Private company share transaction - practical issue.
Discussion
Background: I've worked in professional services for 15 years+ and this has been spread between Big 4 (c.5 years), "boutique" (c.5 years) and Big 4 (c.5 years) so know my way around my issue from an advisory perspective but appreciate things are different in the real world, so would appreciate any practical views/ thoughts/ experience.
I've recently returned to the boutique firm. One of the reasons I left was that it was privately held but had a very fragmented shareholder base, with no real relationships between shareholders i.e. they were able to acquire shares in the 80s/ 90s when they worked for the firm but weren't required to sell them back on leaving. As such the largest shareholder has c.30% and then you have the current MD (only employee shareholder) with c.15% and 4 individuals with c.12%. There are then some insignificant minority shareholders with the balance.
One of the reasons I returned was that the current MD is now on the path to retirement so the route is clear for me to take over running the business, however given the shareholder base my concern was that I'd still ultimately be working for shareholders with no real connection with the business anymore. However part way through negotiations for me to return one of the 12% shareholders wrote to the board stating that he wished to sell his shares. The MD worked through the pre-emption provisions in the Articles and no existing shareholder wished to acquire them so it was clear for me to buy them. Additionally another of the 12% shareholders has died and his estate has recently written to the MD stating they also wish to sell. Without sounding disrespectful it can be reasonably expected that the other two 12% shareholders won't be around for much longer. As such there is a route to potentially getting myself to 48% relatively quickly (and cheaply given they are minority shareholdings) and then finding a way to get to over 50%.
The issue that however has arisen is that the MD has been working with the company's lawyers to effect the transfer and they have advised that an SPA should be signed between myself and the seller. The Seller has however taken exception to this and said he will not sign an SPA. He has drafted an offer letter for me to sign. Once I sign this and send him the funds he'll then execute a stock transfer form. Personally I see no issues with this route, given its a transfer between private parties and the offer letter seems reasonable to me. However I have spoken with the MD this morning who says he will need to read the letter, and take advice from the lawyers, to make sure the board are happy to authorise the transfer in accordance with the terms of the letter.
My concern is that I'm potentially getting caught up in politics between the MD and the seller. They did work together in the 90s and I understand things weren't great between them before the seller left. Surely the position is now that myself and the seller should simply be able to agree a deal between ourselves, given the pre-emption provisions have been exhausted.
Any thoughts welcomed.
Thanks
I've recently returned to the boutique firm. One of the reasons I left was that it was privately held but had a very fragmented shareholder base, with no real relationships between shareholders i.e. they were able to acquire shares in the 80s/ 90s when they worked for the firm but weren't required to sell them back on leaving. As such the largest shareholder has c.30% and then you have the current MD (only employee shareholder) with c.15% and 4 individuals with c.12%. There are then some insignificant minority shareholders with the balance.
One of the reasons I returned was that the current MD is now on the path to retirement so the route is clear for me to take over running the business, however given the shareholder base my concern was that I'd still ultimately be working for shareholders with no real connection with the business anymore. However part way through negotiations for me to return one of the 12% shareholders wrote to the board stating that he wished to sell his shares. The MD worked through the pre-emption provisions in the Articles and no existing shareholder wished to acquire them so it was clear for me to buy them. Additionally another of the 12% shareholders has died and his estate has recently written to the MD stating they also wish to sell. Without sounding disrespectful it can be reasonably expected that the other two 12% shareholders won't be around for much longer. As such there is a route to potentially getting myself to 48% relatively quickly (and cheaply given they are minority shareholdings) and then finding a way to get to over 50%.
The issue that however has arisen is that the MD has been working with the company's lawyers to effect the transfer and they have advised that an SPA should be signed between myself and the seller. The Seller has however taken exception to this and said he will not sign an SPA. He has drafted an offer letter for me to sign. Once I sign this and send him the funds he'll then execute a stock transfer form. Personally I see no issues with this route, given its a transfer between private parties and the offer letter seems reasonable to me. However I have spoken with the MD this morning who says he will need to read the letter, and take advice from the lawyers, to make sure the board are happy to authorise the transfer in accordance with the terms of the letter.
