selling a company

Is Shareholders Approval Needed to Sell a Business?

Linkilaw Business Structures

With so many interests to consider when selling a company, it can become a complex affair. However, the most important interest to consider is that of the shareholders as the company cannot be sold without the stockholders’ approval first.

The Rights Of Shareholders

Shareholders have certain rights and privileges due to their part ownership of a company. 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. These rights and privileges, also mean that the board of a company cannot go ahead without their approval. In fact, the board merely represents the best interests of the shareholders.

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

“The rights of shareholders can be limited, modified or waived. However, shareholders cannot be financially liable for more than the amount unpaid on their shares. Shareholders can agree with the company and/or between themselves that their rights are restricted.” – Spencer Summerfield, Head of Corporate at Travers Smith

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.

Shareholders’ Agreements And How They Affect Selling A Company

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

Generally, such agreements are created when you first become a shareholder of a company since many businesses 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 shareholders’ 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 counteroffers 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 sell 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. In this case, it can be very helpful to be assisted by a lawyer. 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, book a call with our legal team and we’ll answer all questions you may have.

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