Legal Tip 82: Investing in a Private Company

Investing in a Private Company

When you invest into a ‘business’ with others there are various ways to structure the set up. One way is to have a company own and run the business with the relevant parties, or their family trusts, owning the shares.

Where one party is merely a shareholder and is not part of the running of the business then that party is generally not a director of the company. Being a director of a company is risky and directors can be personally liable for the company debts in many instances.

But not being a director is also risky as you will not know what the company is up to.

I knew a person who invested a substantial sum of money into a restaurant. The restaurant was run by a husband and wife and they wanted to expand and open more restaurants. My friend was a friend of a friend of the owner. So they offered shares, in one of the companies which ran one of the restaurants, in exchange for money.

My friend got a few payments and then the money stopped. She drove past the restaurant and it was still going with the same name. The persons in control were not working there, but had managers etc. She even went to eat there a few times and it seemed a bit slow, but was operating ok. Excuses followed and then the persons who set it all up disappeared. My friend waited and waited and nothing happened.

Then she contacted me - she had no written agreements whatsoever. She didn’t know what she owned or what she invested in. She knew there was a company and knew its name but nothing else. She transferred about $100k into a virtual stranger’s personal bank account to ‘pay’ for the ‘investment’. We did an ASIC search and found she did own about 25% of the relevant company’s shares. The company was still in operation, i.e. not shut down.

We sent someone around to the restaurant to speak with the manager. He told them that he was the owner and had purchased the business almost a year ago from the husband and wife.

What they did was cause the company to sell the business, including the trading name, but to keep the company open. My friend ended up owning shares in a $2 company.

Further checks showed the couple had moved out in the middle of the night and did a runner. They had done this to several people and had also committed more serious crimes as well before fleeing overseas, never to be seen again.

All this happened more than 10 years ago now.

So if you want to invest in a private company with others, be careful.

 

Foreigners: there's no trusting them.

Had a similar thing on my books last year. People are sometimes too trusting.

 

They can just flee when the going gets tough!