A favorite Willie Nelson song cautions mothers not to let their babies grow up to be cowboys. If Willie had been asked to offer guidance to mothers of investors in private Texas companies, however, he might have changed his lyrics to sing, “Mamas don’t let your babies grow up to be minority shareholders in private Texas companies without a redemption agreement.” This new version of Willie’s hit song might have been a dud on country radio, but it would have been sage advice.
An investor who buys a minority stake in a private Texas company without an exit strategy in place is likely to become locked in to the investment long after he/she desires to sell out. This situation arises because unless the minority investor obtains a redemption agreement (or some other contractual exit right) at the time he/she buys the stock, he/she lacks the right to choose when he/she can later “monetize” the investment. In most cases, no market exists for the minority shareholder’s stock in a private company, and there is no requirement for the company or any other investors to repurchase his/her stock. The minority shareholder is stuck hoping for a liquidity event such as a sale of the business, a merger or an initial public offering (IPO).
Fortunately, all hope is not lost for minority investors who do not obtain any type of redemption agreement. Texas statutes and case law provide minority shareholders in private companies with exit rights if they can establish that they were “oppressed” by the conduct of the majority shareholder(s). In these limited circumstances, the minority shareholder may be able to secure a courtordered remedy that provides value for his/her ownership interest in the company.
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