The following article discusses session one in the IR Global Virtual Series on ' Redistributing Share Capital – Considerations for family-owned
Bruno Pichard – France (BP) A familyowned company in France
may want to open its share capital for various reasons.
First, the owners may want to realise value, though they are
not able to withdraw cash from the company. This is either because the company
doesn't have the cash, or because, for tax or legal reasons, it is more
convenient to sell or open the share capital to someone else.
The company may also need to develop its activities and find
cash to finance new development. This financing may be done by bank loans, but
it can also be done by increasing share capital, which for the company may be
more comfortable. When share capital is used, the company doesn't have to repay
a loan. The shareholders may have to buy back the new shares, but not the
company itself. The most popular route to raising capital really depends on the
minds of the shareholders. Some family-owned companies really do not want to
open the share capital and so they will always prefer bank loans. Other firms
are more reluctant to use loans and they prefer to increase the share capital.
Sometimes there is a minority release, meaning that some
members of the family want to sell their shares or get money from the company.
In such a case, the other members of the company may not have the available
cash and so they need a third party to finance this withdrawal.
Another possibility includes the joint venture. This may be
used when a company has to make an alliance with a competitor or somebody else
in the same market. In such a case, it may be useful to have a common company
through a joint subsidiary. This can also be achieved through the opening of
the share capital of the family company.
A final reason to open share capital, is as an executive
incentive. In France, in a familyowned company, executives may feel that, as
they are not members of the family, they do not have the same opportunities
they may have in another company. For instance, private equity funds which own
French companies, may open the share capital of the company in which they
invest. This gives executives or senior executives, a significant opportunity
to make capital gains which attract less tax than salaries.
Alex Canham – England (AC) In the case of family run
enterprises, it can be tempting to keep the shareholding within the family and
with people who are trusted. However, minority shareholders can add value to a
Minority shareholdings have to be offered for the right
reasons. In England and Wales some of the more common reasons for offering a minority
shareholding are to bring an expert into the company, to grow the company by
way of investment, or as part of an employee share scheme.
Rather than simply offering an employment role, an expert may
be incentivised by being offered a minority shareholding. Not only does the
company get the benefit of their expertise, but the expert has the opportunity
of benefiting by way of increased value in their shares by helping to grow the
Employee share schemes are often used as a way to
incentivise key employees, by offering them the option to purchase a small
shareholding in the company. This option is normally not able to be exercised
until the employee has been with the business for a certain period of time. The
option is often granted for an agreed price, and this means that if the value
of the business grows then the employee is able to effectively buy the shares
at a discount. If the share scheme is drafted in the correct way it can also
provide the employees with a tax advantage in the event that the option is
exercised. It is therefore crucial to take specialist legal advice if
considering implementing an employee share scheme.
Minority shareholdings for investment are commonly offered
to individuals who are looking to invest money in private businesses, and
simply make a return on their investment. The laws of England and Wales prevent
private companies offering their shares for sale to the general public.
Therefore, this option is typically used if the company knows of individuals
who may be interested in supporting the growth of the company by way of
Steven Goldberg – California, U.S (SG) In our practice,
taking on minority shareholders is often focused around the transfer of wealth
from an older generation to a younger generation.
This occurs both from an operational (soft) side and a legal
and tax perspective in the USA. There is a still a significant estate tax for
large estates, so developing minority shareholders can dramatically reduce that
John Friedemann – California, U.S (JF) As an interesting
perspective, my practice more often deals with companies that take on minor
shoulders because they're looking for capital.
That's the core difference between Steve's practice and
mine, because he's dealing with high net worth clients that are looking at
estate planning and generational transfer. I'm looking more at traditional
businesses that don't have those circumstances.
U.S – California – SG In family businesses we are often
structuring executive compensation. We see that a lot up here in California
with wineries, where a certain prize winemaker may get a percentage of the
winery. It is also done to keep key employees in place.
Minority shareholders have some informational rights, but
they don't have a lot of control. This lack of control translates to a lack of
liquidity and marketability and actually drives down the value of minority
interests. In other words, it is often the case that all of the parts are not
worth the same of the whole.
U.S – California – JF If you're evaluating an ownership
interest, then a person with more than 50 per cent ownership is going to get
full value measure of appraisal for that value. Somebody with a minority
interest will have a minority discount, which might be up to 30 per cent.
US – California – SG With transfer taxes in the United
States, valuation is very important. A niche group of appraisers are often used
to value minority interests and discounts can range from 30 per cent to 60 per
cent depending on a variety of factors, including cash flow, leverage, and the
size of the business.
Germany – MS There are four areas where I can see
constellations in Germany that lead to shareholders taking on minority
In Germany, we have very traditional companies which are
driven by certain families over generations. They have a generational problem
because younger generations are not willing to drive the business forward. In this
case, someone takes over as managing director and this person quite often gets
a stake in the company.
