Shareholder Rights - Selling your Shareholding

Selling your Shareholding

The Market for Shares

Unlike Public Limited Companies (Plcs), shareholdings in Private Limited Companies are not readily available to the public. Just as Joe Public cannot readily buy shares in a Private Limited Company, any shareholder in a Private Limited Company cannot readily sell those shares to Joe Public.

This can lead to situations where shareholders are “locked in” to a company (often against their will) and, although their shareholding may be very valuable on paper, they are unable to realise that value (by selling the share, for example). Even if a buyer can be found, shareholders often then face a number of further hurdles before any sale to that buyer can proceed.

Pre-emption Rights

The problems faced in trying to realise the value of a shareholding in a Private Limited Company can be made all the more difficult by provisions in the Companies Articles or (if there is one) in a Shareholders Agreement. In particular, it is very common to find that these documents contain further restrictions on the disposal/transfer of shares. For example, they may provide that only a certain class of individuals can hold shares in the Company (such as the relatives of the original shareholder(s)). Most commonly, restrictions on the transfer of shares take the form of “rights of pre-emption” whereby the shares which are to be sold/transferred must first be offered for sale to a prescribed class of individuals (normally the other remaining shareholders). This is, in effect, a right of first refusal before the shares can be sold elsewhere or to someone who may be a “stranger” to the remaining shareholders.

Share Value

A right of first refusal in itself does not present any great problem to a “want out” shareholder, but the catch often comes in the price to be paid. In a typical right of pre-emption, the price to be paid by those exercising their right of first refusal is expressed to be a “fair value” (to be independently determined in the absence of any agreement, often by the company auditors).

Unless the shareholding to be sold represents a majority shareholding in the company, a “fair value” will normally include a very substantial discount on what the owner will normally regard as the “real” value. This is known as a “minority discount” and it seeks to reflect the fact that the shareholding is not a majority shareholding and does not therefore in itself carry the ability to control the Company.

This can lead to seemingly harsh results and substantial under valuations against what many would regard as the “true” value of the shareholding. For example, if a 49% shareholder in a 10 million pound company sells his entire shareholding to the 51% majority shareholder (for who else would want to buy?) a crude example of the likely “fair value” might be:-

Company value - £10 million

49% of £10 million = £4.9 million

Minority discount, say 75%

= Valuation @ £1.225 million

Whilst the “true” value to the 51% shareholder might well be seen as something in the order of £4.9 million (or more), he might well only have to pay £1.225 million by reason of the calculation of a “fair value”.

Non-Registration

A further difficulty sometimes faced in seeking to sell a minority shareholding is that the Articles of Association for many companies will also contain provisions enabling the Board of Directors to refuse to “register” (in broad terms to recognise or ratify) a transfer of shares on specific grounds or, in some circumstances, on whatever grounds they choose and without giving any particular reason.