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Is it legal to sell a company without telling the shareholders?

Woonsocket, RI |

My boss is selling 50% of his company to another party and hasn't informed the shareholders, is this legal? My boss will technically still be the co-owner apparently, but is it legal to just sell the company out from under these people who technically own some part of it? I'm not totally sure how this process works, but apparently all the paperwork is being filed currently and once somethings change hands it's done (they said 30 days or so). How can someone do that legally? I thought being a share holder meant you had the right to that sort of information???

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Attorney answers 3


Corporate shareholders are also owners of the company, and they do have various rights, including the right to vote on the actions of the corporate board of directors, which must have agreed with this sale. Shareholders get to vote on management decisions, but here, their collective ownership interest is less than 50% so apparently the boss is going to become a minority owner like them, or maybe he's just an employee and an officer and doesn't own any part of the company. It's the directors who make decisions like this.

If you have access to the corporate governing documents, such as Bylaws, Shareholders' Agreement, meeting minutes, etc., you can review them and see what they say about sales.

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Is this a public corporation or private? I am assuming private. Can you tell us what percentage each shareholder has and who they are? What type of stocks they own?

This is a very complex area of law. Majority shareholders, in general, owe fiduciary duties to minority shareholders. Why do I say, in general, first I don't have enough information, second, the law is different depending on the state the corporation is in and the state that it is registered in.

It sounds like if the shareholders are somehow getting ripped off then they do have a right to sue someone. They should contact a lawyer in their area for a consultation.

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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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