Understanding the Importance of Shareholder Agreements

Recently, the team at CreoValo was introduced through one of our financial advisor partners to a shareholder that owned a minority interest in a consumer food and beverage business.? The minority shareholder was?interested in selling his 25% position in the company. However, the company’s majority shareholders were not interested in buying the his interest in the business, nor were they interested in selling the company to a third party.?

Unfortunately, this situation is not uncommon, but what options are available to help minority shareholders create liquidity? In this article, we will explore one such possibility, a "Texas Auction," and provide some critical considerations when reviewing your company's shareholder agreement.????

What is a Texas Auction???

In general, a Texas Auction is a provision in a shareholder agreement that allows a minority shareholder to initiate an auction process by offering to acquire the majority shareholder's stake [by contributing the required funds in an escrow account]. If the majority shareholders choose not to sell it or their shares in the company, the majority stakeholders are obligated to purchase the minority shareholder’s shares at the offered price.??

This approach can create an attractive opportunity for a strategic buyer who has previously expressed interest in the company. If the majority shareholders choose not to buy out the minority shareholder, the strategic buyer can provide the necessary capital to facilitate the minority partner’s buyout of the majority.?

In the case of the minority shareholder in the consumer food and beverage business, CreoValo suggested the shareholder speak with a strategic buyer who had previously expressed serious interest in the asset. This strategic buyer could provide the capital necessary for a transaction if the majority shareholders failed to respond to the minority shareholder's request for liquidity at an attractive price.??

Key considerations for reviewing your shareholder agreement:?

If you are a minority shareholder in a private company, it's essential to review your shareholder agreement carefully to ensure that you understand your rights and obligations. Below are some key considerations to have in mind when reviewing your shareholder agreement:??

1. A provision for the divorce of a partner: This provision outlines the process for a partner's departure from the company in case of a dispute or irreconcilable differences.??
2. A plan for the worst-case scenario: A worst-case scenario plan can help you prepare for an unexpected event that could impact the company's operations or ownership structure.??
3. Share valuation: Share valuation determines the fair market value of the company's shares and helps in calculating the purchase price during a transaction.??
4. Operational control: This provision outlines the roles and responsibilities of each shareholder in the company's management and decision-making process.??
5. The buy-sell agreement: This agreement outlines the process for buying and selling shares of the company among shareholders.??
6. An exit strategy: An exit strategy outlines the process for exiting the company and includes options like an initial public offering (IPO), acquisition, or merger.??
7. Minority investors in private companies: Minority investors in private companies often face unique challenges, such as limited liquidity, lack of voting rights, and the possibility of being overruled by the majority shareholders.??

Conclusion??

As a minority shareholder in a private company, you have options available to help create liquidity, such as a Texas Auction.? Reviewing your shareholder agreement to fully understand your rights and obligations is crucial. Consider working with an experienced attorney to help you review your agreement and create a plan that aligns with your goals and objectives. By doing so, you can ensure that you are well-positioned to navigate any challenges and achieve your desired outcomes.?

DISCLOSURE:

The information in this presentation is not intended, nor should it be relied upon in any manner as legal, tax, investment, accounting or other advice, or making of any claim as to the past, current or future performance thereof, and CreoValo expressly disclaims the use of this presentation for such purposes.? Each recipient should consult with it or their own advisers as to legal, tax, investment, accounting or other related matters concerning any contemplated transaction.??

Securities products and services are provided through Foro Capital Markets, LLC (FCM), member FINRA and SIPC. This document is for information purposes only. FCM did not assist in the preparation of this information, and FCM makes no guarantees as to its accuracy and completeness or the reliability of sources used for its preparation.?

CreoValo works with certain investment banks that agree to share a part of their success fee with CreoValo if and when a transaction closes.?