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When caught up in the excitement of a new company, particularly a family run company, the last thing you want to consider is what happens if it all goes wrong. Why is it so important to think about the end, right at the beginning?
It is a common misconception that, as is the case with listed companies, the value of every share in an unlisted company is the same. The reality is very different and there is no statute to govern the position. The Companies Act has over time regulated the conduct of companies closely, however the sale of shares is not something the legislators have ever dealt with and it has always been the responsibility of the company itself and its directors.
When a shareholder wishes to sell their shares, the first port of call for valuation are the company’s Articles. It is here that the founders have the opportunity to set out their wishes either by specifying the valuation basis, methodology or even the formulae but an overwhelming amount do not take this opportunity instead choosing to remain silent. They perhaps they do not wish to consider the sad but inevitable fact that in the future shareholders will leave, retire, die or may even fall out. Perhaps they simply have not given it any thought at all. So what’s the problem?
If the Articles are silent the default provision usually adopted is Market Value but it is important that founders understand the meaning of this and consider what they actually intend for their company.
One of the factors to be considered in valuation is the voting influence that the shares have. It is not uncommon for a number of founder shareholders to all contribute the same capital per share, significant time, effort and money in making a success of their company. If one for example, only holds a minority interest and wishes to sell their shares, in absence of any other provisions in the Articles, they may be paid a heavily discounted price merely because their shareholding was less than their fellow shareholders with no provision to the contrary.
The Articles give us an opportunity to remove doubt and avoid disputes which are costly both physically and emotionally. Take that opportunity.