Since litigation is so expensive, when a shareholder dispute arises, talks about the minority shareholder being bought out often happen before attorneys even become involved. Often a client will come in with an offer in hand, or even a fully negotiated deal, asking for me to “write it up.” But what happens if you only have a handful of the documents necessary to value the company? How can you assess whether the other side’s proposal is a low-ball offer or a good faith attempt to pay you what your shares are worth?
Every company is different, every shareholder is different, and every circumstance is different, but there are general rules that usually apply. More often than not, minority shareholders want to be cashed out because problems with the majority shareholders have caused an erosion of trust. So, if trust issues have led you to want to be bought out, why would you suddenly trust the other side in buyout negotiations?
If you are, for example, a 20% shareholder, why should you not be entitled to see all of the documents that the 80% owners have access to? If you were purchasing a company, you would want to see all the books and records of that company in due diligence in order to arrive at a fair purchase price. Why should the process be any different if you are selling? This is especially the case when you are selling, at least in part, because of the historic lack of access to financial information.
Perhaps most importantly, the financial records may reveal transactions you previously never knew about, that give you substantial rights. What if the majority owner has been paying himself three times what he told you he had been receiving, and three times what the job is worth on the open market? You might be entitled to significantly more than simply the value of your shares. Also, that overage should probably be considered when valuing your interest, meaning that a third-party buyer would reduce salary to market rate, leaving more profit in the company and making it more valuable. So, shouldn’t it be taken into account in the valuation of your shares?
When you think you have a good deal in place, but it was negotiated in the absence of information, stop and ask yourself – why wouldn’t they give me full access to the financials? What are they hiding? Why should they have information that I don’t?
Any client who negotiates on less than a level playing field is taking a significant risk that the result will also be less than fair.
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