What Rights Should Investors Seek When They Do Not Control a Company?

Investors without control should seek contractual rights that let them monitor the company, protect their position, and understand how they can exit. A minority stake does not automatically provide a voice in major decisions. In my experience, these protections need to be agreed before funding and written in terms that can be applied when circumstances change.

Secure a Channel for Oversight

Consider whether a board seat or another formal way to participate in governance is appropriate. Define which decisions require the investor's consent, such as material changes to the business plan or major transactions. A veto can protect an investor from decisions that alter the nature of the investment, but the agreement should identify those decisions clearly so ordinary operations do not become difficult.

Set expectations for financial and operating information. Specify what the company will report, how often it will report, and how the investor can ask questions. Investors can also seek agreed auditors and clear rules for related-party dealings. These terms help the family assess performance and spot conflicts before they become disputes.

Protect Ownership and Exit Options

Pre-emptive rights can give an investor an opportunity to participate when the company issues new shares. Anti-dilution terms can provide a measure of protection if shares are issued on specified terms. Understand the limits and mechanics of each provision, including whether the family must contribute more capital to preserve its percentage. The company may need fresh capital, so an investor should know what follows if it cannot or chooses not to participate.

Consider rights that address transfers and exits. Tag-along terms may allow a minority investor to participate in a sale by another shareholder. A right of first opportunity can address a shareholder's proposed sale, while an agreed exit process can set expectations for how a minority interest may be sold. These provisions should explain timing, valuation, approvals, and how the parties resolve disagreements.

Fit the Rights to the Deal

There is no standard package that suits every company. The rights an investor can negotiate depend on the size and value of its commitment, the company's needs, and the other shareholders' willingness to agree. Seek terms that protect the investment and can be used in practice. If a co-investment is involved, check the fund documents too, since rights and decision authority can depend on the structure.

Compare the proposed terms with the family's role, expected holding period, and ability to monitor the business. For more on the company relationship, review how to assess an opportunity from a close contact and what to assess before investing alongside an operating business. Have your attorney review the shareholder agreement, subscription documents, and related contracts before committing capital.

Read next: How can a family protect its position as a minority investor in a private company?

Protecting minority interests is generally going to be a matter of a shareholder's agreement.

Sources: The Single Family Office. Informational only, not financial, legal or tax advice.