When a minority shareholder sells their shares, sometimes a discount is applied to account for the fact that the shares don’t provide a majority control over the company.
Disputes and rights of pre emption
In a private limited company, the valuation of shareholdings can be complex, and can often be the subject of dispute, particularly if a shareholder is forced to sell their shares following a fall out between owners.
If a shareholders’ agreement is in place, this may provide a right of pre-emption on share sales. This means that existing shareholders have the right to purchase an exiting shareholder’s shares before they are offered to any third parties. This might give an unfair advantage to existing shareholders to insist on a minority shareholding discount, which the shareholder might have to comply with due to the shareholder agreement.
These issues often arise in small or medium sized private companies. However, the good news for an exiting shareholder is that if the business is essentially a ‘quasi partnership’, i.e. where the shareholders and directors all take part in the running of the company, then case law in this area has tended to support the fact that there should be no discount for minority shareholdings in these circumstances, unless the shares had been bought at a discount in the first place.
Therefore, if a shareholder can demonstrate that they are in fact a quasi-partner then they may be able to avoid a minority discount shareholding.
What is a quasi-partnership?
A lot of small companies are regarded as quasi-partnerships. They are essentially small partnerships which have limited liability because they are registered as companies at Companies House.
To all intents and purposes however they are run like partnerships, where the directors and the shareholders are the same, and between them run the company equally.
Whatever the company or company officer situation, when a shareholder wants to exit and sell their shares, it is recommended that an independent valuer is appointed to value the shares, particularly if there is no other method for valuation set out in a shareholders agreement.
At Francis Wilks & Jones we frequently advise on all aspects of shareholders disputes, including selling shares and minority discount and pre-emption rights issues. Contact one of our friendly team today to let us help you, if you have concerns in this area.