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  1. #1
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    Default Query about private company shares

    I know that this forum is about publicly traded shares, but I wondered if there was interest and advice about off market trading of director/employee shares. This would occur routinely among thousands of SME directors, but of course each situation is specific to the organisation. Still, there maybe advice to share in what is otherwise a very definite situation. Let me know if there is a place in the forum.

  2. #2
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    Private shares meaning ownership of a corporation where it's shares are not publicly traded on a stock exchange. That is no different than being a business partner of a corporation. Quite simple and these are usually arranged between accountants and lawyers. They usually are very long term but the biggest problem is liquidity. I've had friends that formed partnerships in business and wanted their shares to be bought out as he wanted out of the company. It involved lawyers as he threatened litigation if no action was done. Not a great situation to be in when forming a partnership in any business, and no, this is not something you and I can just buy and sell. After all "private = private" and the handling is very limited to the stakeholders in the business.

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    Quote Originally Posted by SBQ View Post
    Private shares meaning ownership of a corporation where it's shares are not publicly traded on a stock exchange. That is no different than being a business partner of a corporation. Quite simple and these are usually arranged between accountants and lawyers. They usually are very long term but the biggest problem is liquidity. I've had friends that formed partnerships in business and wanted their shares to be bought out as he wanted out of the company. It involved lawyers as he threatened litigation if no action was done. Not a great situation to be in when forming a partnership in any business, and no, this is not something you and I can just buy and sell. After all "private = private" and the handling is very limited to the stakeholders in the business.
    Thanks for the post. I meant to clarify that I own 16% of the shares in a professional services company, and there are more shares becoming available due to retirement of some directors. However, I would also need to find future employees to sell to when I retire. The price of the shares in another thing. There are many moving parts, as you can imagine, for optimising ones position. I don't mean to be too philosophical about this either. I guess liquidity would be the concept we're working with. My query was about finding a place in sharetrader to discuss that. Newbies corner?
    Last edited by Fred114; 07-09-2021 at 07:20 AM.

  4. #4
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    You can discuss your issues here. Anytime when shareholders in a private company change, this creates problems for both sides. As with my friend, you have the issue of "being fairly paid out" vs the other side of the coin, those that don't want to pay the asking price or simply do not have the funds to do so. Partnerships are complicated and valuations are far apart from the owner and the buyer of the shares. If there's conflict or you feel you're being disadvantaged, seek a lawyer. Usually in the formation of the partnership, there should be clauses of how partners enter and exist, compensation clauses, disputes, etc.

  5. #5
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    In this situation (professional services in the construction sector), there are effectively three groups involved in the exchange of shares. The situation has arisen naturally through the retirement of founding directors (after 40yrs, and the first time this has occurred in the organisation). One has already sold 40% of his shares of one-third ownership to two new directors, and they now own 6% each from this year. I and another employee were sold the other third of the company, so I am on 16% with another mid-tier director retiring in ten years (say) and we bought them in 2016. The other founding director keeps his moves very hidden, and consequently is influential, but at a distance from the running of the office. The constitution states that you cannot own shares without employment in the company, so he will have to sell if he wants to retire from work. Should I pick up half of his remaining parcel of 33%? The other director has his remaining 60% to sell too. That's alright in principle, but the price of the shares has been based on the amount of invoicing being managed, which has risen (almost double) since I bought in as a director. As a founding director, he paid nothing for them, but of course has contributed immensely to the development of the company. So have I, and clients will now come directly to me and ask that he is not involved. Because he so isolated and yet takes an outsized salary and benefits, he runs the risk of becoming a liability to the organisation because he may not get the price he wants. He has been protected by the other founding director. So there is a change in culture, away from the founding fathers, to a new crowd. I don't have another 15 years to develop this company, partly because I'm already fatigued. I would also have to sell whatever shares I hold to a new crop, within ten years, and that group may not have enough access to financial capital to do that. Where the hell do these conversations take place? Is there support?
    Last edited by Fred114; 08-09-2021 at 09:31 AM.

  6. #6
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    Hi Fred,

    A little parcel of challenges you have there! But, it may make you feel a little better to know that it's not exactly an uncommon situation for entities with a partnership type set-up like yours.

    Some
    questions for you.

    - Is there a Shareholders Agreement (SHA) in place?
    - If so, does the SHA take precedence over the Constitution in the event of conflict between the two?
    - If so, does the SHA (or Constitution for that matter) afford the founding Shareholders/Directors some additional rights/"powers"?
    - Are ALL shares of the same class & rank, or for example are there for A Shares & B Shares?
    - The Constitution; is it a standard template version (e.g. ADLS), or bespoke for the company?
    - How many Company Directors are there (and how many are permitted - Max?). I gather you are noted as a Director on the Companies Office?
    - From your "Trust question thread", have I understood you correctly.... your Family Trust actually holds "your" shares? Or perhaps not and they are in your personal name (too)?
    Last edited by FTG; 08-09-2021 at 12:14 PM.
    Success is a journey AND a destination!

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    I'm not sure what exactly you are looking for in terms of support. Generally these kinds of issues usually require some thorough investigation (particularly every partner and their intentions with the company). Making matters worse, the company may not be in any competitive position to sell their shares in an easy way. That is in larger cities with well established firms, if one ie lawyer firm wants out, a competing firm can easily buy in and merge. But NZ is a small place with limited competition to make your share ownership having 'value'. If the founders of the business lose their enthusiasm, so will the company (unless someone is really really keen taking over).

    I hate to say it but your best support is probably going to be through a lawyer. The more parties involved in the business, the more messy it can get.

