A critical element of having a shareholder’s rights protected is how their exit rights are defined. In a publicly listed company, an aggrieved shareholder can simply sell their shares through the Stock Exchange to quit their shareholding in the company.
However, it’s not quite so straightforward and simple for minority shareholders to dispose of their shares in a private company. This is particularly so if the company’s Constitution limits its shareholders’ ability to sell or transfer their shareholding.
Hence, exit clauses are commonly included in the Shareholders’ Agreement to enable all private company shareholders to sell their shares and quit the business in a way that is equitable for all the company’s shareholders.
Exit Strategies For Minority Shareholders
Are you a minority shareholder looking to sell your interest but struggling to gain agreement on an equitable price?
Have you got close to an agreement on price, only to have the majority shareholder opt out of buying your interest?
Then there are the complications that arise when lawyers get involved. You may discover proceeds from your sale are withheld to enable a clawback on warranties to be executed, leaving you exposed to not being paid in full?
What most minority shareholders want is to avoid having a potential argument dragged through the courts later in an effort to recover the funds owed to you.
There is another, more effective mechanism to allow minority shareholders to exit gracefully.
Is Liquidation An Option?
One of the main problems associated with negotiating the sale of your shares is damage to the value of your underlying business when your focus is not on the fundamentals. Profits suffer, key client relationships can be neglected and supplier relationships strained while you are disputing the value of the business in court it can decline precipitously.
One solution to resolve shareholder departures when a deadlock exists is to apply to the Court to have the company placed into liquidation, with an instruction from the Court that the liquidator be required to sell the business as soon as practicable and that the sale process is via competitive bids.
The liquidator prepares the required company documentation, advertises the business sale and negotiates with interested prospective buyers. During this time, it is business as usual commercially.
Existing shareholders have the opportunity to bid for the company during the tender process as can any other interested party. A purchaser is then identified and funds disbursed to the company’s shareholders upon settlement according to the shareholding percentage as mandated by the Court.
Court Liquidation is in an effective solution to an impasse between shareholders and can prove surprisingly cost-effective. Due to the Court’s involvement, the process is impartial and transparent. An alternative is shareholders agree voluntarily to appoint an independent liquidator.
Exit Clauses
Exit clauses are critical for shareholders, particularly for those minority shareholders who often don’t have the ability to contribute to the future direction of the company or who lack the ability to secure an enhanced sale price for their parcel of shares when they look to exit their shareholding in the company.
Incorporating effective exit clauses in the Shareholders’ Agreement, allows minority shareholders to exit easily. By mandating their fair treatment and maximizing their benefits in the event the majority shareholders look to dispose of their shareholding, an exit clause provides an element of protection for minority shareholders.
Final Observation
Prior to investing in a private business, it is sensible to review both the Company’s Constitution and its Shareholders’ Agreement. Ensure the exit rights of minority shareholders are adequately protected. Naturally, consult your lawyer about the adequacy of these documents before moving forward with your investment.
If you are caught in a company with shareholders disputing how the business is sold, a liquidation may be an option to consider. McDonald Vague have experience in liquidations in matrimonial disputes and where shareholders have reached an impasse.