Dealing with minority shareholders

Each and every shareholder deserves a voice when the time to sell comes along, but there are efficient ways to handle the demands of those with smaller holdings. By TOM McKASKILL

By Tom McKaskill

When it comes to selling out, not everyone will necessarily be happy and some may in fact set out to stop it happening.

Any business that has a range of large and small shareholders has to be very careful that all the shareholders are on the same page when it comes to the ultimate decision: selling the business.

Minority shareholders can come in all shapes and sizes. Some might belong to that wonderful group, “family, friends and fools”, while others might be external independent investors or employees.

Each one will have their individual reasons for investing and perhaps might not agree with selling out or have the same attitude to the anticipated sale price. Some family members might be interested in protecting the job of a favorite relative or be convinced that the business should be developed further to realise its potential.

External investors may have put money into the venture on the expectation of it floating on the stock exchange, and be disappointed that the business is not intending to see the strategy through. Other external investors may have expectations of generating additional employment within the community and not want to see the business sold and potentially relocated.

Almost certainly there will be some employee shareholders who will fear for their jobs or be disappointed with their share of the sale proceeds. Managing these relationships and expectations is a critical part of the preparation of a business for sale.

I have been involved in several business sales where these situations occurred. In one case, managers recruited into the business who were able to buy shares felt that the business should be developed further before it was sold as they were to receive very little for their recently purchased shares.

In another business, one shareholder was adamant that the business should not be sold. Instead, she thought that the business should be scaled back, a new product strategy developed and more investment sought to revitalise the business.

These situations can be explosive. They can be highly emotional, stressful for management and very disruptive to a sale process. Only by involving all these parties in the discussions can they be made aware of the facts, strategy alternatives and likely outcomes and an agreement reached.

It is worth developing a consensus around three scenarios; what if you have to sell, what if you are made an offer to sell, and under what conditions you all would decide that it is the right time to sell.

You have to sell when you are in deep trouble. At that point you can’t waste time discussing it or throwing blame around. When you receive an offer, you should have an agreement on the minimum acceptable price. Finally, you need to come to an agreement as to the conditions that need to occur when you will all be comfortable to sell out and move on.

You should also put in place a shareholder agreement that will bind the minority shareholders to an agreement made by, say, 75% of the shareholders for such critical decisions. This prevents a small shareholder from holding the rest to ransom. As long as all shareholders are treated equally in the sale proceeds, there should be no reason for not having such a provision.