1 investor and 1 director 50% shareholding each advice please

1 investor and 1 director 50% shareholding each...

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Hi 

Theres a client of mine that is founder of a company

He won investment 3 years ago from 1 investor, under that agreement he has 50% of the shares in the company.

The business wasn't doing great in it's first 2 years of business, in fact loss making. 3rd year much better and now profitable. He wants to look at benefiting from dividends and taking on more staff. Yet, doesn't want to distribute dividends to the investor who actually doesn't get involved in the running of the business in any way shape or form. Was potentially looking at dividend waiver initially, but now he is now considering winding up the company or simply setting a new form up so he can benefit from 100% dividends and full control of that company. Got a call today and now a financial advisor is getting involved to 'work together' on this.

So my thoughts were  the options available to him are 

1. Carry on as is. 2. Hand back the investment or/and assets invested in the business and walk away 3. Set up a new form - but does option 1 or 2 as well

The ultimate aim is for the founder to get 100% control of the company and benefit from dividends. The company can offer many differentiated services which is why option 3 might be an option.

Can anyone provide advice / guidance here , am I on the right track ? I assume potential legal implications here also.

Replies (15)

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By johngroganjga
02nd Oct 2014 08:40

Is there a shareholders' agreement that regulates the terms on which one party buys out the other in a situation like this? Otherwise it's just a matter of making an offer to buy out the other shareholder and negotiationg a deal - isn't it?

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By secondgo
02nd Oct 2014 07:09

Hi there, yea theres nothing holding them back from buying back the other shareholder.

the money invested was used to build out a website (similair to people per hour) - he could I guess give this back (website development was capitalised) and any cash on the offer , and the offer made can be at any price right ?

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By secondgo
02nd Oct 2014 07:14

And also, with all the trouble that this man is going to (getting other advice and exploring other options - see point 3) this leads me to believe they want to walk away without spending a penny (either making an offer or otherwise). This makes me uneasy.

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Stepurhan
By stepurhan
02nd Oct 2014 07:50

What did investor do?

You say that the investor doesn't get involved in the running of the business. But would the now profitable company exist if they had not made an investment? If it wouldn't then I think the investor is entitled to some return for that, don't you? It sounds like you are trying to either just give them their money back or leave them worse off by winding up a company which, if it only just making profits now, is presumably currently in the red.

Make them an offer that gives them a return acknowledging the investment made the business possible. Trying to do anything else, with a 50/50 split of control, is likely to lead to a highly unpleasant legal battle.

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By johngroganjga
02nd Oct 2014 07:58

So no shareholders' agreement and no investment agreement?  If so that is surprising.

Not sure what you mean by "the offer made can be at any price".  This will be a negotiation. There is no point in your client wasting his time making an offer that any rational vendor would reject immediately out of hand.

Sounds like your client needs advice about how much it would be reasonable to pay, and how best to structure the purchase.

If your client walks away without doing a deal, and then sets up in competition with the company he has solicited the other shareholder to invest in, he is likely to end up in prison (I exaggerate, but you take my point).  How would you feel if you had been invited to invest in someone's company and as soon as the company became successful it was closed down for no other reason than that your partner did not want you to receive any return on your investment.  You would be round to your solicitor's office within five minutes wouldn't you?

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By Carl London
02nd Oct 2014 08:20

If there was paperwork perhaps there would be a non-competition clause which would preclude the guy from setting up a similar business within X months/years...

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By secondgo
02nd Oct 2014 08:24

There is a shareholders agreement , if I was unclear apologies. Going back to my point it doesn't stipulate (or say) the founder cannot make an offer to the investor.

You guys are right, I said right from the outset to the client what he's thinking of doing may have legal implications which could get messy.

I agree , he should put an offer on the table , negotiate it and agree it with the investor

Going back to the comment above. The investor has done nothing but invest funds into the business so management and operations day to day lie with the founder. The business however would have been profitable without the investment - the website part of the business is loss making , the other side of the business (agency) that the funds were not used for , is the part he is having success in.

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Replying to johnhemming:
Stepurhan
By stepurhan
02nd Oct 2014 08:50

Stupid move

secondgo wrote:
The business however would have been profitable without the investment - the website part of the business is loss making , the other side of the business (agency) that the funds were not used for , is the part he is having success in.
If this is correct, your client has been astonishingly stupid. He independently setup a second income stream, but decided that the company 50% owned by someone else was a good place to do it. This is when he should have set up a separate company, so the investor only had an interest in the part they had actually invested in. They didn't, and the investor having rights in connection with this second income stream is their own fault.

Whilst this would at least explain the desire not to give a return, you are still in a tough legal position. Like it or not, the investor has 50% rights in a business run through the company they own 50%. Any move to extract that business from the company, however you might justify it, is asking to be sued. Get some good lawyers on this and try to negotiate a good price for getting them out.

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By johngroganjga
02nd Oct 2014 08:34

The relevance of the shareholders' agreement it that it might have foreseen the very situation that has now arisen and spelt out exactly how it is to be resolved.

Saying that it doesn't stop one shareholder buying the shares of the other is not really the point.  What does it in fact say about the situation that has now arisen?

And, as pointed out above, is there a non-competition provision? 

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By mrme89
02nd Oct 2014 08:47

So director was happy taking the investors money when it needed funds (loss making position). But now it's profitable, he doesn't want to share the success with the investor.

If I were the investor and had taken the risk with a start-up and the company was now profitable, I would be looking to see a full return on my investment and make a profit.

Agree with comments above but I would add that any unreasonable offers made to the investor is likely to be challenged. Does your client have the funds to go legal? Or would they try and find another mug, I mean investor to inject more funds in to the business?

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By secondgo
02nd Oct 2014 09:12

Yes guys, agree with you, and yes he was stupid or naive should I say.

He probably does have the funds to go legal and I have strongly advised he use their services because of the implications this may cause and because I'm no legal expert.

While it doesn't explicitly state the exit terms under the current situation it does say the investor must consent to any default or material change in the agreement. It doesn't have an anti-competition clause but most likely in any case the investor as you guys have rightly pointed out would be more concerned about getting a return.

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By johngroganjga
02nd Oct 2014 09:36

He doesn't need to go legal as there is, as yet, no dispute.  He should frame a reasonable offer, make it, and then attempt to negotiate a mutually satisfactory parting of the ways. Only if that attempt fails will there be a dispute.

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By secondgo
02nd Oct 2014 09:41

Yes your right , as mentioned in my post - he is exploring options . Thanks I think that's the plan of action / advice I was after. Thanks all as well

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By neileg
02nd Oct 2014 13:50

@secondgo

Just be a little cautious about getting involved. Who is your client? The company, the original shreholder, the arms length investor or some combination of the three? If there is a dispute, you don't want to be caught with a conflict of interest.

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By secondgo
02nd Oct 2014 18:23

Yes agree , that's an inherent risk of working in the smaller end of the market , we work with small innovative start up companies . It's more personalised than it is working in a bigger firm. I havnt been afraid to push back though because I care about my profession , what I do and the advice I give.

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