selling a company

Stockholders Approval is Needed To Sell Your Business

Linkilaw Business Structures

Selling a company can be a complex affair and that’s because there are so many different interests to consider. One of the most important groups of people in any sales is the shareholders and in many cases, a company can’t be sold without shareholder approval first.

The Rights Of Shareholders

Shareholders hold certain rights and privileges due to their part ownership of a company when selling a company. Those rights and privileges often mean that the board of a company cannot go ahead and do whatever they want with a company. In fact, the board simply represents the best interests of the shareholders seeing as they are playing a big role in a public company’s very existence and growth.

Their rights extend into areas like voting in members of the board, transactions, buying assets, voting out directors and also approving the sale of the company itself.

Generally, whenever changes are sought to be made in a company, shareholder approval on these matters is a requirement first.

One of those areas is the sale of the company. Below, you’ll see the different ways that shareholder approval can be acquired before selling a company.

Shareholder Agreements And How They Affect Selling A Company

The easiest way to get shareholder approval for selling a company is via a shareholder agreement. Often, you’ll hear and read about terms such as “buy-sell agreements” or “forced buyouts.” These are both forms of shareholder agreements.

Generally, such agreements are created when you first become a shareholder of a company since many companies can foresee that there is the possibility of their business being sold or bought out later on. It also outlines what will happen in the event that the company may be sold.

Often, a shareholder agreement will also include in advance how the company will determine what a fair price is for shareholders that are forced to sell their stock. It will also detail areas like what kind of counter offers can be made by shareholders in the event that the company is being sold.

Bring-Along Provision Or Drag-Along Rights

This form of agreement occurs when a company forces its shareholders to agree to selling a company. However, for this to occur, the board of directors of a company or a majority of shareholders needs to agree to the sale. Once they agree, they are then in a position to force the rest of the shareholders to join in with the sale of the company.

Before such an agreement can take place, there typically needs to be a few areas that must be discussed first. One of those is the rights of investors, particularly major investors. Major investors want to have the most say in the affairs and running of a company so they want to be given the most influence and power. This means sorting out an agreement whereby they can have the most say in the sale of a company rather than the minority of investors that don’t pour as much money into the company.

A threshold for approving the transaction sale must also be negotiated, specifically, what figure constitutes a majority to force other shareholders to join in the sale. It could be anything such as 50% or two-thirds of the investors.

This tends to be a bit more of a drawn out process compared to a shareholder agreement and can sometimes drag on until a reasonable conclusion is met that satisfies all parties involved in the sale.

Mergers And Acquisitions When Selling A Company

A merger is when two companies are combined, usually with the goal of increasing the company’s profit and control over the marketplace. One company will seek to acquire the other company but rather than act as new entities, the acquired company will become part of the bigger company and operate under the acquiring company’s banner.

Before such a merger can take place, shareholder approval is needed for both companies. So both boards of directors of each company will seek to gain shareholder approval so that the merger can take place. Usually, this is done via the form of a vote and the board of directors will present their case to shareholders as to why it’s a good idea to merge with the bigger company.

The other way that a company can be sold is via a straight out acquisition. In this case, the buyer gets a majority stake in the company it’s seeking to buy. The key point with this one is that if the buyer happens to obtain a majority stake in the company it’s looking to buy then shareholder approval is no longer needed. That company can simply go ahead and buy the smaller company.

Each country and state tend to have a different jurisdiction for a mergers and acquisitions process so make sure you check in advance what your country’s laws and requirements are.

Closing: Selling A Company And Shareholders’ Rights

The above are the most common ways that a company is sold and each details the shareholder approval that is required to complete the transaction sale. More often than not, shareholder approval is an absolute requirement for any company to be successfully sold without any legal ramifications.

We know that it can be a complex area to understand so if you need clarification regarding anything to do with selling a company then book a free Startup Legal Session.

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