Four Owners, One Dissents, What Could Go Wrong?

searcher profile

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!

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commentor profile
Reply by a professional
from Northwestern University in Chicago, IL, USA
I would look if there's a drag right as that's a powerful provision, which basically forces the dissenting owner to sign the docs (or at the least the company has the power of attorney to sign on behalf of the dissenting owner, just make sure that the org docs have a power of attorney provision, otherwise you'll need the dissenting owner to actually sign the purchase docs).

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.
commentor profile
Reply by a professional
from Northwestern University in Chicago, IL, USA
What type of company (c-corp, LLC, etc.), is this, where is it organized and how are you structuring the sale (asset purchase or corp sale? C-corps have dissenter/appraisal rights and CA typically has stronger dissenter rights. Also an asset sale is usually better as the entity itself is not being sold. Also, is the blocking owner key in any way? Operationally this may be an issue. What is the percentage ownership of the dissenting owner?

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.
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