Shareholders who no longer agree on direction, dividends or succession are one of the biggest threats to a company’s value. There are ways to break the deadlock without going to court, and almost all of them involve someone leaving at a fair price.
Many family-owned and mid-sized companies begin as a partnership between friends, siblings or former colleagues. For years the partnership works. Then lives change: one wants to grow and the other wants dividends; one wants to sell and the other wants to hand the business to their children; one works in the company and the other does not. Disagreement sets in, decisions stall, and the company starts to pay the price.
The cost of a drawn-out dispute
A dispute between shareholders rarely stays inside the boardroom. Senior staff notice and start looking elsewhere. Banks become more cautious. Investments are not made because nobody approves them. And if the dispute reaches the courts, the company can spend years in limbo, with legal costs and a damaged public image.
In almost every case, the value lost during the dispute is greater than the gap between the shareholders’ positions.
The possible solutions
One shareholder buys out the other
This is the most direct solution: whoever wants to stay buys the stake of whoever wants to leave. The difficulty lies in agreeing the price and financing it. An independent valuation and a payment that is partly deferred or bank-financed solve most cases.
The company buys back the shares
Under certain legal conditions, the company itself can acquire the departing shareholder’s stake using available reserves. This requires careful legal and tax analysis.
An investor comes in
A financial investor or a family office buys the departing shareholder’s stake. The remaining shareholder gains a new partner, usually more aligned with growth, and the one leaving receives liquidity without depending on the other.
Sale to a third party
When nobody wants to, or can, buy, the solution may be to sell the whole company. With a well-run process, everyone receives market value, and the dispute is resolved by both leaving.
Splitting the businesses
When the company has distinct activities, it may make sense to divide it, with each shareholder keeping one part. It is a more complex solution, but sometimes the only one that preserves what each of them built.
The role of an independent valuation
The point at which almost every negotiation between shareholders gets stuck is price. The one leaving tends to value the potential; the one staying tends to value the risks. A valuation by a third party with no interest in the outcome — with an explicit method and assumptions discussed with both sides — does not eliminate the gap, but narrows it to a negotiable range.
It also helps separate two issues that tend to get mixed up: the value of the company and the personal grievances built up over time. The first is resolved with numbers; the second rarely is, and should not block the first.
Prevention is cheaper
The best solution to a shareholder dispute is a written shareholders’ agreement drawn up before the dispute exists. A good agreement sets out what happens when a shareholder wants to leave, dies or becomes incapacitated, when there is deadlock, and how the price is calculated in those situations. Many mid-sized companies do not have one, and discover its absence at the worst possible moment.
GestInvest acts as financial mediator and adviser in situations between shareholders: independent valuation, designing exit solutions, finding investors or buyers. Read more about our shareholder solutions and our corporate advisory work.
Frequently asked questions
Can a minority shareholder force an exit?
It depends on the type of company, the articles of association and the shareholders’ agreement. The law provides some exit mechanisms, but in limited circumstances. This point should be reviewed with a lawyer.
Who pays for the independent valuation?
Usually the company, or the shareholders in equal shares. When both pay, both trust the result more.
How long does it take to resolve a dispute like this?
With goodwill on both sides and an accepted valuation, between three and six months. In court, often years.
