Minority Investment

A minority investment is a stake in a company below the controlling majority. The investor holds less than half and generally cannot determine the business alone. In return, the investor often secures certain participation rights through the contract. That is where the real negotiation lies: the economic value of a minority depends less on the percentage than on the rights agreed in the articles and the shareholders' agreement.

A catalogue of consent requirements for the budget, larger investments, further borrowing, acquisitions, changes in management and a sale of the company is customary, together with information and reporting rights, a board seat, pre-emption rights in future capital increases and exit provisions. The last of these matter most, because a minority shareholder without contractual exit rights depends on the majority choosing to sell. Tag-along rights, put options exercisable after a defined period and provisions on valuation in a buy-back are therefore common. Under company law it should be noted that material resolutions require a three-quarters majority, so a holding above 25 percent creates a blocking minority conferring influence even without special contractual rights.

The structure is used above all in the growth segment, in staged succession solutions and where an entrepreneur wants to raise capital but retain control. Besides the rights, the valuation on exit is decisive for the investor, because a put right without a defined valuation procedure is worth little. References to a multiple-based method, to expert determination or to a pre-agreed minimum value are customary. Payment terms also need settling, since a company can rarely fund the buy-back of a larger stake in one instalment and payment by instalments without security represents a substantial risk.

Note: This explanation is for general information only and does not constitute legal advice. The legal position depends on the individual case and may change with new legislation or case law. For a binding assessment, please consult a qualified lawyer.