Shareholder Disputes: Managing Shareholder Buyouts and Exits – Episode 3

In this third and final episode of our Shareholder Disputes series, we move from prevention to resolution—exploring what happens when a founder’s exit becomes unavoidable. We break down the practical mechanisms for buying out departing shareholders.

Join hosts Stuart Mullins, Corporate Partner at Clarkslegal, and Nicky Goringe Larkin, founder of Goringe Accountants, as they provide practical guidance on: 

• Navigating the funding challenges of share buyouts after disputes
• Understanding company share buybacks: legal requirements, financial constraints, and the importance of expert advice
• Exploring alternatives when buybacks aren’t viable, including personal funding by remaining shareholders and structuring payment terms and security to include Employee Ownership Trusts (EOTs)
• Practical tips for ensuring smooth exits and maximising value for all parties

 This episode offers actionable insights for founders and shareholders navigating the complexities of business separation.

 To discuss any of the topics from this episode, please reach out to Stuart Mullins or Nicky Larkin—they’re ready to help.

Transcript

Stuart Mullins   00:05
Hi everybody and thank you for joining us in the 3rd and final podcast, around our theme of shareholder exits and shareholder restructurings. I am Stuart Mullins, I'm a corporate partner at Clarkslegal and I'm joined by Nicky Larkin, the founder of Goringe Accountants and Business Advisory. Hi, Nicky.

Nicky Larkin   00:31
Hi Stuart, good to see you.

Stuart Mullins   00:34
Likewise, likewise. Well, Nicky, so by way of a recap, we've had two podcasts in the series so far, and we would encourage you, if you haven't, to have a listen to them. I think when we talk about shareholder disputes, you've got to think a little bit wider as to not just you know, people falling out. But there's a number of reasons that can give rise to an issue where the exit of a founder and therefore share transfers and value transfers need to be having regarded to. In our second podcast, we talk very much around how you might avoid a shareholder dispute. And that starts right from the inception of having a well drafted shareholder agreement in place that can support and deal with and contain blueprints for a number of exits and govern a number of circumstances where there might well be an issue. And today, I think what we're talking about, Nicky, is we're sort of assuming that the parties, if you, for want of a better phrase, through the worst of it, that they've, that the issue resulting in a founder or founders leaving has arisen. The shareholders' agreement has half worked in the sense that they've gone to the ADR or mediation provision, and they've agreed terms, and those terms for the purposes of this podcast are, there will be an equity split and by that I mean that one or two of our disgruntled founders have agreed terms on which they will leave the business, and in consideration for doing so that they will want to realise value for their shares, they will want the others to buy them out or the company to purchase those shares. Now, if you've listened to the first of our podcasts, you have heard me talk around valuation methods and compulsory transfer provisions that we can build into shareholders agreements. One of the things that shareholders agreements in themselves cannot necessarily deal with is the pot of metaphorical gold that is required to give people for their shares when they do leave. There are certain circumstances where it is possible to ensure, such as critical illness and death, but by and large, those remaining shareholders in the company does need to come up with the money to do the deal. So I think what we'll do, Nicky, is we'll talk about some of the typical exits that we've seen over the years and how they may work. I mean, one of the obvious ones is the company's ability to buy back shares, what we call off-market purchases of shares. Now, there are some tight rules and regulations around those, aren't there, Nicky?

Nicky Larkin   03:40
Absolutely. So it's not going to be suitable for all businesses. So what essentially you're trying to do is one or more of the shareholders' shares are being bought back by the company, but there's got to be sufficient reserves, etc., to do that. So, if you've got a particularly significant valuation or if your reserves are just very small, that may not be possible. But it is always worthwhile looking if that is a possibility because it does mean that it saves the other shareholders having to raise funds elsewhere by doing that. But caution, you need to make sure it's done properly. You'll need proper clearances. So you do really need to make sure you're engaged with an experienced tax advisor that can put this together and make sure that they get the correct clearances from HMRC.

Stuart Mullins   04:40
Thank you, Nicky. I think that's absolutely right. And one of the legal requirements is that the shares must be paid for on day one in full on completion of the transaction. And what that means is that all the money needs to be paid for on the share for the shares immediately on completion. You cannot use low notes, you can't use vendor or centre finance to get around that problem. There are certain structures that can be implemented that can assist, but by and large, unless there are, as Nicky says, sufficient distributable reserves on day one. A conventional off market share purchase is not generally not an option. Which leads us on to other options really. One is that the existing shareholders can raise their raise money through their own wealth through remortgaging or borrowing against their own personal assets and using that money to buy out the shareholders. And of course, if you were to approach that route, you'd be free to do so on whatever terms you agree with the exit shareholders. So, for example, you wouldn't need to necessarily pay for all the shares on day one. You could draw that out over a period of time. Now, if you were going to go down that route as a group of founders, you would probably need to offer those exiting shareholders some security, whether that's a charge over property such as a house or whether that's a personal guarantee or cross guarantees in the event that the shares can't be paid for as and when they should be, it gives that seller some protection. Now, in and of itself. where you've had an issue that's forced a separation of shareholders, that's often not necessarily something that founders can agree on, which I then think takes us to some sort of trade exit. those remaining shareholders to consider whether or not it's time to join forces with a competing or complementary business that can support in that exit. Nicky.

