Problems with Minority Shareholdings
For some quirk of fate we have recently been involved on both sides in a slew of claims by minority shareholders who believe they have been disadvantaged.
Most have acquired a small parcel of shares as a result of their employment while many were sales representatives of the company; the owner of the company wants them to have some “skin in the game” as it were.
While it is nice to give an employee a small stake in the company, showing loyalty to a staff member who seems to go that extra mile for the company, it can cause problems downstream. The directors may have regarded the business as theirs where in fact it is the company’s, a subtle difference.
The directors might claim expenses that, while a legitimate expense, provided a personal benefit to themselves; a conference in Las Vegas, a trade fair in Germany with incidental side tours attached.
With a minority shareholder on board, those expenses are fodder for a claim of prejudice against the minority.
When the company buys a new luxury car for the director, the minority shareholder who has worked hard to improve the performance of the company can get a little upset. Especially if there is no dividend rewarding them for their effort. There is a whole new dynamic to running the company with minority shareholders. A dynamic that should always have been there, but with a minority shareholder is a lot more important.
When the relationship sours or for some other reason the minority shareholder leaves the employ of the company, hopefully there is an agreement that they must sell their shares. Otherwise the company will have to recognise that they continue to have an interest in the company and must be provided with annual financial statements. They may require the company to be audited, and can continue to argue the directors are not treating them fairly. Worst of all they may commence plying their trade with a competitor. If they left feeling hard done by, they may use whatever information they can to carry favour with his new employer, including the financial information they obtain as a shareholder.
Hopefully, there is a shareholders agreement which can require the shareholder to sell on the termination of his employment. We can envisage an employee of longstanding retiring but wishing to retain his shares and the employer happy with that.
If the shares are to be purchased, it is probable the agreement will stipulate it must be at Fair Value. This would be a requirement under S.149 of the Companies Act 1993 if the directors are the purchasers.
While it is a nice idea to have an employee owning some shares in the company, we caution against it. The reward given now may become a rod for the directors back in the future.
Our involvement with a shareholder employee who had 5% of the shares in a subsidiary company in a group was a revelation in how poorly the directors considered their obligations.
The subsidiary company was very successful, generating good profits. Unfortunately other subsidiaries in the group were not successful. Excessive management fees were charged by, and subvention payments were made to, the parent company. All surplus cash was advanced to the parent.
The employee worked for 12 years without receiving any dividend. When the business was sold at a substantial capital gain, all the proceeds went to the failing group.
Just as we recommend serious thought on an employer giving shares to an employee, we recommend that an employee consider rejecting owning shares to reduce any issues extraneous to his employment relationship.