Shareholder Exit: Advise on a £5million Deal

Posted by: Olexandr Kyrychenko
Posted in: Reading room
Date published: 26/01/2024

This case study examines a founder shareholder exit transaction in an industrial component manufacturing company, where we represented a 50% founder shareholder on their exit strategy and share sale. The case highlights aspects of corporate law, including share sale agreements, negotiation strategies, restrictive covenants, cross-jurisdictional issues, and warranty negotiations. Our team was instrumental in ensuring a smooth exit which protected our client’s future business interests.

Detailed Analysis

1. Share Sale Agreement and Exit Strategy:

Our client, a 50% founder shareholder founder, sought to sell his stake in the company to the remaining shareholders. The deal’s value was approximately £5million, paid in multiple tranches. The structuring of these payments and discharging of our client’s other obligations to the remaining shareholders presented significant challenges. Our primary objective was to secure the client’s financial interests, considering the staggered nature of the payment and ensure that the risk of non-payment or delay was minimised. After extensive negotiations, ironclad provisions were put in place offering extensive protections to our client.

2. Restrictive Covenants and Geographical Considerations:

A significant degree of thought was given to our client’s future business aspirations. Our client intended to establish a competing business in a different jurisdiction which would, in today’s global environment, compete directly with the company. Great care and attention was given to various undertakings and restrictions in the transaction documents to ensure that our client’s rights to compete were unfettered and yet the terms were agreeable to the parties. After lengthy negotiations, we were able to achieve our client’s goals enabling our client to engage in competition with the company.

3. Warranty Negotiations:

An exceptional outcome of the tenancy of our negotiation was securing minimal warranties on the part of our client, in particular as the remaining shareholders were fully versed in the company’s affairs as such any request for standard suite of warranties was entirely unacceptable to us and our client. Warranties in SPAs present potential risks to sellers, as they can lead to post-transaction warranty claims, an outcome which had to be guarded against. By securing minimal warranties being given by our client to the remaining shareholders, we ensured that such risk was as close to nil as possible, enabling our client to move on from the company without looking over their shoulder during the warranty period.

4. Cross-Jurisdictional Elements:

Our client’s competing business was established in a different European jurisdiction, adding a layer of complexity, in particular when taking into account potential future competition. This cross-jurisdictional aspect required careful consideration of different legal systems and their impact on the restrictions.

5. Governance and Director Matters:

Being a founder shareholder, our client was also a director of the company, which added further concerns. In the transaction documents were able to minimise any potential future liability which the company may seek to pursue our client for. The focus was ensuring that the exit strategy allowed our client to draw the line on his involvement with the company and protected them against any potential future claims, which is always a concern.

Conclusion and Key Takeaways

This case exemplifies the intricacies of a shareholder exit in a corporate setting, involving complex negotiations and legal considerations. The successful outcome – securing the full payment without any deductions or warranty claims – emphasises the importance of strategic planning and negotiation in corporate law. Key takeaways include:

Strategic Negotiation: The ability to negotiate terms that minimise client risks, particularly in transactions involving staggered payments.
Balancing Interests in Restrictive Covenants: Skilfully negotiating restrictive covenants that protect the client’s future business interests without reaching impasse with the buyer.
Cross-Jurisdictional Expertise: Navigating legal complexities in cross-jurisdictional contexts.
Minimising Warranty Obligations: Achieving minimal warranty obligations to safeguard the client post-transaction.

The successful navigation of this transaction demonstrates the importance of nuanced specialised legal expertise in handling shareholder exits, in particular where future business plans of the exiting shareholder are of note.

This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.