Four Owners, One Dissents, What Could Go Wrong?
April 02, 2025
by a searcher from The University of Michigan - Stephen M. Ross School of Business in Kirkland, WA, USA
Hello SF community,
I’m in the process of acquiring a company with four equal owners. In our most recent revision of the purchase agreement, three of the four owners have agreed to the terms, while the fourth is abstaining and may dissent at closing. This is structured as a stock purchase. The company’s corporate bylaws specify that the transaction can proceed with majority approval.
Has anyone navigated a closing under similar circumstances? What are the potential risks of future litigation from the abstaining/dissenting owner? Are there proactive steps we can take to protect the company from such legal challenges?
I’d greatly appreciate any insights, advice, or experiences you can share. Thank you!
from Northwestern University in Chicago, IL, USA
In terms of the reps in the purchase agreement, typically the key stockholders will make the reps and some times the liability for misrepresentation is several and not joint and limited to the proceeds each one receives. I would make sure it's joint and several and to the entire amount of the purchase price to cover the dissenting owner if he decides not to be part of the transaction. If you can get seller financing that would also be good to give you some additional comfort.
I'm generally not a fan of legal opinions - I've drafted many of them over my career - because they only cover the law, but not the facts of the situation and its littered with assumptions and carve-outs to reduce a law firm's liability. For instance, if the owners lie/misrepresent/omit information, to the lawyer, then the opinion is basically useless. The opinion is also only as valuable as the law firm that writes it (or its insurance policy) so even if the law firm makes a gross mistake you probably won't recover all your losses. Lastly, it will also cost you money so will increase your transaction costs. Having said that, some folks like them because it makes lawyers double check their homework, which admittedly, does provide some comfort.
from Northwestern University in Chicago, IL, USA
First, I would carefully look at the bylaws, organizational documents to see what is the voting threshold to sell. I would also see if the docs have a drag along right that permits the majority of shareholders to drag all shareholders. This is a powerful provision. Having said that, you want to have a shareholders resolution and board resolution (if there's a board) clearly stating that the transaction is approved and in best interest of all shareholders.
Second, I would try to structure it as an asset sale as it's typically better.
Third, make sure you have all the assets to run the business and that no asset is under any owner, especially the dissenting owner.
Fourth, in the purchase agreement, try to make the liability against the owners joint and several otherwise the dissenting owner may not be liable even if he receives a portion of the proceeds.
There's probably other issues, that I haven't thought, but consult an attorney. This is not uncommon and can be structure in a way to reduce the risk.