The second area is a management buyout (MBO), which happens
quite often in the automotive sector. Key employees who have influence in the
company may enter into it as a minority shareholder.
Thirdly, we quite often see a merger of two companies,
usually a small company and a larger company. The shareholders of both
companies found a holding company and become shareholders in this holding
company. The holding company then owns the two former companies.
Minority shareholders can also be created when venture
capital is required.
One main issue in transactions is with respect to companies
who have real estate. This is in order to avoid the tax on the transfer of real
estate when you sell the shares in a company. The solution is that the old
shareholder maintains 6 per cent, so there's no tax on the transfer of shares
regarding the real estate, which is in the target company.
Do you have the same in the US?
U.S – California – SG The US does not have a similar rule.
If you have a sale of shares in a US company, there would generally be tax on
that sale if there is a gain. There are strategies that we use to minimise or
defer tax. The tax is levied, typically, on the difference between the seller’s
cost (adjusted for a variety of factors) and the proceeds from a sale.
Don Looper – Texas, U.S – (DL) We have three very different
practices here, which gives a very different look at this issue.
I would say 95 per cent of all our minority investing work
is representing private equity funds. Money is a key factor in why the
transaction is happening, but the primary benefit is typically to gain a
The drafting of those agreements is materially different.
Steve is focused on the minority interest holder breaking up the family
interest so that the values are lower for estate tax purposes.
Our focus when drafting those agreements is almost always
focused on maximising the value of that minority interest. That comes in the
form of mandatory distributions and the mandatory decision-making authority of
the minority interest.
It is materially different when you're drafting the
agreements and you're representing the minority interest. Your goal is to make
that minority interest very valuable and possibly even a secured transaction.
Another reason we might do this is to create strategic
partners. We have one client in Arizona that has an international agriculture
pesticide company, they have sold a minority interest in some of their
subsidiaries, purely for strategic purposes. Once that party becomes a minority
shareholder, they have an incentive to always buy their product from the
majority owner. The owner then locks in a natural sales stream.
The minority investor is coming in with capital and they are
dictating the terms, which makes that minority interest very valuable. They
might have mandatory distribution rights, or the essential veto rights on
decision-making. They could also have clawbacks or provisions that would
entitle them to increase their ownership in the event that certain performance
criteria or thresholds are not satisfied. That's a very different type of
drafting and they're usually highly negotiated transactions.
U.S – California – JF You touch upon an interesting
dichotomy in these transactions. If the transaction is generated by the owner
wishing to pass to another generation, then it’s an ownerdriven transaction. If
they need venture capital, then it’s an investor-driven transaction and now
it's an entirely different set of documents and entirely different terms
because the investors have all the power in that situation.
U. S – California – SG There's obviously very different
motivations. If I'm counselling a family on a transfer of wealth, the
motivation for the transfer is usually very different than unrelated business
partners, who are looking to maximise profit. Within families, gifts are
common. However, unrelated business partners usually have similar motivations
as Don's clients; they will try and get the best deal that they can.
Lavinia Junquiera – Brazil (LJ) Businesses may need to offer
equity to third parties to obtain further capital, skills or expertise. Thereby
founders can also sell shares, have liquidity.
This process of selling shares needs to protect the company
and its shareholders from loss of control, hostile takeovers, and disputes
between shareholders in the controlling block. Professional advisers can obtain
insights from multiple stakeholders to identify their individual goals, needs
and possible compromises. They apply legal tools that help find solutions to
restructure the company while reaching multiple goals to bring harmony and
stability for the company´s continuing success.
Robert Lewandowski – Poland – RL There are currently around
823,000 family-owned enterprises operating in Poland. They make up between 60
per cent and 90 per cent of all SME businesses in Poland. The two most common
forms are limited partnership and private liability companies.
These private enterprises might consider taking on minority
partners/shareholders to finance growth projects, increase the value of their
enterprises or to acquire other enterprises on the market.
Comprehensive analysis carried out in Poland shows that most
enterprises still prefer to take loans from banks to finance future endeavours
(over 77 per cent). The issuing of shares on the stock market, or venture
capital investment, is not widespread, however this alternative is becoming
more popular in Poland.
Family-owned enterprises are not used to going public (being
enlisted on the stock exchange market), therefore private equity is still the
most common means of equity funding in Poland. This may take many forms, such
as venture capital (gaining capital at an early stage of a family-owned
enterprise) or mezzanine capital (mixture of own and foreign capital).
