, vendors and others outside the company.
In sum, going through a business divorce is rarely a positive for majority owners, but this distracting conflict is less likely if minority partners remain focused on the company’s long-term success. This goal is achievable when majority owners adopt a governance structure designed to provide minority partners with transparency, predictability and the opportunity to participate to some extent in management. Further, none of the procedures discussed in this post will deprive the majority owner of ultimate power over the company, and instead, they are intended to assist the owner in building a strong, lasting consensus with all of the company’s owners.
