Shareholders at War!

Its just a matter of time before we see shareholders at war again, just like they were after the global financial crisis.

A classic case in point popped up in the High Court last month.

It involved a falling out between siblings. Basically, four siblings between them owned four companies. Three of the four ganged up and removed the fourth sibling (“A”) as a director of the companies. Naturally A took offence to that because his view was that the companies were not being well managed.

He asked the court to make a number of orders including:

  1. Reinstating him as a director
  2. Requiring the directors to obtain a business plan, a review of health and safety procedures, and a review of remuneration to senior staff
  3. Compensation to be awarded to him by those siblings who had received “inappropriate remuneration/benefits” from their positions
  4. Appointment of a majority of independent directors (in contract to the current position where only the siblings were directors)

His siblings basically sought to have A’s application thrown out because:

  1. The relationship between siblings had broken down, and was not recoverable
  2. They offered to buy A out at fair value, and that what they have offered is where the court would get to if they make an order anyway

The court agreed with the siblings. It pointed to a number of previous decisions which state that, provided the price offered is fair, an offer to purchase is an obvious and sensible solution. That a reasonable offer can cure “all forms of conduct that are unfairly prejudicial”.

The court also said that it will normally be reluctant to accept that managerial decisions amount to unfairly prejudicial conduct. In other words, the court was not about to unravel directors’ decisions and in fact noted that the remedy for a dissenting minority is not to prevent the majority from acting, but rather to exit from the company at a fair price.

There were a couple of points that popped up in this case which no doubt will pop up in the months ahead:

  1. Any offer to buy the other shareholder’s shares should be at a value that does not discount a shareholder’s minority interest
  2. Excessive salaries or benefits that have been sucked out of a company should be taken into account before fair value is assessed. In other words, market rates for salaries or director’s fees should be used, not inflated ones which would lead to an undervalue of the shares.

The take home message is this:

If you have a fight between directors/shareholders and you are in the minority, chances are you will either have to reconcile (if that is possible) or walk away with money in your pocket (at fair value). And if you are in the majority, it is going to be in your best interests to buy out the one who is not playing ball (at fair value).

The other thing I would say is that, if the situation is clearly irreconcilable, get it done! Quickly.

One final asterix: None of the above applies if the company is a dog and nobody wants to stay on. That could be the beginning of the end and, I hate to say this, but maybe you need to think about selling the business.

Live to fight another day.

We have done this before!

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