The 49/51 Deal or the Deal Involving More Than Two Owners
Even more dangerous than the 50/50 deal is the 51/49 deal, or a deal with multiple partners and inadequate controls on what those with majority power can do. Any lawyer who represents small businesses knows that a business partner who owns up to 49 percent of his or her business can be run over by the majority owner.
Without agreements to the contrary, Michigan and federal law provides that the majority rules, and aside from some legal limitations, the majority in the 49/51 deal can pretty much run the business anyway they want. They can make decisions including, but not limited to:
- The direction the business will take.
- Prices for the company’s products or services.
- Compensation and benefits payable to employees and owners.
- Entering into a contract unfavorable to the company but to the advantage of one or more of the owners.
- Selling the company altogether and at what price.
- Demoting, firing, or decreasing other owners’ pay.
It is true that when the majority goes too far, the law provides mechanisms, such as a shareholder oppression suit, for preventing extreme abuse, but the majority can accomplish great harm while still falling short of behavior considered shareholder oppression. The solution lies in establishing written agreements within the business that limit the power of the majority in key areas. For example, the owners may agree that no owner working for the company can be fired or had his pay or benefits cut absent good cause defined in the contract. Written agreements may provide that the business may not be sold or its major assets mortgaged without the consent of a super majority of the owners. A shareholder agreement may provide that certain decisions made by the majority in title the minority to be bought out at a predetermined price high enough to make the majority think twice about making these key decisions against the wishes of the minority.
It is said that good fences make good neighbors. So do good contracts. The time to work out these details is before problems arise when everyone still has stars in their eyes and is operating with a high degree of trust and good faith.