Non-Control Capital Investment in M&A Transactions

In today’s active M&A market, the availability of money and the limitations on investment opportunities have created a unique climate where non-control investment possibilities abound. Non-control capital provides a way for business owners to achieve their goals without ceding company control to an outsider.

There also are numerous legal advantages to minority investment, including creating possibility when a change of control is prohibited.

What is Minority Investment?

A non-controlling interest, also called a minority interest, is an ownership position wherein a shareholder owns less than 50% of outstanding shares and has no control, or lacks complete control, over the decision-making of the company. Room exists to negotiate over levels of advice and input available to non-controlling investors.

However, sophisticated minority investors may mandate control over salary decisions, control over expenditures, veto over additional debt service, and input into other material matters. Material matters could include dissolution, other equity investment, and approval of mergers and acquisitions. Other control over corporate decisions or votes should be limited.

Minority investors, whether that investment comes from private equity or from individuals, will receive a proportionate allocation of equity equal to their investment in the company. However, valuation of the company and the equity given are subject to negotiation. It is not until an investor controls 5% to 10% of the company that they typically are in a position to recommend, even informally, changes in board composition or significant input into decisions of the company.

Bridging the Gap to Sale

If a business owner is contemplating a sale of his or her company but does not receive favorable offers, a non-control transaction can be used to bridge the company until the market improves or until a seller can be found. An infusion of additional capital may allow a business to position itself for growth that may ultimately make the business more attractive. A stagnant business lacks value, but the injection of working capital sufficient to modernize, expand, or even advertise can make the difference between a stagnant business and one poised for growth.

Preservation

In family businesses, non-control capital can be useful to allow children or other family members to stay in a business that otherwise may be at risk of closure. Preserving the “name on the door” for generations to come and/or preventing the collapse of a multi-generational business may be a reason to consider a minority investment.

Businesses nearing distress may be able to turn the tide with minority capital infusions. COVID-19 effects like loss of shelf space for retail purveyors can be disastrous, but without capital to pay suppliers regaining that shelf space may be impossible. In addition, paying off high interest rate loans may allow a company to save thousands of dollars in interest, redeploying that savings into the operations of the company.

Expansion

Minority investors may have industry contacts, expertise, or geographic presence in other areas that may allow expansion. In addition, economies of scale available as a result of minority investment may allow existing capital to be redeployed toward expansion.

Non-control investment may allow the company to engage in growth necessary to attract sellers or private equity capital. The most valuable businesses are those positioned for growth. Even without a history of growth, a business poised for growth can be made attractive. Prospective buyers are not buying your history as much as they are buying your future. Accepting a minority investment may allow a seller to position the company for expansion and create a better, more valuable, future.

Legal Advantages of Non-Control Capital

Minority investment can be useful if a company is otherwise prevented from changing control. Current debt service or valuable contracts that contain change of control provisions disallowing an outsider from gaining control of the company without paying off the debt service or cancelling important contracts may prevent a traditional sale. Depending on the nature of change of control provisions, minority investment may be allowed.

Eliminating the Fear of Non-Control Capital

Many business owners fear minority investment, but with the assistance of experienced corporate counsel such owners can protect their investment, their ownership interest, and their control. Minority investment can be positioned as a win/win, with both current business owners and potential investors gaining benefit from the opportunities it creates.

Pittsburgh M&A Attorneys

Jacquelyn Core and Michael Voytek co-chair the Corporate practice group at The Lynch Law Group. They are experienced M&A lawyers capable of assisting business owners with infusions of non-control capital while protecting their business interests.

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