Shareholder Buyout or Exclusion: How Does It Work?

What is a Buyout and Exclusion?

Sometimes a company wants to part ways with a shareholder, partner, or associate. This can be done by buying out or excluding. In a buyout, the company purchases the shares of the shareholder. In exclusion, a large shareholder forces the minority shareholders to sell their shares. Buyouts are often done in consultation. Exclusion can also occur against the will of the shareholder (think of a drag along and tag along clause). There are strict rules for both methods, and it is important to know them well to avoid problems and disputes.

Why Would You Buy Out or Exclude a Shareholder?

There are various reasons to buy out or exclude a shareholder. Sometimes a partner no longer fits the company. Or there are disputes between co-shareholders. It can also be that one shareholder wants to have all the power. A buyout or exclusion can then be a solution, helping to restore peace to the company. However, it is a significant step and requires careful consideration, taking into account the feelings of the shareholder who is leaving.

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How Does a Buyout Work?

In a buyout, you buy the shares from a shareholder, usually in consultation. You first agree on the value of the shares together, which then determines the price for the co-shareholder's shares. The company can purchase the shares itself or another shareholder can buy them. Sometimes the company borrows money to buy the shares. Note: there are rules attached to this.

How Does Exclusion Work?

Exclusion can only occur if one shareholder holds a large number of shares, specifically at least 95% of all shares. This shareholder can then force the others to sell their shares, known as a "squeeze-out." The large shareholder must go to court to do this, where it is assessed whether everything is done according to the rules. The court also determines the price of the shares. Therefore, exclusion is trickier than a buyout but can be useful when a shareholder does not want to leave voluntarily.

How Do You Determine a Fair Price?

Determining a fair price is important to avoid disputes. There are several ways to calculate the value of shares. A straightforward method to get an estimate is to compare it with other companies in the same industry, looking at their EBITDA relative to their valuation. This multiple can then be applied to your EBITDA. Future expectations also play a role. Another method is the Discounted Cash Flow method, which uses the company’s future cash flow to determine value.

It is smart to hire an independent expert who can determine a fair price. Also, check the company’s articles for any existing agreements regarding pricing.

Conclusion

Buying out or excluding shareholders is complicated, with many rules involved and sensitivity around the issue. Yet, it may at times be necessary for the company. Prepare thoroughly if you intend to pursue this. Find out what the rules are, seek advice from experts, and try to reach a mutual agreement. This way, you maintain good relations and avoid potential problems.