Last week I was introduced to a team of three directors who have fallen out with the 4^th director, who is also the largest shareholder in the business.
This team of 3 merged their business with the larger business owned by the 4^th director some time ago, and things have not worked out as they would wish.
I’m helping them unravel the situation, but in establishing the true position it has become apparent that some of the advice they were given was not what I would have recommended, and seems to be unduly favourable to the larger shareholder.
I know the legal firm they used for this transaction – indeed they acted for me when I sold my house – but I would not recommend them for a corporate finance transaction. I am sure they do a few transactions a year but this is dangerous territory best left to the experts.
One item in particular jumped out at me. There is provision in the shareholders agreement for a “bad” leaver to have his/her shares bought out by the other shareholders. The valuation of the shareholding uses the same mechanism for a “good” leaver as for a “bad” leaver.
In this case, the largest shareholder appears to have breached employment law, the shareholders agreement and his statutory duties as a director!
It seems likely he will be a “bad” leaver.
I have not seen the valuations but I am sure the value of his shares will be quite substantial – even though he will be a bad leaver – so that my clients will have to find substantial resources to buy him out.
A provision for a bad leaver might well have saved my clients several hundred thousand pounds. I think the investment in the appropriate expert – a few thousand pounds – at the time of the merger might well have been worthwhile.
“If you think it’s expensive to hire a professional to do the job, wait until you hire an amateur.”
Red Adair