Interesting moral / ethical dilemma regarding 3 Directors

Steve Roberts · Feb 1, 2006

I'm currently in the process of selling a company on behalf of the vendor - we've got two offers and will have a third by the end of this week. The vendor is physically handicapped and will be totally incapacitated within five years - hence the desire to sell now. However, one of the potential buyers must have blabbed (despite signing a NDA) because three of the directors (of the selling compnay) have threatened to resign unless the vendor sells to them (by way of an an MBO). The price would be far less than to a trade/strategic buyer.

My question / dilemma: As a Director their primary responsibility is to deliver profits to the shareholder. As such, by threatening to resign, unless he sells them the company, are they breaching this code of conduct? I realise that whether they are or not probably doesn't matter - because in the real world the problem already exists. As such, I've advised the vendor (on general principle) to accept their resignations and replace them ASAP. At the very least we'll see if their bluffing. Personally, I wouldn't want to employ people who, in effect, "gang up and threaten me!" I've suggested that he uses his "angry energy" in a positive way by replacing the Directors with better people - (to hell with the previous Directors!)

However, I am aware that very often I react emotionally, and on gut instinct. Often it's right but sometimes I'm wrong. Hence this post - any other views?

Rob Holmes · Feb 1, 2006

Firstly - I always react quickly and strongly to ultimatums. Your client cannot afford to be held to ransom by directors.

Also the threatening directors may as well hand in their notice now as if they stay and the new owners hear about their actions the directors will either not be around very long or will have negated their 'power' position by backing down on this. Either way they lose.

Their role as directors is to act for the good of the company and this includes getting the best price if selling the business. They are already not acting in the companies best interests and IMHO could be asked to leave on these grounds.

By approaching the issue like this rather than attempting to discuss the possibility of an MBO they have jeapardised their own positions.

IF the business was to be sold through an MBO and it could be proved that the buyer who was under an NDA has let slip information that has financially damaged the company sales price the difference between the sales price and the MBO price could be recovered if you included the right clauses inthe NDA.

I'm not a legal bod BTW - I'm pretty sure there are other members around more qualified.

Rob

Steve Roberts · Feb 1, 2006

It's complicated by the fact you really don't want to lose key people just before a sale - and the three Directors know this. When I discussed the matter with the vendo it was clear that one Director is a bean-counter, so he's easy to replace (in fact he probably won't need replacing as part of a larger group). Another is the production Director - more tricky but quite replaceable. However, the big question is the Sales Director who has client relationships! Clearly, he, to my mind, is where we need to focus our energies.

Anyway, I've told the vendor to accept their letters of resignation to see if their bluffing. Then, I think, it might be a case of "divide & conquer". As such, we might have a quiet word wth the Sales Director and offer him some equity to hang about. However, we'll the hang the other gits out to dry!! Also, if we can get the Sales Diretor on side we can find out who breached the NDA and sue them for damages - it would be easy to prove substantial material losses as a result of the breach of the NDA. That's the plan at the moment!!

DuaneJackson · Feb 1, 2006

I'd suggest getting the directors in for a chat, individually and explaining the situation as you have done above and lay out the options for them.

Atleast from that you'll have a good idea as to wether the Sales Director can be won over.

DuaneJackson · Feb 1, 2006

On the topic of gut instinct - I often react on gut feeling. Often I'm right but occasionally not. Now I really try ahrd to sleep on any important decisions and get advice - but sometimes a quick reaction is needed.

Ian J · Feb 1, 2006

If you already have two offers on the table do the proposed purchasers actually need the existing directors as if not you may be saving some redundancy aggravation for the future by accepting their resignations now

Steve Roberts · Feb 1, 2006

Ian J said:
If you already have two offers on the table do the proposed purchasers actually need the existing directors as if not you may be saving some redundancy aggravation for the future by accepting their resignations now

As mentioned above, it would be prefereable to have the Sales Director in my view.

