Selling Shares in a Private Company in NZ Amicably

7 March, 2019 | Wade Hansen

There comes a time in the life of many small privately owned companies when one of the shareholders wants to sell up. They might be retiring from business, moving out of the area, or wanting to free up their capital to invest elsewhere. Sometimes the business relationship has come to an end, and this may not always be a happy parting.

Most sales go through quite amicably, but there are things that the selling shareholder – and the other shareholders – need to know about the legal process to get a smooth outcome.

Section 149 of the Companies Act is probably the first issue to consider. It requires vendors to make a full disclosure of any material information they have about the company to potential purchasers.

They can be sued if the transaction proceeds and the buyer later finds out information which would have affected the purchase decision or the purchase price. This is very relevant if the purchaser isn’t an existing shareholder.

Getting agreement on the price of the shares being sold is usually the most difficult thing to do. And here it pays to have a good look at any agreement that shareholders have made in advance.

Usually such agreements cover matters like the rights and obligations of shareholders, how the company is funded, how it is run and managed (it might be run by some or all of the shareholders), how disputes are resolved, and in what circumstances the consent of shareholders to a course of action is required.

A shareholders’ agreement often spells out the sales process to be followed and how shares are to be valued.

For instance, the agreement might say that any sales being sold have to be offered to the existing shareholders first, and that the price will be determined according to a formula in the agreement.

There might be “drag along” or “tag along” clauses, which mean other shareholders can be obliged to sell as well, or that they can require the purchaser to acquire their shares.

Sometimes the agreement may say that if the other shareholders don’t want to buy out the shareholder who is selling, then the company will buy the shares and then cancel them. That’s now allowed under the Companies Act.

The company may well have to borrow money, or restructure its finances, or take other steps to raise the money, any of which may affect the value of the company.

The existing shareholders may well be worse off, or fear that they will be worse off, when a current shareholder decides to sell, and that can be a source of friction.

It is always best to try and negotiate an amicable agreement. If there is no agreed formula to determine the value of the company’s shares, there are experts in valuing private companies who can be brought in. Mediation and arbitration are also options, but all of these cost money and take time.

Another common situation is where there is a “buy/sell agreement” among shareholders. Typically this comes into play when a shareholder dies and their estate wants to sell.

Some companies insure for this possibility. Then the insurance company completes the transaction. The estate gets the value of the shares, but the company’s funds aren’t affected.

Selling to a third party outside the company is an option, and it does happen.

However buying a minority stake is not an attractive option for a potential purchaser unless they are also going to become involved in the business, and that means the other shareholders need to be on side.

There is nothing in law to stop a shareholder selling to a competitor, but this can be very disruptive.  The current shareholders may have to pay a premium to the selling shareholder to avoid having a competitor involved.

Usually the only real difficulty in shareholders selling out of private companies is getting agreement on the price. Once that’s done, the mechanics of a transaction are quite straightforward.

Essentially, the parties set a date for settlement, exchange shares and money, adjust the shareholders’ register accordingly, and life goes on.

The selling party does need to be aware of any restraints of trade that may be sought by the other shareholders, and to make sure that they are released from any security agreement or guarantees that they entered into as a shareholder.

As always getting legal advice before proceeding with a sale is sensible, because we are very well aware of the traps and pitfalls to look for. If you want to ensure your sale goes through amicably contact specialist business sale lawyer, Wade Hansen by phone on 09 837 6885 or email wade.hansen@smithpartners.co.nz