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.