Protecting Your Investment

You and Biker Bob are successfully operating Best Bikes Co. and, as a result, are interested in expanding your operation by opening a new retail location. However, you do not have enough free cash or access to borrowed funds to execute your expansion. You and Biker Bob are talking about your expansion struggles on the trail one day when another biking acquaintance, Wheelie Wallace, overhears. 

Wheelie Wallace promptly butts in, exclaiming that he would be happy to provide the cash in exchange for an ownership interest in Best Bikes Co., but he has some concerns. How can he know that his investment is protected? What if he wants his money back? What if you and Biker Bob decide to do something completely unrelated to biking with his money? What if Wheelie Wallace feels that you and Biker Bob are doing a poor job at managing the company, including the capital provided by his investment?

There are four primary ways shareholders can protect their investments: selling their shares, voting out management, reviewing books & records, and suing for breach of fiduciary duties. The easiest and most common is to sell their shares. No one is going to change anything if I'm dissatisfied with the performance of my six shares of Amazon stock. My only real alternative is to sell.

But selling isn't always an option. In the example above, it may be hard for Wallace to find a buyer for shares in a small, private company. Or there may be contractual provisions that make it difficult for Wallace to sell (these are fairly common in small companies).

If shareholders are unhappy with management, they can fire them. The directors are elected by shareholders. The officers are appointed by the directors. This section will discuss how shareholders exercise their voting power and how shareholder meetings work.

Shareholders can't act well without transparency. This section will discuss the shareholders' right to review a corporation's books and records. This is surprisingly broad.

The last shareholder protection we'll discuss is fiduciary duties. This is a massive topic that warrants its own chapter, so we'll revisit it later on.