does 51% sharehold mean control?

May 17, 2006 2:02 PM

In a UK company with 3 shareholders, with percentages 51%, 24.5%, 24.5%. Can the person with the majority force the other 2 holders to sell-out ?

Myself and my Brother had an idea for setting up a new business venture but we needed investment, a third person offered investment on the condition we signed a contract saying that he was a 51% shareholder, with me and my brother having 24.5% each.

The reason he stated was that without him having 51% that me and my brother could gang up on him in regards to business decisions. The contract does state that "profit shares" will be split equally into 33.3% each.

However my concern is that with him owning 51% of the company he could force me and my brother out. Is this possible ?

is there anything else i should be looking out for in the contract ?

posted by toocan to law & government (16 comments total)

IMO, this is a question for an independent business contract lawyer, not the teeming masses of MetaFilter.

Who are you going to trust with your livelyhood?
posted by Kickstart70 at 2:08 PM on May 17, 2006

You need to talk to a lawyer. Its much more complicated than a yes or no answer.

In truth, you shouldnt be allocating all the shares right now. Where do shares come from to sell to additonal investors? to employees? Also, there's usually a period of vesting for your own shares to ensure you'll stick around for the company becoming viable. And many other issues, depending on how your business is organized.

In truth, from what little info you've offered, it sounds like he's taking advantage of your naivete. Get a lawyer.
posted by vacapinta at 2:16 PM on May 17, 2006

This website seems to have some good info.

I'm not familiar with practices in the UK, but my experience is that US minority shareholders usually receive protection from majority shareholder actions that are counter to the minority's interest. But, of course, you need to have a lawyer look at your agreement and give you proper advice.

If you need to further slake your curiousity, Here are some samples of shareholders' rights agreement. In the US, shareholders' rights agreements are used to delineate the various rights given to shareholders and procedures for making decisions. Venture capital firms make an artform out of these contracts.
posted by mullacc at 2:22 PM on May 17, 2006

You really need a shareholder's agreement in a situation like this. Consult a lawyer (on your own) about this before you enter into any arrangements. Your investor is probably much more savvy than you are, and is already lining things up in his favor.
posted by MrZero at 2:23 PM on May 17, 2006

US minority shareholders usually receive protection from majority shareholder actions that are counter to the minority's interest

I mean in the context of change-of-control situations.
posted by mullacc at 2:25 PM on May 17, 2006

toocan, it's not that he can "force you to sell out"; it's that he can vote in a new board of directors (shareholder approval: 51%) who are personal friends of his, and those new directors can do whatever they want with the company, such as firing the CEO (you). Then the new Board can issue 100,000 shares of new stock, to the 51% guy, so that now the stock ratio, which used to look like 51-24-24, now looks like 99.9-0.01-0.01.

THEN, owning 99% of the outstanding shares, they can sell the company to someone else, write you and your brother checks for the $10.32 that you're owed from the sale of the company, pocket the $12,000,000 that they received from their stock ownership, and walk away.

Losing control of a company is serious business. If you're going to go into business for yourself, shouldn't you be running things, not some third-party investor?

I reiterate the above advice that you desperately need to talk to a lawyer. Luckily, you have little to lose at this point except a minimal amount of time. But I'd hate to see you invest a few years of your life and get taken for a ride at the end of it.
posted by jellicle at 2:41 PM on May 17, 2006

Ideas and strong execution are worth more than capital. Find a different investor if this one won't give you less exploitive terms.
posted by Good Brain at 3:36 PM on May 17, 2006

Quick and dirty answer: 'contract'?

If it's a limited company, it's all down to what's in the company's articles of association. If it's a partnership, it's down to what's in the partnership agreement. Saying that it's based on a 'contract' doesn't help us out with the legal arrangement you have here. Get a solicitor.
posted by holgate at 3:56 PM on May 17, 2006

It's not a great situation to be in, though the 51% shareholder cannot enforce a buy out (unless provided for in the Articles of your company, but that would be unusual and you'd spot it by reading them).

A lot will depend on the Article of Association of the company but the legislation (the Companies Act 1984) has some protections to stop exactly the things that jellicle mentioned from happening. There are standard provisions such as (s.89/95) pre-emption rights (no shares can be allotted without being offered to existing shareholders first) which cannot be disappled without a 75% shareholder vote.

