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Understanding dealership minority ownership interests

December 11, 2009
Filed under Legal Experts

Jim KrendlFor a variety of reasons, a dealership may find it advisable to sell minority ownership (equity) interests to one or more new owners: a junior partner, a key employee, an outside investor or a family member for example. When doing this, there is a tendency to think of all corporate stock as being the same. If you sell 10 percent of the company to someone that means you sell 10 percent of the stock.

However, there are many different types of equity interests. In fact there is an almost infinite variety of types of equity. A simple classification would be preferred versus common stock, with the preferred having a senior right to dividends and other distributions prior to any distributions being made to common stockholders, and with a preference to the preferred stock for return of capital in the event of the liquidation or sale of the company. But there are many other types of equity distinctions.

Also, there are many types of organizations that can issue equity, principally:

* A limited liability company (or a partnership, which is structurally similar);

* A C corporation;

* A Subchapter S corporation.

Of these, only the Subchapter S corporation has serious restrictions on the types of equity it can issue. Subchapter S corporations can issue voting and non-voting stock, but in other respects, all of the stock must be of the same class, with the same per share participation in dividends, distributions and other rights. Either a C corporation or a limited liability company (and for purposes of this discussion various types of partnerships are like limited liability companies) can issue greatly different types of equity to achieve different goals. 

A few examples of equity features would include: A right to convert one class of ownership to another class upon certain events, a right on the part of the company to “call” or repurchase some shares upon certain events; a right on the part of the equity holder to “put” the stock by requiring the company to repurchase some or all of it at a fixed price at some point in the future; rights that shift upon the event of certain events, such as the achievement of certain financial goals. For example, a preferred class of stock might lose its preference at such time as the company hits certain earnings objectives.

DISCLAIMER:  This blog is a highly simplified general discussion. It is not legal advice.  Such advice should come solely from qualified legal counsel who understands your situation and who is familiar with all relevant facts, variations in state and local laws that may apply to you, and other matters beyond the scope of this blog.

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