Shareholder Dispute Resolution Through Buyout

Shareholder disputes are common occurrence because shareholders’ directions and interests often diverge with time whether the business is doing well or not.

This article explains ways to resolve shareholder disputes before it escalates into legal proceedings.

When shareholders no longer see eye to eye, the best way to resolve it is by one party selling to another party or all parties selling together to a third-party buyer. Shareholder disputes are best resolved without having to involve legal actions because the outcome of any legal action will most likely be the exit of one or all parties.

The key is to have an exit process that all parties can agree on. Having all parties agree on a price is often the most difficult part. Thus, third party valuation is often a solution.

Three Common Scenarios

Most disputes involve two camps of shareholders. One of these three scenarios will usually happen:

  1. One party wants to buy the shares own by the other party.
  2. Both parties want to buy the other party’s shares.
  3. All parties want to sell to a third party.

We shall deal with the three scenarios below.

One Buying Party

This scenario is likely to happen when one camp is the controlling shareholder and the other camp has insufficient control or knowledge of the company.

In such circumstances, it is in the best interest of the non-controlling shareholders to sell their shares to the controlling party because it is often difficult to find interested buyers for non-controlling privately held shares without the blessing of the controlling shareholders.

For controlling shareholders who care about their reputation and wish to focus on running their business, it is also in their interest to buy out the non-controlling shareholders at a reasonable price. Else minority shareholders could allege minority oppression or other accusations in court which would consume valuable resources of all parties.

If there is no set share buy-out mechanism in place, both camps often need to agree on a buy-out price, but this is not an easy task. Besides not knowing what price to quote the other party and ways to structure a deal, disputing shareholders are often too worked up to find any middle ground.

This is where appointing a business valuer can be extremely helpful in solving this impasse.

But who should appoint the business valuer?

In the ideal scenario, both parties will appoint an independent business valuer who will take inputs from both sides and make necessary judgment calls. It is rather common that the company will appoint the business valuer in such a scenario. The independent business valuer will determine a value that both parties can use as reference to negotiate a final settlement. It is also possible that both parties agree to transact at whatever price that the valuer determine provided certain conditions are met.  The latter option would eliminate the need for further negotiation after the valuation is done. Hence, the chance of settlement is higher.

It is also possible that each party appoints its own business valuer. If this path is taken, both parties must be prepared that the valuations from the buying party and the selling party will be different because the valuer could only obtain information from the party that appointed him. This path is still better than not having proper valuation done at all because both party’s valuations would be supported by valuation principles that can be used as a basis for further negotiations. This path is usually taken when both sides are familiar with the business and cannot agree on the appointment of an independent valuer.

All Parties Desire To Buy

Many shareholders have emotional attachment to their company and are unwilling to sell. It is quite common that the disputing parties want to buy the other party’s shares when the disputing parties are involved in the company’s management, for example in a 50-50 joint venture or in a family business. Therefore, no party is keen to sell unless the price offered by the other party is extremely attractive.

We believe the weaker party should sell if a reasonably attractive offer is made because prolonging disputes often do not result in better outcomes.

If both parties want to buy out the other party and there is no clear controlling party, then it is better for both parties to work out a deal that will provide an outcome before the valuation is done, for example the party that submitted the highest price after the valuation is completed will become the buyer.

In this scenario, each party can appoint its own business valuer to provide valuation advise. Alternatively, the company can appoint a valuer to determine its equity value and this value will act as a guide to help the bidders.

All Parties Desire To Sell

In cases that all shareholders decide to sell all the company’s shares to a third party rather than buy out each other, they could have the company appoint a business valuer who would advise them on price range that they can expect to get for their shares. The shareholders can use the valuation report to guide them in their negotiations with third party buyers.

This outcome can be a solution when the company is attractive to other buyers and the shareholders rather not have the other disputing camp have control of the business or all parties decide to cash out.

How we can help

We can help to mediate and settle the differences between disputing shareholders by performing one or more of the following:

  • Act as mediator for both parties
  • Structure win-win deal for all parties
  • Develop exit mechanism
  • Business valuation – acting for all parties or one party

If you are interested in finding out more on how we can help you, please feel free to call us at 6681-6713 or email us at admin@rocvalue.com.