Last year I was asked by two different entrepreneurs to realize the transfer of their 50% equity interest in their company. Both cases involved a 50/50 share ratio and it turned out that the shareholders could no longer get along well. What is special about the situations is that both companies initially had three shareholders who each held 1/3 of the shares.
In the first case, one of the shareholders was expelled from the business several years ago, because he was found to have side activities that were unacceptable. The other two shareholders had to fight a very difficult and costly legal battle for this, partly because nothing had been arranged in writing with regard to situations such as bad leaver, obligation to offer and price the shares, financing of the purchase price when leaving the company, etc. Nothing was regulated in the articles of association and there was no shareholder agreement.
Since the exit of the third shareholder, both shareholders hold 50% of the shares. In recent years, friction has developed between the two shareholders. Both shareholders start showing behavior that harms the company and the company becomes rudderless. My relation no longer sees any future for him within the company and wants to leave, and asks me to find a buyer for his 50% shareholding.
Steerless company
You would expect that after the previous unpleasant experience with their former co-shareholder, both shareholders would have thought carefully about how to avoid this type of situation in the future. But the opposite appears to be true, no agreements were made about this afterwards either. The company's accountant did advise drawing up a shareholder agreement, but it did not have the entrepreneurs' interest and priority. And subsequently it disappeared from the agenda.
I have advised against the request of selling 50% of the shares, this is an impossible mission. No buyer is interested in taking over 50% in a rudderless company. After many conversations, the other shareholder (fortunately) has come to the decision to offer his equity stake as well. Now we have been instructed by both shareholders to find an outside buyer for 100% of the shares. That is a better starting position.
Shareholder Agreement
The second case has more or less the same history. Again, one of the three shareholders was evicted from the business in the past with difficult negotiations. Now, due to his age, the oldest shareholder (my relation) wants to retire and transfer his 50% shareholding to the other shareholder.
We cannot exert pressure, as this could lead to a stalemate
I ask for the shareholder agreement, but it turns out there is none. According to my relation, a draft shareholder agreement was drawn up after the third shareholder stepped down, but it was never signed. Reason: business switched to another accountant at that time. The rigging of a shareholder agreement no longer had the interest of the entrepreneurs and subsequently it disappeared from the agenda.
Stalemate
The other shareholder is laboriously cooperating in this process. You notice that he wants to delay this parting and get the price down. The relationship between the two shareholders comes under heavy pressure. Fortunately, the other shareholder takes advice from an adviser who realizes that the parties must part ways, otherwise it could harm the company.
For better or worse, we as advisers try to reach a transfer of this equity interest in harmony. We cannot exert pressure, because then a deadlock could arise. Where normally such a transfer should succeed in a period of 3 to 4 months, it now takes 8 months.
Agreements on paper
There are plenty of 50/50 shareholder situations where cooperation goes very well. But these are two from real life where things are struggling. With a few hours of time effort and at a relatively limited cost of at most €5,000, both situations could have been avoided. The parties did not take the time and effort to put good agreements on paper, even though they should have known better with their previous negative past experience.
So a shareholders' agreement is of great importance for a company with multiple shareholders, especially in 50/50 situations. There is an enormous amount to be arranged in it. An experienced business acquisition advisor and/or corporate lawyer can explain what is wise to arrange in such an agreement. This way you avoid ambiguities and the company is armed against annoying shareholder conflicts.
