There may come a time in a corporation’s life when it wants to do a forced buyout of minority shareholders. Let’s talk about that for a few minutes.
What Are Minority Shareholders?
A corporation issues “shares” of ownership. A minority shareholder holds less than 50% of the shares. Simple.
What Is a Forced Buyout?
A forced buyout happens when, for a variety of reasons, minority shareholders are forced to sell their shares. It can happen when a company is acquired by another either through a share purchase or a merger. The buying company doesn’t want all these shareholders hanging around. The sale can be held up by some minority shareholders trying to get more money for their shares than is being offered. If the bylaws properly provide for it, the minority shareholders can be forced to sell if the majority (or whatever required percentage) votes to sell. It’s called a “drag-along” provision.
Another reason for a forced buyout I just worked on recently: the majority shareholders (about 85%) were saddled with some minority shareholders from a previous owner that handed out equity instead of paying his debts. The new owners wanted to get rid of them for tax and administrative reasons. The Bylaws provided that the company could vote for a forced “redemption” (when the company buys back shares) and set a share price. All the shareholders agreed to the price, and accepted the buyout.
If the company has a “buy/sell” agreement, that’s a third mechanism to force a buyout of shares. Simply put, a buy/sell requires one shareholder to sell his ownership to another shareholder (or to the company) on the happening of an event. That event is usually the death or disability of the shareholder. It can also be something like if the shareholder gets divorced (don’t want the ex-wife getting awarded ownership!) or files for bankruptcy (you don’t want the other shareholders to be forced into business with unknown creditors).
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How Does This Process Happen?
Each business, and its needs, are different. In the two examples, you can see that in one case the business was being bought. The bylaws provided that all shareholders had to sell at the purchase price, or the deal would not go through.
In the second example, the bylaws provided that the Directors could force a redemption. They set out the reasons for the buyout in a Resolution, and implemented.
What If The Minority Shareholders Don’t Want to Be Bought Out?
Then you’ve got yourself a lawsuit, or the deal is killed or has to be modified. That’s another blog post.
Conclusion
Forced buyouts can go one of two ways: they can be easy and everyone is happy; or they can be nasty like a divorce. If you think that at some point your corporation may be in a position to require minority shareholders to sell, make sure your bylaws are airtight and that you go about it using the procedure set out in those bylaws.
For this and any other business law questions, call me at (312) 671-6453 or contact me at palermo@palermolaw.com.
In the meantime, check out these other interesting blog posts:
Board of Directors for Your Corporation: Statutory Authority