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Alex J.
Alex J., Solicitor
Category: Law
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Experience:  Solicitors 2 years plus PQE
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In a UK limited company we had three directors with a share

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In a UK limited company we had three directors with a share split of 42.5/42.5/15%, me being the minority shareholder. Financial year runs April till March. In April 2013 we accepted an offer for our company to be bought out by a larger company “ABC”. We got through Due Diligence and everything signed off. The valuation was X. Half an hour before the money transfer was contractually due, the buyer pulled out. The sale never materialised.

One month later I resigned as a director and left the company, keeping my shares. Towards the end of 2013 a suggestion is made for my shares to be bought by the two remaining directors. In weeks following, they suggest that the company’s value has dropped significantly since I left and they are only willing to pay ~5% of what I would have received had the sale to ABC company earlier in the financial year materialised.

Naturally, I object and wonder what they have (not) done in the 9 months since I left that devalued the company so much. Note the significance of the documented market-driven offer and advanced stage of selling the company, it makes for the ‘perfect’ true valuation as oppose to some auditor, accounting or formula based valuation.

Of course in buying back my shares they want a good deal. Of course in selling back my shares I want a good deal. They claim that me leaving caused the company significant distress and hence the devaluation. As far as I know, turnover and profit levels are as forecasted internally (down slightly) so a 95% drop in share value seems excessive to me.

I’m now looking to gain a stronger position in negotiating this buy-back. We are far apart in this valuation and our Articles of Association nor the Shareholder Agreement offers any guidance.

If they are honest in their valuation and the company’s value has slipped some 95% since I left, I wonder as a shareholder about them being fit for directorship, whether they have handled in the best interest of the company (shareholders) and to the best of their ability. Are they failing to meet their responsibilities as directors? Abusing their position to push down the value, attempting to get my shares on the cheap for the value to then magically rise again? Unfair Prejudice comes to mind.

I understand valuing shares can be a difficult task. I also understand there may be ramifications for being a minority shareholder though during the almost-sale of the company it was always verbalised and documented I would be paid out proportionally. Again, the Articles of Association nor the Shareholder Agreement stipulate any buy-out rules. But compared to other shareholders, at least I have a documented, market-driven, third-party (broker) verifiable company valuation which is 20 times higher than what the buy-back offer is, all in the same financial year.

Where do I stand with this? So far they are willing to stretch to 10% of X with a vague promise that if the company sells in the next 3 years, they will honour a further 40% of X. I would accept around 50% of X but need some expert tips on getting them there… It is not a big enough sum to warrant litigation costing high 4 figures or up. That’s not a route I want to pursue. A low 4 figure mediation service may be worth it, but first I want to know which parts are in my favour and which are in theirs.

Alex Watts : Hello my name is XXXXX XXXXX I will help you with this. Please note that I am a working Solicitor and may be on and offline as I have to attend Court and meet with clients, even at weekends. As such you may not get an instant response when you reply, but rest assured I will be giving your question my immediate attention upon return You do not need to wait here as you will get an email when I reply.
Alex Watts : Who has valued the current business please?

Hi, it was valued by a UK based PLC who had made the final offer, through an independent broker, we accepted. As explained, they subsequently pulled out at the final hour, literally. I mentioned this as in my eyes it seems like a true market valuation as oppose to some accountancy based rule-of-thumb. A valuation the then-fellow directors fought hard for so it's ironic they now value it themselves at 1/20th of that. Let me know if you need any further bits of info. Thanks.

Alex Watts : Have you had your own valuation please?

Hi, no, no further independent valuations if that's what you mean. As far as my own personal views on the valuation, yes I have some idea of this. As hinted in the initial text, April last year we would have sold for X, the buy-back is 5% of X, I would personally accept around 25% of X just to be over and done with it all. For years they've undervalued my contributions so granted, without me, unless they've raised their game significantly, they will have had an 'aha' moment, 'so this is all the shit he did for us to be so successful' so true, without me, it's all worth less. But not less by *that* much because of the recent true near-buyer valuation and because I left it in good shape and the remaining directors aren't exactly inexperienced numpties so if they chose to be well-behaved hard-working directors then they will have had ample opportunity to reach our forecasted revenues and profit levels. If they carried on as disinterested as they were when I ran the show, then it probably has crumbled. But that would be neglect of their duties which I as a shareholder surely have a right to criticise.


