Get Your Ducks In Row On Shareholder Buyout Terms

beautiful ships at harborAs the climate for mergers and acquisitions improves, savvy companies are seeking and evaluating good candidates. Tuning up their own shareholder buy-sell provisions is an important step that acquiring companies need to take to get their ducks in a row. This should be done before an m&a deal that adds or changes shareholders.

Shareholder buyouts may arise in many ways. For example, upon certain fundamental corporate changes, Minnesota statutory law allows a minority shareholder to dissent and demand a buyout at fair value. Alternatively, a buyout may be an available remedy for certain types of improper conduct by the majority toward minority shareholders. Other buyout scenarios include a shareholder’s death, retirement, or termination from employment. However, buyouts can cause vexing problems if not structured and executed carefully.

Here are five proactive suggestions:

(1) Written agreements should spell out shareholders’ intentions about buyouts. All buyout terms, procedures, and valuation methods should be clearly spelled out in signed shareholder agreements and buy-sell agreements. Be sure to state what discounts do and don’t apply and all other necessary details and be crystal clear in stating these terms. This is particularly important when shareholders are added by a merger or acquisition because the new shareholders probably haven’t discussed buyout intentions with the preexisting owners.

(2) Spell out contractually that shares are subject to immediate buyout when an employee-shareholder terminates. It is best to end the relationship entirely if parties can no longer work together effectively.

(3) Have written employment agreements with all employee-shareholders stating that employment is at-will and can be terminated at any time and for any reason. This enables management to run the business effectively and weed out poorly performing employees and also has other benefits.

(4) Get a quality appraisal to determine how much departing shareholders should be paid. It doesn’t pay to cut corners here. Make sure the appraisal is prepared by a reputable, well-qualified appraiser who is knowledgeable about the industry.

(5) Be careful not to compound the situation. Although bad feelings and friction often arise from managerial conflict and deteriorating personal relationships, the company and majority should never engage in oppressive or retaliatory conduct toward minority shareholders because that could lead a court to award a higher buyout sum than minority shareholders likely would otherwise receive.

Steve Marino
Marino Law Firm PA
Tel.: 651.631.8508

One thought on “Get Your Ducks In Row On Shareholder Buyout Terms

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  1. Steve,

    Nice points about shareholder buyouts. At Equity Metrics, we have broken down the processes for shareholders to see the specific impact a buyout would have on the business and/or other party.

    Having the foresight to understand the financial mechanics of a buyout (or any negotiation between two parties) with financial clarity is imperative for a successful outcome.

    Take a peak at how people can create scenarios in an on-line application. The application is enterprise class but affordable.

    Below is a link to the M&A negotiation which includes shareholder buyouts.

    Hope this helps.

    Larry Smith
    Equity Metrics Corporation

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