You will definitely need to see a lawyer. No need for anything too fancy though as this sort of thing comes up frequently and there are standard protections.
posted by patricio at 3:57 PM on May 17, 2006

The takeover is the least of your worries.

I'm trying to come up with a way to put into words how much I think you should walk away from this guy and his "deal". Even if the business is a great success (which it won't be if everyone in charge isn't on the same page), you and your brother are fucked. Don't do it.
posted by cillit bang at 6:07 PM on May 17, 2006

Then the new Board can issue 100,000 shares of new stock, to the 51% guy, so that now the stock ratio, which used to look like 51-24-24, now looks like 99.9-0.01-0.01.

Err, that sounds very odd.. Can someone elaborate?
posted by Chuckles at 10:53 PM on May 17, 2006

Yeah, I'm curious about this as well. A similar ask mefi was posted some time ago, regarding a principal developer of a small company potentially being forced out by another part owner through some legal machinations, and I can't help but think there surely must be laws in place to protect minority shareholders from exactly that scenario (the "use 51% control to literally devalue or dilute the holdings of the other partners"). For example, if the new "board" created X new shares, those would have to be sold at public value and not just given away, and therefore the actual value of "diluting" the other owner's shares to 1% would cost real money or be outright illegal.

It sounds like patricio describes some legislation that does this, but surely there must be a wealth of legislation to protect against this, else this sort of thing would happen all the time. In any event- yeah, talk to a lawer.
posted by hincandenza at 11:38 PM on May 17, 2006

disclaimer - i'm not a lawyer.

At under 25% holding, you have few rights - 25% and above can block a special resolution of the company (required for winding the company up) so together you & your brother may be able to curtail the investor, but individually, you're stuffed.

i believe that there is protection under UK law for minority interests being unfairly prejudiced (like having their holding diluted by the board issuing lots of shares) - but if memory serves me, the remedy is that the majority / company has to pay fair value for the minority shares i.e. you get kicked out anyway, but at least with a pay-off....

if this is the only deal on the table, and you feel you have to take it, just be careful of the articles of association. I've seen one recently where a guy got kicked out of his own business by an investor who had put in provisions that he only got "par value" for his shares - he lost out on about £2m.

Short answer - go & see a commercial lawyer - you need to protect yourself.
posted by khites at 12:54 AM on May 18, 2006

IANAL, but....

I'm pretty sure that anyone owning more than 50% of the stock can force all the other shareholders out one way or another. In particular, there is a tactic I have heard to be commonly used in hostile takeovers: the reverse stock split. The entity which owns 50% +1 share forces the board to perform reverse splits until all the other shareholders have less than a full share. They have to be paid off at "market price", but this can be a major problem if the investor has a legitimate claim that your market price is lower than you want it to be. In particular, if no subsequent shares have been sold, he may be able to legally claim that his buy-in cost is "market price".

The thing that bugs me about this investor is he says "I don't want you and your brother to gang up on me", but insists on having enough stock to gang up on you. All other issues aside, this disingenuous/hypocritical behavior sends up all sorts of red flags in my mind. Even if you can renegotiate the terms to something less ugly, I'd be reluctant to do business with him without a personal lawyer who was much more capable (and probably much more expensive) than any he could afford. If he doesn't want to give you a fair deal now, it doesn't bode well for the relationship.
posted by Mr Stickfigure at 4:16 AM on May 18, 2006

Thanks for all so very much for your answers, you’ve all been a massive help. Basically I need to speak to a solicitor it is just |I cant see one till next week and its really playing on my mind so thanks for alleviating that.

My only other question is ; are voting rights directly proportional to company share percentage?
posted by toocan at 4:27 AM on May 18, 2006

The rules may be different in the UK. In the US, these sorts of things are determined by the corporation's shareholder's agreement or by-laws. That agreement usually has provisions in it about what's required to approve dilution measures, modify the agreement, buy out another partner, and so forth.

Whether or not the voting rights are proportional to the share percentage depends entirely on the type of corporation and the type of shares.

In short, yes, no, and it depends. You need a lawyer who's familiar with the corporate law where you are and where the corporation is.
posted by Caviar at 1:32 PM on May 18, 2006