A critical element of having a shareholder’s rights protected is how their exit rights are defined. In a publicly listed company, an aggrieved shareholder can simply sell their shares through the Stock Exchange to quit their shareholding in the company.

However, it’s not quite so straightforward and simple for minority shareholders to dispose of their shares in a private company. This is particularly so if the company’s Constitution limits its shareholders’ ability to sell or transfer their shareholding.

Hence, exit clauses are commonly included in the Shareholders’ Agreement to enable all private company shareholders to sell their shares and quit the business in a way that is equitable for all the company’s shareholders.

Exit Strategies For Minority Shareholders

Are you a minority shareholder looking to sell your interest but struggling to gain agreement on an equitable price?

Have you got close to an agreement on price, only to have the majority shareholder opt out of buying your interest?

Then there are the complications that arise when lawyers get involved. You may discover proceeds from your sale are withheld to enable a clawback on warranties to be executed, leaving you exposed to not being paid in full?

What most minority shareholders want is to avoid having a potential argument dragged through the courts later in an effort to recover the funds owed to you.

There is another, more effective mechanism to allow minority shareholders to exit gracefully.

Is Liquidation An Option?

One of the main problems associated with negotiating the sale of your shares is damage to the value of your underlying business when your focus is not on the fundamentals. Profits suffer, key client relationships can be neglected and supplier relationships strained while you are disputing the value of the business in court it can decline precipitously.

One solution to resolve shareholder departures when a deadlock exists is to apply to the Court to have the company placed into liquidation, with an instruction from the Court that the liquidator be required to sell the business as soon as practicable and that the sale process is via competitive bids.

The liquidator prepares the required company documentation, advertises the business sale and negotiates with interested prospective buyers. During this time, it is business as usual commercially.

Existing shareholders have the opportunity to bid for the company during the tender process as can any other interested party. A purchaser is then identified and funds disbursed to the company’s shareholders upon settlement according to the shareholding percentage as mandated by the Court.

Court Liquidation is in an effective solution to an impasse between shareholders and can prove surprisingly cost-effective. Due to the Court’s involvement, the process is impartial and transparent. An alternative is shareholders agree voluntarily to appoint an independent liquidator.

Exit Clauses

Exit clauses are critical for shareholders, particularly for those minority shareholders who often don’t have the ability to contribute to the future direction of the company or who lack the ability to secure an enhanced sale price for their parcel of shares when they look to exit their shareholding in the company.

Incorporating effective exit clauses in the Shareholders’ Agreement, allows minority shareholders to exit easily. By mandating their fair treatment and maximizing their benefits in the event the majority shareholders look to dispose of their shareholding, an exit clause provides an element of protection for minority shareholders.

Final Observation

Prior to investing in a private business, it is sensible to review both the Company’s Constitution and its Shareholders’ Agreement. Ensure the exit rights of minority shareholders are adequately protected. Naturally, consult your lawyer about the adequacy of these documents before moving forward with your investment.

If you are caught in a company with shareholders disputing how the business is sold, a liquidation may be an option to consider. McDonald Vague have experience in liquidations in matrimonial disputes and where shareholders have reached an impasse.

Even in New Zealand’s currently comparatively benign economic conditions, some businesses inevitably find themselves struggling to survive. If you want your business to survive and then flourish, you need to put a business recovery plan in place.

Managing a struggling business is stressful and demanding on directors, management and staff alike. The thought of impending failure is emotionally taxing on all stakeholders. Gambling on the business’ success with money from your family or friends, or extending credit with suppliers just to get by is often a poor strategy. Hope is never a reliable method.
Moreover, the ethical challenges involved in risking other peoples’ money is a major stressor for most people.

Why Businesses Find Themselves Struggling

Businesses can often struggle when they grow beyond the directors’ skill set or their ability to control the business’ increasing complexity. Ill health can also pose problems for a business, as can losing interest in the business once the competition catches up or passes it by and the excitement of building something fresh and new fades.
Similarly, many businesses fall into the trap of relying too heavily on a single customer or supplier. Others find technology has eroded their competitive advantage or suffer from being poorly managed.

Corrective Action

Returning to a healthy, dynamic commercial standing requires a thoughtfully considered strategic plan of action. There are several short-term remedial actions which are often an option:

1. Identifying redundant assets and selling them off
2. Converting stocks to cash
3. Adopting a more aggressive recovery policy for debtors
4. Negotiating extended terms from suppliers
5. Exploring debtor factoring or looking at invoice financing options

There are also three well-established restructuring or turnaround options including hive down, compromise, and voluntary administration.

Hive Down

This strategy is appropriate where a struggling business is being restructured in the face of potential liquidation with a new corporate owner assuming control. The proposed restructure is pre-packaged and agreed with secured creditors prior to a formal liquidation process being initiated.

The problem business is sold to a new corporate entity at market value most often based on an independent market valuation. The trading name, associated goodwill and intellectual property is safeguarded. This may take the form of a sale to the failed entity’s current management team or its existing directors. It thus demands certain steps to be taken to avoid phoenix company issues emerging at a later date.

An arms-length sale by an insolvency practitioner following formal appointment to an unrelated third party where the director is not involved either in management or a directorship role avoids creating a phoenix company situation.

Company Compromise

This strategy falls under Part XIV of the Companies Act 1993. It is simply an offer to pay the compromised debt over an agreed time period and at an agreed rate. The debt involved is frozen at the date of the compromise agreement. This resolution requires agreement by the various classes of creditors and needs a majority of creditors representing 75 per cent of the value of each class of debt to agree.

This option provides breathing space for the company to turn its fortunes around while still being able to trade. The compromise manager may be involved in overseeing the trading on or hold a lesser position. The role is defined in the agreement and agreed by the requisite number of creditors.

Voluntary Administration

This option provides a struggling company experiencing financial difficulties with some breathing space. An externally appointed administrator reviews the business fundamentals and provides a report to creditors outlining a potential rescue plan together with a recommended course of action.

The outcome may take the form of a Deed of Company Arrangement (“DOCA”), the liquidation of the business or the return of the business to the hands of its directors.

A voluntary administration arrangement tends to benefit creditors, both secured and unsecured and often leads to a Deed Administrator managing the company for a set period of time through the aegis of a rescue plan.

A voluntary administration formally begins following the appointment of an administrator by a secured creditor, by the board, or as a result of a shareholder resolution. Voluntary administration is more expensive than a compromise model due to the mandated statutory compliance and reporting requirements for formal meetings and public advertising. For this reason, they are more suited to larger businesses.

Final Observation

Any business can find itself is troubled financial waters. The key to surviving and thriving is to identify a strategically solid path forward, involving some form of restructuring or combined with a hive down, compromise or voluntary administration solution.

NOTE: “Riot Foods Group of Companies” comprises:

Riot Foods Ltd, Riot Foods Trading Ltd, Riot Asset Holdings Ltd, Wholefoods Manufacturing Ltd, Edenz (NZ) Ltd Ltd (All Administrators Appointed) (appointed 4 February 2019) AND Poppy and Olive Ltd (Administrators Appointed) (appointed 5 February 2019)

Administrators are: Iain McLennan and Peri Finnigan

Creditors should complete a proof of debt and submit to the offices of McDonald Vague.

Extension of Time – Minute of Associate Judge RM Bell