In the Harry Potter universe (now returned to playing on Broadway), the wizarding world greatly feared the Dark Lord, Voldemort. In the business world, minority investors in private companies should rightly fear the power of majority owners who have the power to amend the company’s governance documents. Minority investors in Texas privately-held companies often assume—understandably, but wrongly—that their equity stake cannot be taken for little value by the majority owner(s). Minority investors further assume, naively, that if the majority owners suddenly changed the company’s rules to take minority investor’s stock or LLC units, the investor would have some sort of legal recourse and a strong claim to pursue against the majority owner.
But, the little-known and alarming reality is that, under Texas law, if minority investors are not careful to limit the “right of amendment” contained in the company’s governance documents, majority owners have the right to effectively pull the rug out from under minority investors. Using this amendment power, majority owners may be able to change the company’s bylaws or revise the terms of the LLC company agreement to remove minority investors as managers, directors and employees, and just as importantly, deprive minority investors of the fair market value of their ownership interest in the business.
Continue Reading The Amendment Power: Voldemort May Not Have Had This Power, But It Is One to be Feared by Minority Investors in Private Companies