John Colter – Mexico – JC Family owners often pursue a share
reorganisation to achieve their goals. This could be parents who own a family
business and wish to bring their children into ownership but retain voting
control. In such a situation, the parents can convert common stock to preferred
voting stock and then issue a preferential stock dividend on the remaining
common stock – which is non-voting – to the children. Such stocks will not be
entitled to vote in certain matters, such as increasing or reducing capital
stock participation, merging the company or certain transfer of ownership,
Another reason is when the private company needs investors
to achieve a special project and wants to transfer certain stock participation
ownership in exchange for a determinate joint venture project.
It is common to set up drag-along and tag-along terms and
conditions on the joint venture. This means that, after the project is
complete, they may have the opportunity to return their capital participation
on the company.
Private companies normally raise finance though financial
institutions, such as banks, and they normally grant certain kinds of mortgage
and pledge guarantees to secure the loans. They may grant a pledge over their
own stock certificates to secure the debt been granted, but is not common to
bring on third parties that will finance the company in exchange of a stock
Thomas Paoletti – UAE – TP From a UAE perspective, we have
to take into consideration that we may have family companies which are
reputable in the market and are not keen on accepting investors or minority
shareholders. They tend to protect themselves, because there are some
activities which may only be run by Emirati families.
Other companies may seek investors, and typically this
happens during the start-up process. During the process of setting up they find
investors who are willing to invest and put some equity into the company. It's
quite difficult for a start-up to have access to bank loans so they might
Financial loans facilities are only available if you have at
least three years of activities and you have a verifiable audited balance sheet
of the company. Otherwise, it is quite difficult to have access to bank loans
or banking facilities.
In some situations, these investors want to control the
terms of governance of the company.
They want to make sure that the investment is properly
addressed to the requirements of the company and they also take a stake in the
The well-known Emirati families typically have an exclusive
agency agreement and act on behalf of big corporation like Microsoft, IBM or
CarreFour. Any transaction these companies wants to do in the region has to go
through these families. They will also typically put their own people in the
management because they want to have some sort of control around how the
Only an Emirati family can have this kind of business.
Foreign investors cannot run them.
Tuomo Kauttu – Finland – TK Minority owners realising value,
is not one of the most common reasons to open the share capital of a company in
my experience. Realising the value of whole stock is much more common.
It's difficult to find buyers who are prepared to pay the
real price of the real value of a minority share of the company. Family
companies are operated differently than public companies or private companies that
are not family owned.
Generally, buyers don't think that owning minority shares
has a real value. If the firm is operated by the majority shareholders, it
means you really don't need such shares. In most cases buyers gain higher
profit by investing in other kinds of companies.
There are many cases just around shareholder agreements. It
is not common for owners to realise the value of their shares by selling shares
to outsiders, if that is a minority share of the company.
It is a totally different situation when we are discussing
financing the growth or expansion of the company. It's much more common to
distribute shares to outsiders to get capital or equity in the company. In many
cases, those outsiders who are intending to contribute equity to the company
attribute a different value to such shares than the owner.
There are many tools, investors can use to protect their
ownership in the case that the shares are distributed by the company in
exchange for equity, in comparison to the situation in which the shareholder is
realising his or her minority shares’ value.
Generally, owners can protect their ownership and power by
shareholder agreement, class of stock, and redemption and consent clauses in
by-laws/articles of the company in addition to similar conditions in
shareholder agreement. Naturally, an investor has much more influence to all of
such tools when the shares are distributed by the company due to need of
capital rather than sold directly by minority shareholder. Similarly, the
existing shareholders can improve their rights against new shareholders,
depending on the negotiation power on both sides.
There are also some other relevant reasons for opening share
capital, including tax planning. In some case in this is why the family owners are
obtaining minority shareholders. Generational shift or transition to immediate
family or a third-party due to retirement is also a reason, as is expansion
into foreign countries.
John R. Colter-Carswell (JC) Colter Carswell &
Asociados, S.C. – Mexico www.irglobal.com/advisor/john-r-colter-carswell
Lavinia Junqueira (LJ) Tudisco, Rodrigues & Junqueira –
Markus Steinmetz (MS) Endemann Schmidt – Germany www.irglobal.com/advisor/markus-steinmetz
Alex Canham (AC) Herrington Carmichael – England www.irglobal.com/advisor/alex-canham
Bruno Pichard (BP) Pichard & Associés – France www.irglobal.com/advisor/bruno-pichard
John Friedemann (JF) Friedemann Goldberg LLP – U.S –
Steven M. Goldberg (SG) Friedemann Goldberg LLP – U.S –
Tuomo Kauttu (TK) Aliant – Finland – Finland www.irglobal.com/advisor/tuomo-kauttu
Thomas Paoletti (TP) Paoletti Legal Consultant – UAE www.irglobal.com/advisor/thomas-paoletti
Donald R. Looper (DL) Looper Goodwine P.C. – U.S – Texas www.irglobal.com/advisor/donald-r-looper
Robert Lewandowski (RL) DLP Dr Lewandowski & Partners. –