Selling Shares

We're experienced in dealing with selling shares in private limited companies. We can advise you on the best strategy to maximise your returns.

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How and when should I sell my shares in a private limited company?

When your shares are no longer benefiting you — or when you’re looking to capitalise on the value of the company or feel marginalised or forced out of the company — you may decide to sell your shares.

However, this can be trickier than you realise. There are various obstacles to overcome — both legal and political — to reach a successful outcome, including provisions in the company’s articles of association or shareholders’ agreement.

Unlike when a shareholder owns shares in a publicly listed company, there’s no ready market for shares in private limited companies. This can make it very difficult to sell the shares — or at least to sell them at anything that represents an accurate assessment of the true share value.

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’re unable to realise that value (for example, by selling the shares).

Even once the question of value has been addressed, you should know that there can be other obstacles to selling a shareholding, such as pre-emption rights and the requirement for the board of directors to approve the registration of any sale.

Our team has extensive experience in dealing with selling shares in private limited companies. We can advise you on the best strategy to take when you’re looking to sell, so that you can achieve your commercial objectives and maximise your returns.

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What are pre-emption rights?

When looking to sell your shares in a private limited company, it’s common to find that the company’s articles of association or shareholders agreement contain restrictions on the disposal transfer of shares. As an example, they may stipulate that only a certain class of individuals can hold shares in the company (such as the relatives of the original shareholders).

Restrictions on the transfer of shares take the form of 'rights of pre-emption', whereby the shares that are to be sold or transferred must first be offered for sale to a prescribed class of individuals (usually the other remaining shareholders). In effect, this means that you must offer a right of first refusal before you can sell the shares elsewhere or to someone who may be a 'stranger' to your remaining shareholders.

Pre-emption rights can have a dramatic effect on not only who you can sell to, but how much you can get for your shares — making it harder to earn a profit on your initial investment.

Right of first refusal

While a right of first refusal doesn’t in itself present any great problem if you want to sell your shares in a company, the catch is often what price you can sell for. 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' which — in the absence of any agreement — is independently determined, often by the company auditors.

Unless the shareholding represents a majority shareholding, a 'fair value' will normally include what could be a substantial discount on what the owner will normally regard as the 'real' value.

This is a 'minority discount', reflecting the fact that the shareholding isn’t a majority shareholding and doesn’t itself carry the ability to control the company. This can lead to substantial under valuations against what many would regard as the 'true' value of the shareholdings.

What might this look like in practice?

Let’s say that you’re a 49% shareholder in a £10m company and you’d like to sell your entire shareholding to the 51% majority shareholder. With the company valued at £10m, 49% of £10m would be £4.9m. But let’s say that the minority discount comes in at 75%. The value of your shares would be £1.225m.

So, while the majority stakeholder might see a 'true' value of your shares at £4.9m or more, they would only have to pay £1.225m by reason of the calculation of a 'fair value' — putting you at a distinct disadvantage that makes it impractical to sell.

In a shareholder dispute, potential arguments over precisely what’s meant by 'fair value' can often be foreseen. The court has wide powers to direct which factors should be taken into account in determining any 'fair value'. In the absence of other guidance, the 'fair value' of shares is likely to be determined by whatever your valuer considers appropriate — so it’s key that you choose the right valuer.