Many business owners wish to sell their companies without giving up control of them, for many different reasons. At Leialta we recently came across such a case, where a business owner owned a holding company that held 100% capital of another company. The business owner did not believe it would be simple to find an external investor and preferred to offer the sale of the company to the employees working for him. Read on to find out how to sell your company to your employees without giving up control over it.
What ways exist to keep control over a company after its sale?
Whether the company is sold to employees or to a third party, the original owner can keep control in various ways:
- Setting a reinforced quorum. The original owner of the company can keep control over it by adding a bylaw stipulating a reinforced quorum, so that certain decisions may only be passed with supermajority. For example, the original owner may hold onto 40% of the stocks or shares of the company and sell the remaining 60% to employees but changing the articles of incorporation that establish the company so that some circumstances require 70% overall agreement.
- Regulation of voting rights in limited liability companies. When the company being sold is of limited liability, it is possible to regulate that there are different shareholdings with different numbers of votes – this is not possible with public limited companies. For example, the share capital has 1,000 shares, 900 have one vote each and the remaining 100 have 10 votes each. This system could be applied for all resolutions or only for some. Therefore, if the original owner holds more shares with an entitlement to vote, then he can control the company.
- The golden share. This is the most effective way of ensuring that although the original owner maintains a minimum shareholding in the company, he can still have control over decisions that are taken, if so desired.
What is the golden share?
To understand how to sell your company while maintaining control, it is important to understand the concept of a golden share. This type of share allows its holder to have a veto right over any decision taken in the company. The golden share is also used by states to maintain control of companies in strategic sectors such as electricity or gas.
The golden share therefore allows its holder to veto decisions relating to corporate restructuring processes (mergers, spin-offs, dissolutions), changes in the company’s board of directors or the sale of a company’s assets.
For example, in the case we mentioned at the beginning of this post, it would be possible for the original owner to keep a stake in the holding company and thus, indirectly, maintain control.
Aspects to consider when selling your company to employees
Some of the things to consider when selling your business to employees include the following:
- The transaction may be done through a sale of shares directly by the employees, or through the creation of a new company by the employees and its purchase of the other company.
- If the employees are unable to pay the full price of the company at once, a deferred payment can be agreed so that a percentage of the value of the company is paid at the time of signing the deed of shares (e.g. 25%) and the rest in several instalments through the profit generated by the company. When a golden share is agreed, the same will be done, dividends will be distributed and the price of the company will be paid to the original owner out of those dividends.
- The employees will want to carry out a due diligence process to gain a thorough understanding of the state of the company. This will require independent experts to analyse the company and verify the business, labour, procedural and legal aspects in general.
- In many cases, employees wish to buy the company, but do not have the liquidity to do so, so it is necessary to analyse the types of aid that can be applied for and to ask banks for financing.
- If employees set up a new company to buy out the old one, they should choose the appropriate manner to do so, since should they meet the requirements, it would be possible to form a cooperative or a worker-owned company.
- Depending on the type of corporate restructuring operation to be carried out (spin-off, spin-division, dissolution, etc.), the applicable taxation will have to be considered, as the tax neutrality regime could be used.
- Once the sale of shares or holdings has taken place, the employees who become shareholders may decide to carry out changes to the company by means of a structural modification, but if a golden share has been established, the holder may have a veto right in these cases.
Thus, as shown above, there are several options for selling your company to your employees and maintaining control to a greater or lesser extent thereof. The best way to ensure this is by contacting a business consultancy to look into your case and advise you on the best way to carry out the sale and, above all, to continue to maintain control of the company.
