Gaining Advantage Together

0330 0947777

Kicking and Screaming...what happens to the little guys when its time to sell a business?

Over a series of articles Oliver Ling examines some of the traps and pitfalls of operating within a private limited company structure without the protection of either a shareholders’ agreement or bespoke articles of association. Poor preparation of a company’s constitutional documents can lead to disputes and ultimately the business failing.

Imagine you are a majority shareholder, holding 85% in the capital of your company. The dream has come true, and a larger company has offered to buy your business for £10m.

The fly in the ointment is that the minority shareholder, holding 15%, does not want to sell. The business is presently providing him with a steady income, and his £1.5m share is just not enough to make him interested – some people!

The larger concern makes it clear that they do not wish to buy 85% of the company – it’s all or nothing.

Without a set of bespoke articles and/or a shareholders’ agreement with “drag along” provisions, there is not really much you can do. The relevant legislation only provides statutory drag along where the minority shareholder holds 10% or less of the issued share capital.

So your options are to either allow the minority shareholder a greater slice of the pie as a negotiation, which hardly seems fair, or you have to pass on the offer, and spend the rest of the time in business with the minority shareholder, seething in a deep pit of resentment, which does not generally create a harmonious work environment (I give it six months).

Turning the tables, what if you are the 15% shareholder and the larger company is perfectly comfortable with acquiring 85%, where does this leave you?

Your former business partner could sail off into the sunset on his new solid gold yacht (impractical I know, but it assists with the mental image), and you are left working with, or, more likely; for, people you do not know, and with whom you never intended to be in business.

Taking into account the almost certainly substantial size difference between you as a minority shareholder and the larger concern, your position is far from stable.

A shareholder with less than 25% of the issued share capital in a company is very much at risk, especially where the majority shareholder(s) are of a significantly larger size, with greater financial power.

Drafting bespoke articles and a shareholders’ agreement for you business means “tag along” provisions can be included, allowing a minority shareholder to tag along with a sale, at the same price and on the same terms as the majority shareholder, failing which, they can prevent the sale from taking place.

Key contact

Oliver King, Solicitor

Oliver King

Solicitor

Call 01904 610886