Minority shareholder buy out

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Gannons worked on securing the best possible financial deal for the shareholder in a publishing company. She planned to retire at the same time as a large multinational company was buying the business.

Our client was a founder, minority shareholder, director and employee of a publishing company. After 10 years, she gradually reduced her working hours in preparation for retirement. A large multinational sought to acquire the business. We advised her on the sale of her shareholding and the tax implications.

Client’s shareholding

We had initially advised our client in connection with a shareholders agreement and new articles of association when a third party investor joined the company. We ensured that those documents contained several favourable clauses for our client. These prevented our client’s shareholding from dropping below 5%; confirmed that our client’s shares were full voting shares; and finally ensured our client would remain a director of the company.

We also advised on the company restructuring which involved amendments to the share capital to cater for different classes of shares.

Ensuring minority shareholder rights

It was important to enshrine into the corporate documentation that in the event of a sale, any minority shareholder will receive the same consideration as any majority shareholder.

Our client was aware that the articles of association included drag along rights. These could force her to sell her shares at the same price as every other shareholder. She was also keen to ensure that the sale documentation (including the share purchase agreement) fully protected her rights. In addition, our client wanted to structured the transaction in the most tax efficient way possible for her.

Complicated earn-outs

The sale of the shares included an initial payment in cash upon completion. Provided that certain conditions were satisfied, then further payments would be made on the first anniversary of completion . This is what is known as an “earn-out”.

Entrepreneurs’ relief

We advised our client that she would qualify for entrepreneurs’ relief on the basis that certain conditions were met throughout the one year period ending on the date of the sale. We had assisted our client in attaining these conditions in the earlier shareholders’ agreement and articles of association.


Namely these were firstly that the target company is a trading company (or holding company of a trading group). Our client then had to hold at least 5% of the ordinary share capital of the target company entitling her to 5% of the voting rights. Finally she is an officer or employee of the target company (or one of the companies in the group).

Tax on earn-outs

The position regarding the earn out consideration qualifying for entrepreneurs’ relief was more complicated, particularly given the one year holding requirement. We therefore negotiated with the buyer to structure the consideration in such a way as to enable our client to benefit from entrepreneurs’ relief in respect of the earn-out consideration as well as the initial consideration.

Warranties and indemnities – trade sale

The share purchase agreement contained a number of warranties and indemnities. We negotiated with the buyer on the basis that our client was only a minority shareholder in the company. Bearing this in mind, we got the buyer to agree that not to require our client to give the warranties and indemnities on a joint and several basis with the other sellers. Thus, her liability would be limited to the maximum amount of consideration she was receiving under the share purchase agreement.

We reviewed the warranties and disclosure letter with our client. This ensured her familiarity and acceptance of the warranties given and the disclosures made.

Restrictive covenants

We also advised our client on restrictive covenants which the buyer required in the share purchase agreement. Our client was due to be retiring and had no intention of setting up a competing business. Therefore, although the restrictions were prohibitive in this case, this would not be a problem for our client. Hence we did not spend time negotiating the specifics of the restrictions. In different circumstances, however, the restrictions can be important.

  • It was great working with Gannons again to ensure that I was in the best possible position for my retirement.