Article written by Andre Bresler (Managing Partner – Benchmark International -South Africa)
Finding mutually beneficial outcomes in the face of mutually destructive alternatives.
Shareholder disputes are as commonplace as domestic divorces and – like family law – company law has clear mechanisms that define the boundaries of fair play.
The correlations between domestic and shareholder divorces are innumerable but the ramifications of such disputes are far greater – work families are larger than domestic ones, and the sums of money involved often staggeringly different.
Irrespective of the reasons why the parties have grown apart, the difficulties in finding a non-litigious and amicable parting of ways are numerous. The shareholders in private companies rarely have the will or risk appetite to incur debt, or resources at hand, to acquire the interests of their partners. Emotions run rampant as each party belittles the other’s contribution to the success the business has become, and the contest quickly degenerates into a lose / lose situation with the victor merely laying claim to the lower quantum of loss.
From an M&A perspective, shareholder disputes represent their own challenges, but equally present themselves as rare opportunities, as deal cycles can be much shorter than the average given the common objective to achieve a speedy resolution.
The available pool of prospective purchasers is typically larger for transactions conducted as a consequence of shareholder disputes. Aside from the array of strategic investors that can be targeted one party invariably wants to remain involved in the business, whilst the other wishes to leave. Such continuity presents a low risk to private equity investors and provides shareholders with a very viable class of alternative acquirer.
If the shareholders agree to pursue a transaction with a third party, there can be quantifiable benefits for the remaining and departing shareholders alike. For the remaining shareholder it removes the burden to raise the capital to acquire the equity and, equally importantly, provides a fair value for a departing shareholder. The price achieved is based on the fundamentals of the business in an open market circumstance, as opposed to being constrained by the affordability criteria of the remaining shareholder. Oftentimes the business grows as a natural consequence of having access to additional funding, acquirer synergies and a newly focused healthy work environment.
The temptation to gain personal advantage in such emotionally charged shareholder exit discussions is not uncommon and can prove to be a barrier to engaging in a formal and fair process as one partner seeks to marginalize, or even punish, the other. It is in these circumstances company law is remarkably similar around the world and conduct that unfairly seeks to advantage one party over another is dealt with under the oppression remedies. These laws and remedies vary little in jurisdictions as far afield as the USA, Europe, or South Africa where the law seeks to discourage and prevent such abuses, especially as they pertain to minority shareholders.
If it gets to that the courts have a wide array of alternatives and significant discretion to deal with matters of this nature – the most commonly applied being the requirement that one shareholder purchase the other’s interests at an independently determined value. Where sanity does not prevail, and disputes degenerate to the point that a company is mortally wounded, or even ceases to exist, the harsh reality is that the courts still have – and do exercise – the authority to order a buy out at a date prior to the commencement of such oppressive conduct, should it be found.
Commonly cited precedence is that of the Scottish Co-Operative Society v Meyer in the UK, and of Louw vs Nel in South Africa, where the courts held that a winding up order was in itself “no bar to an order for relief against oppressive conduct being granted” It is in circumstances such as these that one party has been compelled to acquire the equity of the other, in a business that no longer exists, based on a value determined at a point prior to the commencement of the dispute – irrespective of the fact that the business has long since ceased to exist.With record levels of dry powder in private equity funds, and significant cash on corporate balance sheets, the benefits to both the shareholders and the business of initiating a formal and fair process with a third-party buyer to achieve a market driven, non-litigious and amicable parting of ways is far preferable to the alternatives described
About Andre Bresler:
Andre is the managing partner of Benchmark International. Benchmark International’s global offices provide business owners in the middle market and lower middle market with creative, value-maximizing solutions for growing and exiting their businesses. To date, Benchmark International has closed over 600 transactions in excess of $6B across 30 industries worldwide. With decades of global M&A experience, Benchmark International’s deal teams, working from 12 offices across the world, have assisted hundreds of owners achieve their personal objectives and ensure the continued growth of their businesses.