Buying Minority Shareholdings

 

So what are your options when you have a person with a minority shareholding, working in your business, and you want to exit them? A 90% shareholder cannot simply force a minority shareholder to sell. Unless a formal takeover squeeze-out applies, the minority shareholder’s consent is required, and the price must be fair. This article assumes the minority shareholder works in the business, as this is where emotion and complications arise. 

 

The reasons to exit them can be plenty, but they have legal rights that you must be fully aware of. They can make life problematic quite easily, and ideally an amicable process is more favourable than an antagonistic one, and usually less expensive. 

There should be a shareholders agreement in place that should provide direction in this situation, and this is also layered with their legal rights, shareholder agreement or not. They also have employee rights. So seek legal advice. This article is not intended as legal advice, just a guide to anyone considering this course and what their options could be. 

 

 

An ideal outcome is a voluntary share purchase, as there is minimal recourse to a more formal legal route that can get expensive. How to exit them can be straight forward or not so straightforward. Regardless of the legal position of the respective parties, these key elements can lead to relatively smooth or fraught experiences. Maybe you buy their shares and they remain an employee? It happens. 

 

 

This will ultimately determine the value of the shares. And this is key. And a tough one to be scientific about. If the turnover is low and the profit is low, it is a pointless exercise running up expensive bills that outweigh the value of the shares. But valuations are not straightforward. Even with a relatively small business that for example had a turnover of £100,000 and a net profit of £15,000, a simple rule of thumb is multiply the profit by a factor of between 2 and 5, depending on the industry and the growth trend of the business. Throw in the fact the business relies heavily on the minority shareholder who would be expensive to replace, some assets and different income streams, and it soon gets complicated. 

 

So getting an independent valuation is a sensible choice and they can cost less than £500 for a small, simple business with low turnover and a simple structure, but can run into thousands for a larger concern that is more complicated. Remember, the minority shareholder also has the right to get an independent valuation. 

 

 

1. There can be a minority (lack of control) discount that reflects the inability of a minority shareholder to influence company decisions. 

The typical UK range is roughly 15%–40% and often it’s 20%–30% for owner managed private companies 

 

2. Lack of marketability discount that reflects how difficult it is to sell shares in a private company and the typical UK range is 10%–30% 

 

Discounts may be lower where minority shareholders have strong protections, such as: 

• Reserved matters or veto rights 

• Guaranteed dividend policies 

• Tag along rights 

• A clearly defined or imminent exit 

 

 

This is down to the key stakeholder/s to manage and steer the individual personalities/politics. It's normal for shareholders to wish, hope and convince themselves that a business is worth more than it actually is. An independent valuation will help all parties get past that emotion and should lead to constructive discussions about what both parties want their outcomes to be. 

 

 

This is an important element to look at objectively. The attitude of the minority holder towards the whole process does need to be assessed as does the noise and distraction the whole process can have on the business owner. The cost of a hostile process can be more expensive than meeting a compromise on a price, but every case is unique. Don’t let your heart rule your head. 

 

 

Make sure you are clear on your reason as this can also influence the price you are prepared to pay. I've come across many business owners who avoid the potential conflict and elephant in the room, and tolerate a minority holder. Sometimes this minority shareholder is actually holding the business back. You may have an individual who refuses to retire. Stay objective and you may also want to look at the HR route if things become untenable. But tread carefully and understand your red lines. 

You don't want is a minority holder working in the business, with shares, who is unwilling to sell or causing issues, when the majority holder is looking to sell. Ultimately they cannot prevent a business sale from going ahead, but they can make life difficult. That kind of dissonance would be a serious deterrent to a potential purchaser. 

 

 

The minority holder has two sets of rights if they work in the business. One as an employee and as a shareholder. Both must be treated fairly and delicately and obviously the shareholder agreement and other documentation needs to be fully understood. So ultimately the options are as below 

 

 

 

A 90% shareholder can offer to buy the remaining 10% directly from the minority shareholder. 

 

• This is entirely voluntary. 

• Price and terms are negotiable 

• The minority shareholder can accept, reject, or negotiate price and terms. 

• The majority shareholder cannot force a sale. 

 

 

• The company itself (not the shareholder personally) can buy back the minority shares, but: 

• The Articles of Association must allow it. 

• Shareholder approval is required. 

• The buy-back must be funded from distributable profits or new share issues. 

• A written buy-back contract is required. 

• Proper filings must be made with Companies House. 

 

Crucially, the minority shareholder must still agree to sell. 

 

3. Statutory Squeeze-Out Following a Takeover 

 

This is the only situation where a minority can be forced to sell. 

 

• Under Companies Act 2006 (sections 979–982), a shareholder who reaches 90% ownership through a formal takeover offer made to all shareholders may compulsorily acquire the remaining shares. 

• All of the following must apply: 

• The 90% was achieved through a formal takeover offer. 

• The offer was made to all shareholders on identical terms. 

• Statutory procedures and timelines were followed. 

• The minority shareholder has the right to challenge the price in court. 

• This does not apply where: 

• The 90% holding was built up over time. 

• There was no formal takeover offer. 

• The majority shareholder is simply seeking to tidy up the share register. 

• Pricing and Fairness 

 

Even where a squeeze-out applies, the price must be fair and consistent with the takeover terms. Minority shareholders can apply to court if the price is unfair. 

• In voluntary transactions, minority shareholders are entitled to seek an independent valuation and negotiate terms. 

• Protection for Minority Shareholders 

 

If a majority shareholder applies pressure by excluding the minority, withholding dividends, extracting value through excessive salaries, or otherwise acting unfairly, the minority may have a claim for unfair prejudice under section 994 of the Companies Act 2006. This often results in a court-ordered buyout at fair value. 

 

A 90% shareholder cannot simply force a minority shareholder to sell. Unless a formal takeover squeeze-out applies, the minority shareholder’s consent is required, and the price must be fair.