I am talking about minority shares in a small company or a business. After 28 years in law enforcement and law, both as a lawyer and legal advisor for international multinationals, I can tell you, buying minority shares is a borderline scam in most cases. Don't do it unless you want to lose your money and frustrate yourself beyond human endurance.
So what is minority shareholding? Anything less than 51% ownership and in practical terms "He who controls the check book, controls the company." What happens is this. You are approached by a shyster, usually the "father and son" scam we speak about so often. They almost always have the Bible under the arm and use the Lords name in every second sentence - they have to...being shysters to begin with. Then they make you an offer you just cannot refuse and that should give you enough reason to run away for successful business people are seldom nice people. They may be kind and generous up to a point, thereafter they revert to true form. Remember, an offer you cannot refuse is always fishy, especially when told it is one and pushed for an answer.
This offer usually says the following. They have a business which is worth X amount. Ok, let us stop right here - who says so? They do? Well that ain't good enough in my eyes for I have already decided they are shysters even if they speak the taal and use the Lords name. You have to check independently and they would always react furiously that you dare to look a gift horse in the mouth, so to speak. That is a clear sign they are lying for a genuine company doing well is something to be proud of and they would gladly show you the books. Problem is you won't ever be easily allowed to buy shares in such a company to begin with. Why not? Because it makes no sense, they are making money, why would they want to share with you? So get your own auditor to look at the books. They are exceedingly clever people, auditors, and will spot a shyster two miles away.
Of course it may be to expand the business (the usual reason used) and they need a cash injection in which case there is many other ways to do so. First is to take a loan at a bank, it is called bridging finance and paid off quite quickly. Or to take a normal medium term loan and sign surety for it because no bankster in this world will not ask for personal surety. That is where you give your house and your life including your daughters to them. No one wants to do that but you have to ask, why are they not doing it? Perhaps they cannot get a loan for they have a bad credit record.
Now a bad credit record in itself means nothing in the real world as more than 50% of you reading here will have one. It may be a late payment or no payment or even plain fraud (they say it is a mistake) from some provider. When you live and work for your own account as a small business owner and a client suddenly doesn’t pay you, as happens frequently, it causes a ripple effect. It happens and I will never look down on a man who got trampled by the process. Or you lose your job, simply cannot find another and down you go. Read my book Your Worst Enemy how to deal with banksters and the hounds from hell known as debt collectors - legally you can hurt them as much as they can hurt you. But the point is you have to ask why they have not gone that route.
With such things, as cash injections, I would advise you to act as a creditor and loan the money against surety and remember their house is not surety unless fully paid, why, because you stand behind the other creditors who will be paid first. And if no bond on the house, then why do they need you? Any shyster banksters will gladly loan them the money. So will the ball breakers too, you know the shady uncles who operate at totally illegal and immoral interest rates. Fact is, these money lenders are, in my opinion, a lot easier to deal with than a bankster. Between the two they are more honest - you know there will be no lawyers or red tape or a computer controlling him, he will come after you with his bully boys if you don't pay. So neither the shysters, nor anyone else who is not desperate, will deal with them. They are rightly scared because they don't fear the civil courts but they do fear physical violence. Behind the big mouths they are cowards.
So that leaves you, the fool with cash they are going to do in. They offer you the 10% for X amount (it can be whatever percentage, as long as less than 51% - technically you can look at more than 24% but I don't want to become too boring here). So you agree and then they take your money and give you your shares, it looks and is very legal. They spend your money immediately, usually to pay the uncles who are threatening to break their balls or on a new bakkie for Boetie. I mean he has to look successful to get another idiot to invest to keep his lifestyle floating.
You are now expecting the promised dividends at the end of the year, you know, to recover your initial investment with a nice profit (called your return on investment of ROI) and perhaps use that as supplement to your pension. But there is a problem, since you have no control and even less say in the business they run it in the red with no profits. "It is to save on tax Mate, so we don't pay Uncle Sam." But my friend, our Lord said more than once to pay the taxman. This will bite you, when you have two books - when you sell your business you cannot show the real profits because it is fraud so your selling price goes down to almost nothing, who wants a redline company? And you run a hell of a good risk of being ruined by lawyers' fees when you get caught and you will - any lifestyle audit will fold you. But worse, you will never see a dime on your investment. When it comes to dividends, they simply use the profit, if any, to buy vehicles and take care of themselves first, there never are any dividends declared. Then your investment has just become a cheap non-interest bearing loan for them. What can you do legally? Almost nothing, you do not have much legal protection as a minority shareholder. About all you can do is to attend meetings and have insight in the books. I say again, you have no control over the direction of the company, nothing. You are left at their mercy.
Fine, so you realised, I made a mistake, let me sell my shares and get out. Now you will find out your shares are worthless, no one wants to buy them. Why should they? They have been done in before and you are too honest to lie to sell shares. You take the loss and next time you tell everyone, don't buy minority shareholdings. It is never worth the trouble.
Koos Kotze is a former member of the South African Police Force. He served between 1985 and 1991 primarily as a sergeant in the Pretoria Flying Squad. During his police years, he was awarded the South African Police Medal for Combating Terrorism twice besides lesser awards. After leaving the Police Force he obtained the law degrees B Iuris & LLB at the University of the Free State (Bloemfontein, South Africa) and was a commercial law attorney for eight years. These days he is the owner of JKLS Africa and Associates, a specialist legal consultancy which specializes in reducing legal risk in sub Saharan Africa. He wrote several books on business, law, counter-terrorism and security issues. At times he is asked to participate on the Voice of America regarding legal forensic matters.