The real dilemma is the "perception" that the prospective buyers may get. One of the biggest things which effects price and saleablity is "perceived risk" to the buyer (low risk = high price and high risk = low price). If I were a buyer I'd be forgiven for being more than a little disconcerted at having 3 Directors all leave at once. As such, if we can reduce it to the two less important ones leaving, and then turn their leaving into a perceived benefit, it could work.

We'll need all our best powers of diplomacy when we meet the buyers and explain the situation - of that I'm certain!

Ian J · Feb 1, 2006

Sorry, I missed your second post. Divide and conquer seems to be a reasonable policy but much depends on what the company does and how it does it and what it is that the potential new owners want from it. They may be pleased to get shot of the bean counter so that they can replace him with one of their own without having to fork out for redundancy

winton50 · Feb 2, 2006

Thanks guys I'm so glad that you think a good management accountant is so easily replaceable!!!

MY tactic would be to choose the most replaceable and accept his resignation first then let the others stew a bit. It will divide the three and concentrate the minds of the remaining two.

Then have a discreet word with the buyers and see how much they want the incumberance of existing directors. If they don't then accept the other two letters as well.

no redundancy payments

'don't let the door hit you on the ar5se on the way out'!!!

crus · Feb 2, 2006

Hmm,

for me divison and conquer is pointless, this tactic will be seen through and succeed in demotivating or ego inflating anyone you keep.

For me there is an issue that the directors probably feel that they were hard done by as if the owner is friendly with them, it would possibly had made sense to be open and say the company may be up for sale if they were interested. instead they have been reduced to assetts and one or more are now pushing things out of hurt feelings.

The buyer who slipped on the NDA, how did he do this, was it deliberate, is he backing the directors? I would remove him from the picture, for the sake of clarity, court new buyers, have a chat with the directors and give them a window to raise the NDA guys offer before you then intiate the process of sale with another buyer.

This way everyone is working together again and if the directors don't have the backing they will realise that they want to keep their jobs, houses and cars for the interim at least. The seller still has all assetts intact and knows the market value.

D

Steve Roberts · Feb 2, 2006

Well it's all a bit "old news" now, with these things, and I do on average a deal a week, one has to move VERY quickly and VERY decisively.

Anyway, the "divide & conquer" strategy is working (or seems to be). As such, I'm relatively comfortable with the situation.

Steve Roberts · Feb 2, 2006

winton50 said:
Thanks guys I'm so glad that you think a good management accountant is so easily replaceable!!!

MY tactic would be to choose the most replaceable...

That would be the accountant.

SillyJokes · Feb 2, 2006

Ha, Steve, you are really having to earn your fee on this one aren't you! Bwah hahahahaha.

Isn't the point of a good business that it is one that can run without any one particular member of staff?

You gotta have ordinary people doing extraordinary things [/ends fake american accent]

Steve Roberts · Feb 2, 2006

SillyJokes said:
Ha, Steve, you are really having to earn your fee on this one aren't you! Bwah hahahahaha.

Isn't the point of a good business that it is one that can run without any one particular member of staff?

You gotta have ordinary people doing extraordinary things [/ends fake american accent]

Aye, I'm having to work for my crust on this one! Honestly, I could talk for hours about how deals have nearly fallen over. Not long ago we sold a "cattle grain" distributor to a large producer of cattle grain. Some of the monies was to be paid by way of an earn-out a year later, linked to certain performance criteria. The problem was the new owner wanted to replace the cattle feed with their own product. However, the vendor said "what if the cows donlt like the taste?" Clearly that would effect his turnover, profit and ultimately the earn-out. The buyer said, "well if the cows don't like the taste, then there's no point in us buying you".

The solution: We went to a local supplier, bought a sack of the buyers' branded cattle grain, went to a friendly local farmer (client of the vendor) and watched the cows eat the grain. Everyone was happy, so we concluded the deal. Had the particular cow turned his nose up to the food, no deal would have been achieved !!!

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