My Investor Is Being Too Hands On. Is There Anything I Can Do?
Investors getting very involved in the business can cause problems for business owners who want to retain control. On one hand, without the investor, the business would not have the money to fund its operations. On the other hand, some investors may not have the industry knowledge or technical skills for their ideas and suggestions to be of use. A business in this situation has a few options to explore, depending on the type of business and the investor’s contribution in the company.
If the investor is a shareholder or partner in the company, read the business’s corporate organizational documents (if shareholder) or partnership agreement (if partner). They may include a provision regarding shareholder or partner input in company activities. Shareholders generally can choose to buy or sell shares at will, and majority shareholders can vote all of their shares on corporate actions, shutting out other opinions. Partners are likely to have a vote in company decisions or some other level of control.
For hands-on shareholders, try saying no to their creative suggestions first, as the easiest option. Check on their ownership share in the company to see if they are majority shareholders. Majority shareholders who bought into the company and then attempt to change it from within or sell it off can be both difficult to ignore and difficult to remove without buying out their shares. The corporation itself should consider if it can afford to buy back the majority shareholder’s shares. However, some corporate charters have provisions and may only allow buybacks upon the approval of a majority of non-controlling shareholders. The minority shareholders, if they agree that the investor is too hands-on, can work together to present a united front against the hands-on shareholder’s misguided ideas. As a last resort, and if you are a shareholder yourself, ask the hands-on shareholder to buy you out.
For a partnership with more than two partners, consider convincing the other partners all to vote against the hands-on partner’s positions. If the hands-on partner’s activities rise to the level of contradicting information in the partnership agreement, such as a stated purpose for the partnership,, then the other partners may be able to force the partner to dissociate, or withdraw. See, e.g., California Corporations Code § 15906.01.
If your hands-on investor simply lent you money to start up your business, like an angel investor, and you have no contractual mechanism for lowering the investor’s level of control, you can evaluate whether you can replace the investor with a different one or afford to do without them. If so, ask the hands-on investor to step away from the business.
If you are facing a hands-on investor situation and want to learn more about your options, protect yourself and your business by seeking out an experienced business attorney. Michael Leonard, Esq., of San Diego Corporate Law, named a “Rising Star” for 2017 by SuperLawyers, has the experience and the insight to find creative solutions for you and your business. To schedule a consultation, e-mail San Diego Corporate Law or call Mr. Leonard at (858) 483-9200.