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Question added to topic Legal Basics For StartupsSeptember 22, 2008

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.
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 L. Kaufman, Esq. is an award-winning New York City attorney, edutainer and author. Under her Ask The Business Lawyer brand, she reaches thousands of entrepreneurs and small business owners with her legal services, professional speaking, information products, and LexAppeal weekly ezine. She also writes the Making It Legal blog.

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