shareholders limited-liability-company fiduciary-duties
How can I protect myself as a minority shareholder when I don&#39;t have the money to pay legal fees?
<p>I'm about to sell shares to an angel who is going to become the majority shareholder of my company. The money will go into the company as new shares. I can only pocket it through salary agreements.</p>

<p>One of my concern is the new angel can decide to cut me off. They can do so by breaching fiduciary duties such as diluting my shares. </p>

<p>As a small timer, I won't have any money to bring them to courts if this happens.</p>

<p>How would I go about (in these negotiating times) to avoid such a scenario?</p>

<p><strong>EDIT</strong></p>

<p>I'm selling shares to raise capital for my company to grow, hence why the angel is needed. He wants control of the company, thats fine with me. However, I've heard many stories of founders been cut off (through clever schemes) and eventually end up with nothing, as in ZERO $$. I'm in Australia, so I do trust the judiciary system to protect me in any breach. Though my concern is the legal fees associated when such an event happens.</p>

<p>It is important to only enter into this partnership with someone you trust but you and the investor will have different incentive structures and may very well have different views of the company as time goes on. The investor does not need to be a dishonest person to decide that you might need to be demoted from CEO at some point, for example. You may differ on the need for future investments or the need to both accept dilution to bring in the investment. If you are the CEO they could legitimately worry that you will spend their money in an wasteful manner. </p>

<p>Usually an angel is a minority shareholder and they need to protect themselves from you diluting or otherwise screwing them. They would insist on a shareholder agreement that protected them, usually worked out with the help of their attorney and yours. If the angel has a good reputation in the local start-up community you may be able to find an attorney to work for the company who will get paid by the company after the investment comes in.</p>

<p>A note - an investor has a duty to themselves to protect their money. If they become a board member they also have a fiduciary duty to the company but not to you personally. In their fiduciary duty to the company they could honestly think the best course of action is to bring in an investor or a new CEO in a way that is detrimental to you. A good agreement might protect you but it is their money and they need flexibility to deal with unforeseen circumstances. It will no longer be <em>your</em> company after the investment.</p>

<blockquote>
  <p>How would I go about (in these negotiating times) to avoid such a scenario?</p>
</blockquote>

<p>You can't, although a well-thought contract reduces the chances of loss. Even if you hire an expensive attorney and sue the buyer or company, you still are at risk of losing everything because there are many incompetent lawyers and many corrupt judges. The judge presiding your case might be <a href="http://www.oneclubofjusticides.com/2018/04/felon-carol-kuhnke-seeks-reelection-as.html" rel="nofollow noreferrer">literally a felon</a> whose manifesto <a href="https://3.bp.blogspot.com/-Ck7HHqFkIaE/Wsoe0CGdR0I/AAAAAAAAARY/OucDrTd_kOAXRwHpcjSKoFsfyWEc0hTjQCLcBGAs/s1600/employers.jpg" rel="nofollow noreferrer">in court</a> is to favor "<em>anybody who's powerful</em>".</p>

<p>Although you refer to <em>negotiations times</em>, it is important to keep in mind that negotiations are just a process in preparation for something enforceable and consequently much more important: the contract. In the event of discrepancy, a contract will almost always prevail over any representations made during negotiations.</p>

<p>That being said, the first thing for you to determine is <em>what</em> exactly you would prefer to accomplish (i.e., to sell your shares or to keep them) <em>and why</em>. This is not clear from your post and comments in other answers.</p>

<p>For instance, your mention that</p>

<blockquote>
  <p>I can only pocket it through salary agreements</p>
</blockquote>

<p>suggests that, instead of receiving a lump sum, you would be paid in installments under color of an employment relation.</p>

<p>But then you mention some concern about dilution of your shares, albeit without elaborating what relation you think it bears with a breach of fiduciary duty or with the event of selling all your shares at once. What does dilution have to do with the salary agreements you mention?</p>

<p>You don't specify whether you currently perform any functions at the company, but your mention of salary agreements prompts the question: Is an employment relation necessary for the sale? more specifically, is it necessary to intertwine a shares transaction with an employment relation?</p>

<p>Your status as employee &amp; former shareholder could give the counterparty an opportunity to disrupt your entitlement by tortiously alleging that you have a conflict of interest.</p>

<p>Will your employment be <em>at-will</em>? how will your "salary" agreement differentiate between compensation insofar as an employee versus the proceeds from the transfer of shares?</p>

<p>Is it better for you to (1) sell all your shares at once and be paid in installments, or (2) sell them in batches at different times so you retain the ability to decline further transfers/agreements if the whole matter is not working for you?</p>

<p>These are only few of several issues you need to decide before you get to the point of reflecting your conditions in a legal document (i.e., contract) for the sell-off of shares.</p>

<p>It also appears that you are confusing the meaning or applicability of <em>fiduciary duty</em> in your case. The duty arises in contexts where a party expectedly places special reliance on representations made by his agent (such as an adviser, an attorney, etc.) or person of superior position. Contract law certainly is premised on a <em>covenant of good faith and fair dealing</em>, but <em>fiduciary duty</em> seems inapplicable in your matter because it is about an <em>arm's length</em> transaction: a context in which two shareholders (namely, an "angel" prone to <a href="https://law.stackexchange.com/questions/48941/how-can-i-protect-myself-as-a-minority-shareholder-when-i-dont-have-the-money-t#comment95524_48950">getting ticked off</a> and you) have opposite interests.</p>

<h2>1. Don't do deals with people you think might be criminals</h2>

<p>If you are contemplating entering a business arrangement with a person who you think might break the law in order to screw you over - find another partner.</p>

<h2>2. If you must deal with criminals, be prepared to lose everything and walk away</h2>

<p>If this guy is really the least bad option; make sure the deal is so good now that you don't care if he steals from you later.</p>

<p>It is important to only enter into this partnership with someone you trust but you and the investor will have different incentive structures and may very well have different views of the company as time goes on. The investor does not need to be a dishonest person to decide that you might need to be demoted from CEO at some point, for example. You may differ on the need for future investments or the need to both accept dilution to bring in the investment. If you are the CEO they could legitimately worry that you will spend their money in an wasteful manner. </p>

<p>Usually an angel is a minority shareholder and they need to protect themselves from you diluting or otherwise screwing them. They would insist on a shareholder agreement that protected them, usually worked out with the help of their attorney and yours. If the angel has a good reputation in the local start-up community you may be able to find an attorney to work for the company who will get paid by the company after the investment comes in.</p>
