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Is it legal for a majority owner of the family business to invest in a competitor because the competitor would sign a 5-year contract to buy products from you?
I am 35 years old and have been working for my parents for 20 years. I have been managing a division of the business for 15 years. My father, who owns 51 percent, wants to buy into and help expand an up-and-coming business owned by a former employee of our biggest competitor. He plans on using our good credit to get a personal loan to do the deal on his own.

Asked by tarpman
Posted: Monday, September 22, 2008  |  Found in Legal Issues


More answers by Nina Kaufman
Answer by Nina Kaufman
Generally, a majority owner has the right to control the decision-making of the company. However, he runs into a possible conflict of interest/fair dealing situation if he hampers the business's credit to do a deal that the business will not profit from. In addition, the investment in a business of a potential competitor is problematic, as business owners have an obligation to place the interests of the business first.

If you have a shareholder's (or other ownership agreement) in place, there may be rules about the voting percentage needed to authorize an "interested" transaction of this type (such as, simply 51 percent majority isn't sufficient; you might need 66 2/3 percent).

You have some thorny issues here and would be well-advised to speak with an attorney about your situation.
Nina Kaufman has a New York City-based boutique law practice and is president of Wise Counsel Press LLC, which produces legal information products for entrepreneurs. She writes the Making It Legal blog and the Business Law Advisor column for WomenEntrepreneur.com.

Note: This response is for your general information only. Be sure to consult with an attorney regarding your particular situation to get the advice you need.


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