50% shareholder MBO

[Thenextstep202]

Hello,

Person A owns 50% shares in small business and is the only registered director.
Person B owns 25% shares along with her husband (C) who also owns 25% but is not involved in business day to day.
There is no shareholder agreement in place.

A & B run the business day-to-day with other employees.
They are paid the exactly the same.

Recent disagreements over the future of the business have arisen. A feels like their contribution towards the business is significantly more and that B is holding back growth, and it is unfair they are both renumerated the same. B disagrees. A wishes to continue forward without B.

A got a professional valuation for the company and offered the relevant amount to B & C each for their 25%.
This was rejected outright as being too low, but no other proper valuations have been put forward.
B does not want to wind down the company presumably as she currently has a very good deal earning the same as A but for much less work allowing her to also have another part-time income generating job outside of this company.

Can A resign as director and start up on her own, either retaining her 50% share in the existing business (and hence dividends) or ask B to buy her out at market value? Or alternatively if neither option is accepted, then the business is voluntary liquidated?

In reality without A in the business it will be very difficult to run without replacing her at a high cost as she had the required specialist skills to make the products, while B mainly deals with the more admin side of the business.

A, B & C have tried to discuss this but ended at an emotional stalemate.

 

[Lisa Thomas]

Yes she can resign but if A resigns and is the sole Director, who will be left to run it? Will B or C be prepared to step in as Directors?

It might cause her problems if she leaves it rudderless.

There's nothing to stop her starting another business (unless she is bankrupted in which case that could cause problems), and nothing to stop her setting up another company or companies, as long as she is not disqualified as a director.

Is the Company solvent?

 

[Thenextstep202]

The company is solvent yes. And no A is not bankrupt.
I assume B would step up to be a director if A resigned but I see that leaving it without an official director could cause issues.
A's preferred situation would definitely be to buy out B/C but her offer was rejected completely (they alluded to expecting 4 x the value which is ludicrous given the size of the business and the fact there are no physical assets).

 

[brucegreig]

These types of scenarios always make me think of the dispute resolution mechanism known as a Texas Shootout. High risk, I've never actually seen anyone implement it, but here's how it works:

First step: everyone agrees to use the Texas Shootout mechanism

A offers a price to B.

B must sell to A at this price, unless ...

... B offers A £1 more to buy out A. If B does this, then A must sell to B at that price.

So A must pick a price which they think is a reasonable valuation. Pitch too low, and they risk having to sell their own shares at that low price.

High stakes. Feels very risky. But does elegantly avoid any argument about what a reasonable valuation is.

But you have to get everyone to agree to follow this mechanism first.

(I realise I am not answering OP's actual questions - just adding some more thoughts)

 

[IanSuth]

other option is you agree to a buyout a the average of 2 independent valuations and parties pay equally for both valuations (so person valueing owes all an equal duty of care)

 

[WaveJumper]

Yes you could go down this route

“Can A resign as director and start up on her own, either retaining her 50% share in the existing business (and hence dividends) or ask B to buy her out at market value? Or alternatively if neither option is accepted, then the business is voluntary liquidated?”

 

[The Resolver]

Yet another good example of why it is reckless to run a company without a Shareholders Agreement.

Firstly , if the company is left with no Director, then the Registar of Companies can stike the company off. The Secretary of State may firstly issue a Direction that a Director be appointed by the company within a time frame (up to 3 months) else the company and the last Director and others running the company (e.g anyone who can be termed a shadow director, (possibly B dependant on her tasks) ) can be charged with an offence.

One of the steps A could take as a Director is to approve a transfer of shares from A to 2 other persons on whose vote he.she can trust thus opening up the opportunity to pass Ordinary Resolutions by head count (hoping B and C are unaware of the rule to call for a Poll in order for share percentages to be the factor.)

One of the Resolutions A can consider is to appoint a replacement Non Executive Director on whose vote A can rely thus freeing A up to resign and start a competing business.

Secondly, how is B being paid? Is it salary or are interim dividends being issued? If salary then A as sole Director can terminate her employment (after going through a fair process focused on inadequate time spent in running the business.) You may need to plan this out with initially raising her poor performance level, Deal as if a non shareholding employee with meetings to hear her response , appeal etc. Of ocurse if B is spending significantly less time than you, then your time may become the greater to justify increasing your salary.

Faced with no job she may then be more prepared to agree a sale and full exit. She will have to take on board that she cannot force any dividends to be issued, being left only with the option to spend a lot of monies in a minority shareholder court action.

As to valuations, was the one obtained a market valuation based on what a third party may pay to acquire the business or just an internal book valuation intended just to give the owners a general idea of profitability and asset value,

If B (and C) are gentuinely prepared to sell then you can all try and agree through blind bidding offered by Smartsettle ONE (interest declared as an advisor to the company). See video here The example is of a tenancy deposit dispute but it can be used for reaching an agreement on any matter whether a dispute or simply reaching agreement on a ;business deal. There is no charge save if agreement is reached, (incidentally the system just won a licencee an investment on the French version of Dragons Den).
.
Hope this gives A some ideas for a strategy. He/she can always book in to a free advice call to raise any queries.