The sale of a private company is a complex affair, as there are many different, often conflicting, interests involved. However, the most important interest to consider is that of the shareholders because the company cannot be sold if all the shareholders are not in agreement and do not approve the sale. In other words, all shareholders need to be on board with the sale in order for it to be consummated.
Shareholder unity can become particularly complicated when the company is a widely-held, privately-held company in which there are multiple stakeholders involved, perhaps even multiple generations of the same extended family, all with widely varying objectives (more below). From the buyer’s perspective, they need to know that the sellers have cut their “internal deal” before committing the time and expense to the buying process. Said more directly, prospective buyer(s) need to know that the seller’s spokesperson can “deliver” all of the sellers at the closing, provided that the terms of the transaction are consistent with the internal deal. Buyers will evaluate whether the shareholders will follow through (why is the company for sale, etc.) since there is an opportunity cost and a real cost to the buyer for a dead deal.
Likewise for the seller, there are real “costs” to the company if the deal fails because the shareholders were not in agreement to follow through with the deal. Specifically, the shareholders and management will incur needless distraction from the transaction and the company’s day-to-day operations could suffer, resulting in a decline in operating results (as well as valuation). There is also a large, needless risk that employees and/or other key constituents could find out about the pending transaction.
When the shareholders have contrasting objectives, those differences can cause potential kinks in the deal that need to be addressed before commencing a sale process.
Those contrasting objectives can be as simple as one shareholder believes that they are entitled to a disproportionate share of the sale proceeds or they should be paid a “deal bonus” for their effort to sell the company on behalf of all shareholders. Contrasting objectives can also include ongoing employment opportunities post-closing for certain shareholders or the continuation of certain benefits.
Take, for example, the recent sale of a multi-generational family business. It was clear that the father was not on the same page with the rest of the family with respect to certain aspects of the sale of the company. In a situation like this, it is critical to have a formal, written understanding among all of the shareholders that if the buyer proposes certain minimum terms – to which all of the shareholders must agree in advance – that they will follow through with the sale. In this case, the family resolved the conflict by entering into a simplistic agreement that delegated the negotiating authority to the father to enter into a transaction only if it met all of the minimum requirements.
These agreements are often termed a “memorandum of understanding” (“MOU”). The MOU outlines the guidelines for a potential sale, from who has decision-making authority, to whether or not that authority can be delegated, to the minimum sale price, to the division of proceeds once the sale is complete, as well as other unique terms. All of the shareholders must be in unanimous agreement for the MOU to take effect, and the MOU itself often has a finite period in which it is in force. A MOU is a method to assist in developing a consensus among the shareholders, and ultimately, make it easier to achieve the sale of the company.
In situations where shareholders have divergent interests or cannot get along, they also have the option to appoint a special committee to represent them. The special committee is authorized to negotiate the sale on their behalf, subject to specific terms that are decided upon in advance (MOU). When there is a rift among the shareholders, the sale of the company can be as contentious as a divorce, so it is critical to finalize the “internal negotiation” first before negotiating with the buyer(s) to ensure that the required sale terms are not a moving target, and that the special committee can determine early on if the required sale terms can be achieved. It is important to remember that, as with any deal, it can take time for all of the parties to agree on the minimum transaction terms, so patience is a virtue. That said, the time spent negotiating the internal deal is well worth the effort.
In an ideal world, the “perfect” sale is one in which all of the shareholders achieve their desired objectives and sell the company to the “right” buyer at the “right” price and terms. Achieving consensus among the shareholders prior to entering into a sale process facilitates the sale process so that the sale does not get “waylaid” at the 11th hour by divergent interests, and ensures that all of the shareholders’ objectives are satisfied.
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