In today’s economy the majority of individuals may seek to boost their income by investing in shares or may purchase shares in a company that they are involved with as an employee or officer. Where there are multiple shareholders in a company it can often be the case that you would then be considered a minority shareholder; this is a holder of a proportion of the total issued shares that does not give the holder control over the company.
Where a shareholder wishes to sell their shares, whilst they can put forward a proposed price for the shares, there is no guarantee that this will be the transfer price that they will receive. This is because, whilst a shareholder may sell their shares at any price to a third party outside of the membership of the company, pre-emption rights may often apply. These rights allow the other shareholders within the company to have a right of first refusal and the option to purchase any sale shares before they can be sold to third parties.
Documents that may include pre-emption rights would be the company’s articles of association or a shareholder’s agreement, these can also make provisions that dictate what the transfer price for sale shares will be. Such documents can be drafted, or later altered to include any provisions that are agreed between the relevant parties. Therefore, it is important to ensure that you are aware of any up to date terms in relation to share transfer and valuation.
A standard clause regarding share valuation and transfer price is that this will be the fair market value of the shares as agreed between the parties or, where an agreement cannot be reached, determined by the company’s auditors.
Minority shareholders must be aware that, when selling a minority shareholding, the determined ‘fair value’ of the shares may be significantly below what they are expecting. This is because a minority shareholding can be subject to an automatic deduction in price, which would not be applied to the sale of a majority shareholding. This is intended to reflect the lack of influence held by these shares as purchase of these would not automatically give the new owner any form of control over the company. The individual circumstances of a share sale will greatly affect how the deduction may be calculated, however in some cases, the purchaser may be able to purchase the shares at a 90% deduction and this will be considered ‘fair value’.
For advice on company documents and share sales please do not hesitate to contact 01302 341414.