Case Study

Securing fair value for employee’s shareholding

It is common for there to be negotiations with minority shareholders as to the value of their shares. Minority shareholders sometimes have a strong negotiating position but this depends very much on the underlying situation and many factors such as whether there is a shareholders agreement, amended articles and things such as drag and tag rights or other pre-agreed valuation mechanisms. Read on to see how these issues can play out in practice and how we helped our client in this situation.

In a private company, outside of a sale of the business valuing shares when an  employee ceases to be employed can be difficult.  Our client – let’s call him Jerry – worked in the construction industry for many years. In 2018 he participated in a private-equity backed management buyout of his employer, and so became a director and 4% shareholder of his employer. But, the management team then decided to push Jerry out of the business.

Managed Out

In March 2019 our client was compelled to resign as a director of the company; he was presented with a pre-written letter of resignation and told to sign. Feeling as if he had no other option, he did as he was told. He was stripped of certain responsibilities, including financial oversight of his regional office, and was told to focus on work in the field. Many of his previous responsibilities were given to close colleagues of the Managing Director.

Employment issues

For a time Jerry was reasonably content with this arrangement; he preferred to be working on site as opposed to in an office anyway. However, at the end of that year Jerry was hauled into a meeting and was presented with a myriad of criticisms, including in relation to a set of financial reports which were no longer in his control. Jerry was told that his position was untenable, and that he would lose his job as soon as a replacement could be found. He was told he could either take a different role on a much reduced salary or accept redundancy, which would involve signing a settlement agreement. He was placed on gardening leave to consider his options.

How we achieved a good outcome

Jerry came to us for advice on what to do next. The offer of an alternative position was not suitable, as the salary was too low to support Jerry’s needs. The settlement offer was likewise unsatisfactory.

In order to improve the position on settlement we contested Jerry’s purported redundancy. We pointed out that as Jerry had been told he would be dismissed “as soon as a replacement could be found” he was, by definition, not redundant. We forced the Company to admit that the position was not redundant, and that Jerry could only be fairly dismissed if a formal performance management process was followed. We then began negotiating a more equitable settlement.

Valuing minority shares

A key consideration was what to do with Jerry’s shareholding in the company. While the 4% holding did not give Jerry any control over the affairs of the company, the shares were still valuable. The company’s articles included leaver provisions which governed what would happen to Jerry’s shares when he left the company, and these were heavily weighted in the company’s favour. For instance, under the articles Jerry would not receive payment for his shares until the company was sold or floated, and there was no way of knowing if or when this might happen.

Fair value

The articles also set out how the shares were to be valued. The market price was to be negotiated by Jerry and the board at the time of his leaving the company, and if no agreement could be reached within 21 days the question was to be referred to a valuer. The valuer would be jointly appointed, but the company would decide who the valuer would be and what instructions were provided to them, and the board was to be the point of contact between Jerry, the company and the valuer.

As noted above, if the leaver provisions were followed Jerry would not receive payment for his shares until the company was sold or floated, at which point he would receive the lower of the value of the shares at the time he left the company (whether that was the figure negotiated or determined by the valuer) or their price at the time of the company’s sale or floatation.


Our aim was to loop the share negotiations in with the negotiation of the employment settlement agreement. There was room for negotiation on both the price of the shares and the timing of their transfer, as it was open to the Company to agree to pay for Jerry’s shares at the same time as he left employment if it decided to do so.

When Jerry first came to Gannons his employer hadn’t said what it intended to do about the shares. All Jerry had was the Managing Director’s assurance they would be dealt with after the employment issues had been addressed.

When we forced the company to negotiate an employment settlement agreement the company did make an offer to purchase the shares for £50,000, with £25K paid on the signing of the agreement and the remaining half to be paid after the company was sold or floated. No explanation was given for this figure, which we considered to be far too low, and so the offer was rejected. We repeatedly asked for the board to meet with us to negotiate a price for the shares (as required by the company’s articles) but were rebuffed.

Employment matters – Unfair dismissal

To ratchet up pressure on Jerry the company dismissed him for poor performance. They held a single meeting via zoom and dismissed him the same afternoon, a far cry from a fair disciplinary procedure. This forced us to bring a claim in the employment tribunal for unfair dismissal. We continued to negotiate a settlement agreement, and finally reached a settlement which dealt with the employment issues (but not the shares) shortly before submissions were due to be made to the employment tribunal. Now, the shares were the only outstanding issue.

Valuation report

After several weeks of failing to negotiate a price for the shares, the company indicated they intended to appoint their own auditors as valuer. This was allowed under the articles, though we insisted that for a joint valuation to take place we would need to have sight of submissions made to the valuer and have the opportunity to comment and to make our own submissions. Despite this, a few weeks later we received a final valuation from the auditors, which valued Jerry’s shares at £160,000. This was a vast improvement on the £50K originally offered, but was still too low.

The endgame

We wrote to the Company to point out an important point that they had overlooked.

As the report had not been a joint valuation, it could not be relied upon to determine the price of Jerry’s shares. Therefore, when it came time for the company to be sold or floated, Jerry’s shares would not automatically transfer. We explained that we would apply to a court for injunctive relief to prevent Jerry’s shares from transferring, thereby halting any future sale of the Company.

At around this time, the Company coincidentally bought back shares held by its former chairman. We were able to calculate the price paid for these shares using publically available stamp duty filings, and found that he was paid significantly more per share than any offer extended to Jerry. We suggested that Jerry’s shares be bought for this larger amount. Faced with the prospect that a future sale might be compromised by our legal action, this offer was accepted, and Jerry’s shares were finally purchased for around £230,000, with Jerry receiving his payment straight away in a single lump sum.

Lessons learnt

Jerry’s story is a reminder that patience is a virtue. Had he not come to us, it is very likely that he would have received a paltry employment settlement and next to nothing in respect of his shareholding. Instead, by holding firm, he received a much improved employment settlement and a life-changing sum in respect of his shares.

Alex Kennedy

I know that when the noise dies down there is a solution to be found. I set about that task as quickly as possible.

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