Tuesday, May 15, 2012

On avvo.com, a guest asked the following question: Is it legal to sell a company without telling the shareholders?

I thought the answer by Mr. Linscott Roberts Hanson (http://www.avvo.com/attorneys/60068-il-linscott-hanson-1133366.html) was good enough to share:

Unless there is some sort of agreement restricting the 50% shareholder's right to sell, requiring notice, first refusal options, etc., there is nothing illegal about a 50% shareholder selling his stock to a third party.  In so doing, he has not interfered with the rights of the other stockholders - they are legally unaffected by his sale.  If they had pre-emptive rights to acquire shares before his sale they still will have those rights after his sale.  Most corporations are subject to statutory restrictions on so-called "organic acts" such as merger, sale of the corporation's assets in bulk, amendment of the corporation charter and so forth.  Usually (not always) these kinds of major changes require a larger than majority vote - something like a 2/3 vote.  Thus someone acquiring "only" 50% of the stock would lack the votes to make major changes in the corporation.

Shareholder agreements can be written which include what are called "tag along" or "drag along" rights.  The former would give the other shareholders the right to take advantage of the deal the 50% shareholder negotiated, and have their stock purchased at the same price, while the latter would give the 50% shareholder the right to force the other shareholders to sell their shares along with his.  Evidently neither arrangement was in place here.

The most surprising thing about your question is that someone would be willing to buy a 50% interest without acquiring the remainder of the stock.  50% is not control, in fact there are court opinions that refer to it as a minority position.  If is unusual that someone would purchase a minority position.

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