Buying a minority stake: shareholders agreement, veto rights and an exit strategy

When acquiring a minority stake two contract levels typically come together. The share purchase agreement governs the transfer of the shares, the purchase price, warranties and conditions to completion. The shareholders agreement, often called a syndicate agreement, governs the co-existence of the shareholders: voting behaviour in the general meeting, participation rights, information rights and the conditions of a later exit.

Without the shareholders agreement layer the minority shareholder remains structurally weak. Important resolutions are taken by the majority alone, information flows only via the statutory minimum rights and a later exit is hardly governed. Only the shareholders agreement creates the balance needed for a viable stake. The concept of the shareholders agreement is introduced via the glossary entry on the letter of intent as an entry into the negotiation documents.

A clean interlinking of both levels is important. The share purchase agreement may make the acquisition conditional on the signing of the shareholders agreement; conversely the shareholders agreement assumes the completed acquisition. An overview of shareholder topics is provided by our topic page on shareholder disputes.

The heart of the minority position lies in the veto rights or reserved matters. They make certain resolutions dependent on the consent of the minority shareholder. Typical items are fundamental structural measures such as capital increases, reorganisations and the sale of material assets as well as related-party transactions, larger investments and the appointment of management.

The reserved matters must be carefully balanced. Too narrow a catalogue leaves the minority shareholder unprotected; too broad a catalogue blocks the operating business and creates deadlocks. The same logic applies to information rights: regular reports, access to central documents and a seat on the advisory board secure access to information needed to assess the value of the own stake.

Whoever protects reserved matters through clauses on deadlocks should at the same time think about mechanisms to resolve them. How such constellations evolve and which routes exist is addressed in the post on shareholder disputes and exit.

A minority stake is not an end in itself. Sooner or later the question arises how the stake is sold again. For this case the participation agreement needs clear mechanisms. Central are drag-along and tag-along: with drag-along a majority shareholder can force the minority to join the sale so that a buyer can acquire the entire company. With tag-along the minority may sell along on the same terms when the majority sells.

In addition the contract should contain a pre-emption right for the other shareholders, a call-back right on the departure of a shareholder and put and call options for special situations, such as the death or departure of a key employee. The valuation method for all these cases should be clearly set out in the contract so that it does not itself become a point of dispute.

An initial orientation on choosing the structure is provided by our post on share deal and asset deal. An initial assessment of the risks is provided by our M&A transaction risk profile.

Valuing a minority stake is demanding. A mere proportional share of the company value often does not capture the limited influence; minority discounts are common. Conversely, special rights can raise the value of a stake. What matters is a contractually defined method that does not itself become a point of dispute.

The financing of the acquisition may be structured differently depending on the role. Financial investors often combine equity and vendor financing; employee participations may be governed by loans or option programmes. The post on the purchase price adjustment shows the building blocks for reflecting the purchase price in the contract.

On tax: the acquisition of shares may, where applicable, trigger real estate transfer tax if the company holds real estate and the thresholds of a concentration of shares are crossed. Ongoing income tax consequences must also be considered. A clarification with tax advice is sensible before any participation.