My concern is that I'm potentially getting caught up in politics between the MD and the seller. They did work together in the 90s and I understand things weren't great between them before the seller left. Surely the position is now that myself and the seller should simply be able to agree a deal between ourselves, given the pre-emption provisions have been exhausted.
Any thoughts welcomed.
Thanks
If the pre-emption provisions have been exhausted, then absent anything in the articles or a shareholders agreement to the contrary, you ought to be able to just do it by way of a stock transfer form.
You as purchaser might want to think about whether you want a share sale agreement to give you more than basic comfort as to title to the shares.
Has the MD said why he wants an agreement?
You as purchaser might want to think about whether you want a share sale agreement to give you more than basic comfort as to title to the shares.
Has the MD said why he wants an agreement?
The MD likes to do everything by the book so I think he's just relying on what the lawyers are saying.
Over the course of the weekend I'm going to re-go over the SPA and read it alongside the offer letter to see what protections I'm potentially forgoing but don't really know what I should be worried about, i.e. what could potentially go wrong.
Over the course of the weekend I'm going to re-go over the SPA and read it alongside the offer letter to see what protections I'm potentially forgoing but don't really know what I should be worried about, i.e. what could potentially go wrong.
IANAL but 20+ years in equity capital markets. Depends what the offer letter says. If it contains normal reps on free and clear title, sole ownership, no encumbrances, full and final consideration, no retained interests, and an indemnity in the event of failure of the reps, then it could be sufficient. You might also want to check whether the shares are tied up with another company transaction, eg a directors loan.
Imagine he’s pledged the shares as collateral for a personal or business loan. Or there is a messy divorce brewing. Could come unstuck.
Imagine he’s pledged the shares as collateral for a personal or business loan. Or there is a messy divorce brewing. Could come unstuck.
Why is the seller resisting the SPA? Where else will they sell their shares if not to you?
What justification exists for the Board to refuse to execute the transfer?
Why does nobody else want to buy the shares, especially the MD?
If you have funds to purchase nearly 25% of the company, why not start your own?
What justification exists for the Board to refuse to execute the transfer?
Why does nobody else want to buy the shares, especially the MD?
If you have funds to purchase nearly 25% of the company, why not start your own?
Whoozit said:
IANAL but 20+ years in equity capital markets. Depends what the offer letter says. If it contains normal reps on free and clear title, sole ownership, no encumbrances, full and final consideration, no retained interests, and an indemnity in the event of failure of the reps, then it could be sufficient. You might also want to check whether the shares are tied up with another company transaction, eg a directors loan.
Imagine he’s pledged the shares as collateral for a personal or business loan. Or there is a messy divorce brewing. Could come unstuck.
The offer letter says (in summary):Imagine he’s pledged the shares as collateral for a personal or business loan. Or there is a messy divorce brewing. Could come unstuck.
He warrants he is the sole legal and beneficial owner of the shares and has full power to transfer legal and beneficial title.
He warrants the shares are free from all encumbrances.
He warrants that at no time since he obtained title to the shares has he assigned a mortgage or declared a trust of legal/ beneficial title.
janesmith1950 said:
Why is the seller resisting the SPA? Where else will they sell their shares if not to you?
What justification exists for the Board to refuse to execute the transfer?
Why does nobody else want to buy the shares, especially the MD?
If you have funds to purchase nearly 25% of the company, why not start your own?
Seller is resisting the SPA as he says it imposes unacceptable or impossible obligations and a potential liability for expenses, as well as the fact he wants payment up front. There is no other game in town but he see this an insignificant part of his estate, although represents a loose end that he would rather get rid of. What justification exists for the Board to refuse to execute the transfer?
Why does nobody else want to buy the shares, especially the MD?
If you have funds to purchase nearly 25% of the company, why not start your own?
Pass - MD is out today but will speak with him tomorrow.
It is unlikely that the business will be sold in the foreseeable future and with the MD probably only working two or three more years he has no interest in buying them. I have a much longer term view as will most probably be working for at least another 20 years so it's my interest to stake build so I have day to day control and then potentially seek a sale in the future.
The business has been around for c.40 years and its well connected. I could have probably gone on my own but there is something nostalgic in me that would like to make this 'mine' in the future rather than just being another "My Name Consulting Limited".
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