07 Oct Minority Shareholders can Snag a Sale
Published in Tulsa World
October 17, 2010
By David L. Perkins, Jr.
If you don’t own 100 percent of your company, you should assess whether you have some shareholder-related issues that could hinder a sale.
First, if the parties choose to effect the sale by purchase of stock, any minority shareholder could hold up the deal if you don’t have agreements in place that force them to accept terms agreed to by the controlling shareholders. This is because buyers almost always want to buy 100 percent of the outstanding stock. They don’t want to become partners with someone they don’t know. They also want to own all the stock to maximize the money they can make with the investment.
If a minority shareholder refuses to accept sale terms negotiated by the controlling shareholders, many buyers will back away entirely. Getting the holdout(s) to agree to the deal quickly becomes YOUR problem. Enticing a minority shareholder to go along with you can become costly. It’s just too easy for him or her to hold out until you start offering to pay a premium. Any premium paid comes out of YOUR take.
How can you find out whether you have the legal right to “drag along” minority shareholders in a stock sale transaction? If the selling entity is a corporation, such a provision could reside in Articles of Incorporation, bylaws or a shareholders agreement if one exists. If the selling entity is an LLC, check out both the articles of organization and the operating agreement.
True, most private-company purchases are effected by asset purchase, but some are effected by stock purchase.
For example, in case of a C-corporation seller, the shareholders may attempt to dictate that the sale be completed by stock purchase to reduce the tax burden. Also, title transfer and contract assignment problems can often be alleviated by effecting the sale by stock purchase. Finally, public companies may at times prefer a stock purchase to minimize future depreciation expense (and maximize reported earnings).
What can you do if you’re the majority shareholder and you aren’t protected by “drag along” provisions? First:
- Buy out your minority shareholders now.
- Obtain, today, an option to buy the minority shares in the future at a price that’s economical for you and fair for them.
- Get them to agree to “drag along” provisions (they may ask for “tag along” provisions in return, but that’s probably OK).
- Remove any elements that dictate purchase/sale by stock.
Second, minority owners can hold up an asset sale if a so-called super-majority provision exists in your governing documents. In most states, a simple majority of the outstanding shares is all that is required for the shareholders of a company to approve a sale of all, or substantially all, of the assets, but that can be changed (usually only a higher approval percentage can be required) in the governing documents.
If your governing documents do not stipulate a higher threshold, you’re clear. But if yours stipulate, for example, that a 75 percent vote is necessary, then you could have a problem if the consenting shareholders own less than that.
Where can super-majority provisions exist? The same places as “drag along” provisions. If the selling entity is a corporation, look in the Articles of Incorporation, bylaws or any shareholders agreement. If the selling entity is an LLC, look in the articles of organization or the operating agreement.
The best time to avoid minority shareholder problems when selling your business is when you sell or issues shares in the first place or invest in and/or buy the company. This is when you have leverage. Options are often few when the deal is negotiated and you need the approval of minority shareholders. The power shifts to the minorities, and often the only thing that will loosen the logjam is money – your money.