The Risks of Being Shareholders of Private Companies

If you are investing in a private company, make sure you look for the terms that will enable you to cash out and get your money back.

- Tan Ooi Boon

Unlike investing in publicly listed companies, it is not so easy to exit a private firm, especially if the owners refuse to buy back your shares.

It is also not easy to apply for an order to wind up the company because the courts are extremely cautious in intervening and disrupting an ongoing business unless it is "just and equitable".

So it is not enough for minority shareholders to cry foul just because they want out: They have to prove "unfairness" such as bad faith or plain impropriety in the majority owners' conduct.

Here are three cases of how the courts dealt with shareholders who wanted to bail out of private companies.

TRAPPED AND AT THE MERCY OF MAJORITY SHAREHOLDER

In this case, two brothers pooled their assets into a dormant company that they owned in unequal shares.

The brother who was the majority shareholder had assured his sibling that he would buy him out if he ever wanted to exit.

But when the time came, he reneged on this deal.

So the minority shareholder applied to have the company wound up.