Company sale pitfalls: not getting paid – getting shares in the buyer instead of cash

January 2022

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This Guide is part of the series of sub-Guides I refer to in my Guide ‘8 pitfalls owners looking to sell their company should avoid’.

On occasion a buyer (particularly a larger PLC, perhaps a company on a spree of snapping up companies like yours), will offer some or all of the purchase price by way of issuing shares in the buyer (or a holding company) rather than in cash.

One of the first deals I ever did as a newly qualified solicitor back in the 80’s was for a someone selling his Hatton Garden jewellery company to a PLC. Most of the price was payable by a combination of deferred consideration and shares in the buyer. I advised my client about all the risks. At one meeting with the buyer I was still trying to get my client to negotiate more forcefully to get some protections. The owner of the PLC gaslighted me in front of my client, reassuring him that he owned a highly successful jewellery group whereas I was a callow junior solicitor and just trying to be difficult and put the deal at risk. The client did the deal without protections. Within a year the buyer group had gone bust and my client ended up with no deferred consideration and worthless shares in the buyer.

So if an interested buyer offers you shares as part consideration here are a few things to think about:

• Why are you selling? Do you want to sell your company to get the price for it so you can use it for whatever you want? Or do you want to take a bet on tying it up in another company over which you have no control and no guaranteed exit plan?
• What do you know about this other company? Have you done your own due diligence in it? After all, you’re both doing a similar deal – selling shares in your company in return for shares in theirs. But you will have no control over either in future whereas the buyer will.
• Will you ever be able to sell your shares? If it’s a private company it’s usually next to impossible to sell a minority shareholding. What do the buyer’s Articles of Association say about selling shares? Will there be a shareholders agreement or option arrangements giving you a guaranteed right of selling your shares at some stage? And what protections will you have in the meantime against the value of your shares going down? For a Guide to Shareholders Agreements have a look here.
• If the buyer is a quoted company you might have a market for your shares, but again you have no control over anything. And you might have restrictions on selling your shares for a year or so. I have seen deals where the seller sold to a quoted PLC for shares, which had a very good share value, but wasn’t allowed to sell them for a year at which time the share value had crashed.

So, taking shares in a buyer as part payment for your company may perhaps be a good idea where you are not thinking of retirement yet and see merit of merging into a larger group where you have ongoing employment and various protections at shareholder level. Otherwise, it’s usually not a good idea.

An experienced corporate lawyer can help you to assess and negotiate the best ways to protect yourself.

If you would like to discuss any of the issues raised in this Guide or any other issues relating to the possible sale of your business please email me at andrew.james@onhandcounsel to arrange a complimentary consultation where I can help you to identify what might be involved and how I can help. This will help you to avoid some of the pitfalls you might otherwise be exposed to, and give you the peace of mind of knowing that you have an approachable competent corporate lawyer ONHAND who can provide you with experienced, effective and cost-effective advice and assistance.

About the author:
I have been a specialist corporate lawyer for 35 years. I have the ‘City quality’ experience and expertise to deal with any deal. But I also offer a level of personal service and value of money that you would struggle to get from most corporate law firms.
My business model and approach are particularly suitable for most deals of any range from £250k to £10m.
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