One way of dealing with difficult shareholder disputes is to have an independent party control and sometimes deal with the company assets, while the dispute is worked through.
This allows the parties to focus on the dispute without further issues arising from current trading. Such a reliable independent party is a liquidator (solvent liquidation).
We were appointed by the High Court as liquidators of a solvent company to resolve a shareholder impasse. Two shareholders owned 70% and 30% respectively of the company shares. The companies only asset was its ownership of all the shares in a trading subsidiary company. The directors were in dispute on the management of this company.
The liquidators needed to control the subsidiary trading company. The liquidators consented to becoming directors of the trading subsidiary company for an interim period.
The High Court Order was to realise the assets of the holding company by whatever method the liquidators deemed to be practical and, after the realisation costs, the distribution of excess funds from the sale were to be distributed 70%/30% to the respective shareholders.
Why the need for a solvent liquidation appointment?
The court appointed solvent liquidation was due to a protracted disagreement and dispute between the 2 directors over a period of about 3 years over how a wholly owned subsidiary company was to be run and that the business profitability was declining rapidly.
The main issues centred around:
1. The sales price that the subsidiary on sold its product to one of the directors own private businesses. One director who was not involved in the separate private business, believed the price that the product was on sold for was too low and did not reflect the true value of the product.
2. A disagreement as to how and when a large capital expenditure for a factory upgrade would occur to meet Food Safety Authority regulations. The upgrade required a significant capital injection and the patience of the Food Safety Authority was near an end. Potentially the factory may have been forced to shut down.
3. On closing the business a significant redundancy liability would arise as many employees had worked for the company for a long time. In addition, the Union collective pay agreements were well overdue for settlement.
4. The directors were in a deadlock and could not agree on a correct sale price of the product to a related party and the upgrade development to the factory.
Obtaining the best result for the Solvent Liquidation
The plan was to sell the shares in the trading subsidiary. After discussion with the shareholders, agreement was settled on tendering these shares on the open market as the preferred method to obtain the best price.
The sale of shares in the trading subsidiary would also require continuity of supply agreements of raw material product for the factory to be agreed.
The trading business was profiled along with financial information, advertised in local and national newspapers and also directly marketed to interested parties that were identified. The sale process was by way of a tender of shares.
34 expressions of interest were received, and 20 confidentiality documents were signed and, after discussions with the highest tenderer, a sale was concluded with the 70% majority shareholder.
Of considerable concern to the liquidators throughout this process was to ensure that the return back to the shareholders was maximized, and that tax implications were properly addressed.
The liquidators sought tax advice and two options were available:
1. A bonus issue of retained earnings in the trading subsidiary then sale of that company.
2. Or the preferred proposal was that 30% of the shares that the successful tender did not own of the shares in the company in liquidation be sold direct to the successful tenderer.
Thereby the 70% majority shareholder would acquire the 30% of the shares it did not own in the company in liquidation that owned all the shares in the trading subsidiary.
Option 2 avoided a significant funding arrangement being organised as the successful tenderer only had to fund 30% of the tender price. The payment would be a tax free capital gain for the vendor of the shares and have no downside for the successful tenderer.
The shareholder/directors and their advisors agreed to this proposal, and the liquidators applied to the High Court to have the share transfer endorsed as required by section 248 of the Companies Act along with an application to take the company out of liquidation. The court approved this.
The shareholder dispute was resolved, the 70% majority shareholder now owns 100% of the holding company who in turn owns 100% of the trading company and the minority shareholder received the best price for their shares on an open tender.
The application to the High Court to place the company into liquidation to resolve the director impasse resulted in a good conclusion to the matter for both parties.