One of the more prevalent corporate transactions over the last 12 months has been where one shareholder sells his interest in a company, leaving his fellow shareholders and the business intact.
A shareholder buyout can be triggered by:
- retirement of one of the owners
- a dispute amongst the shareholders
- a desire to restructure a company to create two or more separate businesses
The deterioration of the M&A market in 2008/2009 has meant that business disposals are more difficult to achieve, and the buy out of individual shareholders is becoming more popular for business partners that decide they will no longer work together.
A shareholder buyout is commonly structured as a share buy back but there are other arrangements which can be utilised. Where the values involved are significant, buy outs can be paid over a period of time. There are major tax considerations to the various options available, and decisions should not be made until this is contemplated.
The price paid for the shares almost always causes problems. The transfer value is generally dictated by the Articles of Association, which in the majority of companies will request a valuation by the auditors. In some cases the auditor is unable to give a totally objective opinion, and it is then fundamental that an independent valuer is sought. This valuer can be asked to give a ‘expert determination’ which is binding on all parties.
Where a price can not be agreed, mediation is advisable. Without mediation, buy-outs can become protracted and costly affairs – the business can be neglected during these periods, especially if the shareholders fall out. The ideal position is that the buyer and seller are both ‘moderately unhappy’ with the buy out value!
There are many options available to businesses/individuals in this position, and it is important to obtain professional advice as soon as possible.