Is Unfair Prejudice a reasonable conclusion hence? If so, rather than suing (which probably isn't worth it), I can at least wave that flag/make that 'threat' to try and reach a more fair value valuation. After all, what I'm happy to walk away with is still some 75% discount on what I would have gotten had this PLC not pulled out at the last minute last April. But with their ability to outvote me on everything and maybe even considering winding up the company and transferring the assets to some new Ltd, I'd consider a settlement and be free of this dead weight situation.

Alex Watts :

Yes you could waive it.

Alex Watts :

This beyond my area so I will opt out and allow another to answer it


OK Thanks. On my side it shows as Answered, with you assigned to it. Hopefully someone will indeed carry on from where you left off soon. Appreciate you taking the time to see whether you can add value to this or not.


Thank you for your question.

My name is XXXXX XXXXX I am a company law expert.

I will assist you with this.

What does the shareholders agreement say about the obligations of the shareholders to act in the best interests of the company?

Does the company have any underlying value whether it be from assets or potential future revenue? Does it have any debts?

Personally I would not pursue the unfair prejudice route. An unfairly prejudicial act under S.994 of the Companies Act would be if they for example issued more shares with the sole purpose of diluting you or stripped value out of the company and started hiving the assets to a new company. This is notoriously difficult application to prove and really is only a last resort.

What springs to mind for me to solve this would be:
1. Appointing an independent valuer; or
2. If the issue is cash flow, you agree a price and then they pay part cash now and pay the rest via preference shares or give you a debenture over the company assets until you have paid.

Ultimately if they have been mismanaging the company they maybe liable personally to the company under S.172 of the Companies Act 2006 for breach of director duties or contractually liable under your shareholders agreement.

I look forward to hearing from you.

Kind regards

Customer: replied 4 years ago.

Hi AJ,


Thanks for picking up on this.


As far as I can tell, there is no Shareholders Agreement. I only have a copy of the Articles of Association and understand a Shareholders Agreement is no legal requirement. I don't remember ever seeing or signing one myself either and given our/their style of business, I'd be surprised if there was one. So no SA.


The rest is to my most recent knowledge at the start of financial year 2013-14 when I was still involved. Perhaps it has changed but until the new annual reports are in, I have no way of knowing.


No debts to speak of. It's 'just' a medical distribution company so in terms of assets, no great deal involved like significant IP, no property or machinery owned etc. A database of customers, a reputation etc. sure, as well as some small NHS tenders won (no firm commitments from the NHS part though to actually buy). So no significant assets to speak of.


Cash flow does play a role as they offered me instalments of about 2K a month up to the total they had offered.


They've not made clear whether it's the company offering to buy back the shares in a company buy-back deal or (one of) the individual directors seeking to have the shares transferred. I understand there is a slight difference procedurally and perhaps tax-implications, capital gains tax etc. I don't know whether this has any bearing on my potential strategies.


The irony in all this is, if the value really has tanked 90% just because I left, it shows they value me at 90% of the total company value! They should have thought of that earlier then... But yes, I was valuable or even instrumental given their notable absence but that doesn't change the fact the company makes a certain level of turnover and resulting profits which continued (i've seen it) after I resigned. And they are responsible for keeping up the performance, not me.


I'll check the Company Act references you've kindly given. If you have any further thoughts based on the above, or additional questions, I'm all ears.


Thank you.

The nature of the purchase will only affect you as follows:
1. If it is a company buyback it will have to be a buy back from capital if the company has no distributable profits - this means the directors will have to follow a set procedure which involves notifying the creditors, advertising the purchase and obtaining an auditors report. This takes a minimum of 6 weeks.

2. If they purchase the shares in their own name then they will have to use their own funds.

If you did not have a shareholder agreement they cannot force you to participate in the company, so yes the obligation to act in the company's best interest lies squarely on them. If they have breached these obligations (see s.172) then you might be able to bring a derivative claim against them and hold them personally liable under S.260 of the Companies Act.

Personally I would see if you can explore other methods for example agreeing to appoint an independent valuer which you will all be bound by and then maybe shifting some of your shares from equity to debt or to preference shares so that any payments you receive are staggered.

I look forward to hearing from you.

Kind regards

Alex J., Solicitor
Category: Law
Satisfied Customers: 3843
Experience: Solicitors 2 years plus PQE
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