The desire by a shareholder to sell their shares or entire business can arise for a number of reasons. Whatever your situation - our team of experts are here to help you.
For any number of reasons a shareholder may become disenchanted with being a shareholders in a company.
- it may be that a shareholder is a minority shareholder and is not happy with the direction that the company is going, but has no voting majority in order to change decisions of the company;
- it may be that a shareholder is a business owner and a director, but a falling out with fellow business owners means that the relationship has irretrievably broken down, and it is necessary for the shareholders to go their separate ways.
Sometimes, the only option a shareholder might have when a dispute occurs that is not going to involve potentially expensive remedies might be to sell their shares, and in the case of a business owners, to sell their interest in the business itself.
In a publicly listed company the valuation of shares is fairly straightforward. Share prices are listed on a daily basis, and any shareholder wishing to sell their shares would have to sell using the index share price. In a smaller company and a privately owned company, the share valuation can be far more complex.
If a shareholder is lucky, then a shareholder agreement will be in place which makes provision for the valuation of shareholdings for an exiting shareholder. It is highly likely that a shareholder agreement will state that the value of the shares should be determined by the company’s auditors.
Either way, the valuation of shares is more of an art than a science in private companies. It depends on the company’s performance, and the economic conditions at the time as well as market interest and other factors.
Pre-emption rights and minority discounts
The sale of shares in a private company may be subject to pre-emption rights. These may be contained in a shareholders agreement or possibly under the company’s articles of association. This gives the right of first refusal to other shareholders to purchase the shares of the exiting shareholder.
- this may cause some delay in the sale process while the shares are offered to existing shareholders;
- if a shareholder is a minority shareholder, then the sale of their shares may be subject to a minority discount on the basis that they do not have a majority shareholding.
Both of these issues can cause complications in selling the shares. It is strongly recommended to seek professional advice in order to deal with share sale in these circumstances.
Disruption to business
If one of the significant main business owners and majority shareholders wishes to sell their shares, then this could cause significant disruption to the trading of the company.
- if the shareholders have fallen out in these circumstances, which is often the case, then there are risks to the company when a business owner sells their shares and leaves the company following a dispute;
- if that shareholder has a significant influence on the company and its customers and suppliers, this may lead to a breakdown in the relationship the company has with these key trading entities;
- equally, there may be complications in relationships with financiers, and even with loyal employees.
There is usually nothing to stop a majority shareholder from setting up a similar business which will inevitably compete with the current business.
At Francis Wilks & Jones we frequently deal with all areas of shareholders disputes. Our experience is that prevention is better than cure and ideally all shareholders should have a shareholder agreement in place which can provide for action in the event of a shareholder falling out.
Shareholder disputes can rapidly escalate and if matters go to court, can be particularly expensive. If your company or you personally are facing difficulties, then contact one of our expert team at Francis Wilks & Jones today and we can talk through the options available to you. Having an independent expert on hand can mean the difference between fast resolution or a drawn-out dispute.