Nicky Larkin   07:08
Yes. So, the third-party sale can work very well. One thing with it, if it's done as a full marketed exit, it will hopefully ensure that the shareholders are maximising the value of that sale. So, which is obviously an upside, and potentially they may be able to push, depending on what their requirements are, they may be able to push to get a lot more of their money on day one. But again, that depends on the quality of the buyer and the quality of the business, of how much would be paid on day one. But the downsides of that are that, you know, it's very difficult to manage the timeline of that exit. Typically, if you're being really pushed to a very short turnaround, that can be perceived by the market as more of a stressed exit, or even a de-stressed exit. So which you don't want to end up leaving any money on the table because of it not looking so good. But typically, you know, depending on the sector, it could be anywhere between six months to two years. Hopefully, as long as the underlying reasons for the split can be kept under the rug until that point, hopefully, usually if they can see that there is that pot of gold at the end of the process, the shareholders hopefully will be willing to keep going until that point. But you just want to make sure that you've got good advisors around you, that it is going to be an exit that actually gets achieved.

Stuart Mullins   08:52
I think that's a very good point. If you are going to market and you're in these circumstances, whilst you may have resolved a lot of the issues that have given rise to that particular exit, buyers are, in my experience, quite wary about committing to a process where there could be some leftover. Acrimoniousness, I suppose, is the is the warning.

Nicky Larkin   09:15
Yeah, absolutely. I mean, I was working on one last year where there was a very keen buyer, but once he realised, or once they realised, because it was a corporate entity, once they realised that there were was disagreements between. The various directors, it was, you know, walk away because, you know, who wants to deal with that. So it's, you've got to be very careful.

Stuart Mullins   09:43
And I think also it's... I think absolutely, I think also the opportunity of a or the danger of a price chip becomes a very real risk when they understand that there are desperate reasons to exit certain shareholders. A bargain may well or could be had.

Nicky Larkin   10:02
Absolutely.

Stuart Mullins   10:03
The other option is, of course, go and talk to your incumbent banks, your institutional investors. It may well be that the performance of the business is such that they may well lend the company money some to facilitate that retirement from the founders. But always, always worth considering that, perhaps some third-party PVC or indeed high net support may well also provide an opportunity. I suppose the other areas, we've seen a bit of some topical discussion of them of late, given the recent changes in the last budget, employee ownership, Nicky, may well be an opportunity.

Nicky Larkin   10:45
Absolutely, because it may be that, you know, you've got a very solid business, you've got a great team there, but, you know, just because the shareholders aren't getting on anymore, if they step away, the employees may be very happy to take over the business and manage it. And so an EOT may be a very good option for a business. So this is definitely worth considering. As Stuart mentions, there have been changes in the tax for that. You only get 50% capital gains tax relief now, not 100%. But it still can be a very attractive, effective option. One, because it may give you more certainty on what you get for it. But also, secondly, you've got a bit more control on the time frame of the exit, especially if you're wanting to, you know, go in short term because you're not having to wait for your buyer to make up their mind, because you will have your trust set up and you'll be selling to that. So it is a valid choice for some business owners.

Stuart Mullins   11:58
Quite, Nicky. I think those that have the appropriate culture, the appropriate mass of founders and key team players to play their respective roles between the corporate trust, the board, it is always worth exploring as an option, as you say, not from a tax perspective, not as favourable as it once was, but still very, very attractive and appropriate for the right business.

Well, Nicky, I think that's a good place to pause today. Thank you. Thank you for your input today. Thank you for your input over our entire series on shareholder disputes, exits, where and what to do in the event of planning before there is one. Hopefully you've also gained some useful information as to what you could do whilst or some routes to solution in the event you do find yourself in an instance where you are looking to have to consider an equity reshuffle, for want of a better phrase. There is plenty of information on our website of articles that talk about various aspects of this. So, please do, if you would like further information, don't hesitate to have a look at our library online. And of course, do feel free to reach out to either Nicky or I with any questions, comments or observations that you may have. In the interim, thank you very much for listening and joining us. 

We do hope you follow this, these podcasts and this series useful. Until the next time. Very much, bye for now. Goodbye.

Nicky Larkin   13:56
Thank you, goodbye.