    As for some personal experience, I too was caught into a private investment starting an internet company back in Canada. The business was established but needed some capital; we invested and within 2 years, all that $ vaporized. Never again I would go into a partnership business venture into an already established one. The same noise I hear from friends in similar situations that work in the construction trade. Usually the 'outsider' is squeezed out after they get their capital and when it comes time to sell the shares out ; it's a very stressful journey. Especially when litigation can evolve and the lawyers love rubbing their hands.

  8. #8
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    - Is there a Shareholders Agreement (SHA) in place? Yes
    - If so, does the SHA take precedence over the Constitution in the event of conflict between the two? The SHA takes precedence over the constitution in the event of a conflict between the two docs.
    - If so, does the SHA (or Constitution for that matter) afford the founding Shareholders/Directors some additional rights/"powers"? No extra powers/rights noted.
    - Are ALL shares of the same class & rank, or for example are there for A Shares & B Shares? Yes, same class and rank.
    - The Constitution; is it a standard template version (e.g. ADLS), or bespoke for the company? ADLS one, not bespoke.
    - How many Company Directors are there (and how many are permitted - Max?). I gather you are noted as a Director on the Companies Office? Six directors, with equal rights under the constitution. No maximum stated. Yes, noted on companies office register.
    - From your "Trust question thread", have I understood you correctly.... your Family Trust actually holds "your" shares? Or perhaps not and they are in your personal name (too)? Yes, the family trust holds majority of shares through a holding company. There are a small number held personally through the trading company. The majority of the trading companies shares are held by the holding company.
    Last edited by Fred114; 08-09-2021 at 08:36 PM.

  9. #9
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    Quote Originally Posted by Fred114 View Post
    - Is there a Shareholders Agreement (SHA) in place? Yes
    - If so, does the SHA take precedence over the Constitution in the event of conflict between the two? The SHA takes precedence over the constitution in the event of a conflict between the two docs.
    - If so, does the SHA (or Constitution for that matter) afford the founding Shareholders/Directors some additional rights/"powers"? No extra powers/rights noted.
    - Are ALL shares of the same class & rank, or for example are there for A Shares & B Shares? Yes, same class and rank.
    - The Constitution; is it a standard template version (e.g. ADLS), or bespoke for the company? ADLS one, not bespoke.
    - How many Company Directors are there (and how many are permitted - Max?). I gather you are noted as a Director on the Companies Office? Six directors, with equal rights under the constitution. No maximum stated. Yes, noted on companies office register.
    - From your "Trust question thread", have I understood you correctly.... your Family Trust actually holds "your" shares? Or perhaps not and they are in your personal name (too)? Yes, the family trust holds majority of shares through a holding company. There are a small number held personally through the trading company. The majority of the trading companies shares are held by the holding company.

    Thanks for the answers Fred. They provide a better high level view of the situation.

    Based on those answers and the other general info you have provided, my two cents worth of comment are following. But, I preface those by recognising that I quite possibly could be over-reading the tea leaves! However I note, with a little concern for you, your comment re "already being fatigued". Holding some shares in a private company (and working in the Company) is more akin to running non-stop in 100 marathons that you can't easily deregister from; rather than a 400m walk, from which you can enter and exit as you wish.

    - First & foremost I suggest that you review/implement your 5+yr personal financial strategy. Naturally this should reference all aspects of your financial life, not just the working partnership you refer to. Having a high level of conviction & confidence on where you wish to be financially in 5-10 yrs will provide you with A) more clarity on where you are today relative to where you should be, and B) how to get to your desired destination. In other words what steps (& when) you need to take to get to that point.

    - The ownership & governance structures in place aren't uncommon with these sorts of arrangements in the "professional services" sector. Nothing highly "alarming" spotted.

    - I'm assuming that you obtained legal advice prior to entering into the arrangements? People would far more often than not, as it is normally a requirement that you obtain independent legal counsel prior to deal execution.

    - Funny enough, after receiving that advice, many people in your position initially think, "Why the heck would I sign those doc's!"

    - But of course many still proceed, as there is a belief in & desire to ensure that it won't all end up in a mess. Additionally, relationships between the key stakeholders are often already well established, so there is an expectation that trust, respect & reason will prevail for the common good of the shareholders.

    - But in saying that, it is still surprising how many disputes do occur, with some becoming rather acrimonious in nature. Fortunately, mostly behind the scenes and well off the public arena. Prompted by confidentiality clauses, meditation clauses, protective provisions and of course an innate drive to not negatively impact on the perceived 'market' value of the shares.

    - You currently hold 16% of the shares, but have the opportunity to acquire more upon the retirement of some Directors. Dependent on what the SHA points to, I wonder if this is where your main opportunity to influence long term outcomes lies. E.g. being able to open up the Share register to a wider base? In saying that, often in these sorts of arrangements a simple majority (>50%) will not suffice. However if you and some other like-minded shareholders can get on the same page.......

    - Which sort of starts getting to the rub. Yes as SBQ suggested, one can go down the legal track. But as I guess you appreciate, that does tend to be rather adverserial, and importantly, it likely goes against the spirit of the agreement that all the parties entered into the relationship. Potentially a business relationship buster!

    - So yes, you may wish to seek legal advice. But I would suggest more from a holistic perspective; better understanding your rights & obligations. This stronger understanding would then feed into your "moral compass". Helping determine what actions you want to take that support your long-term personal financial strategy, whilst being legal, ethical and in keeping with the spirit of understanding between the parties.

    - When in business, one should always have an exit strategy, even if it is well in the future. With the current business ownership structure, your successful exit is likely to need a successor. It just happens that having robust succession planning in place is beneficial for you AND the Business. Planning that would be done with the other Directors AND future prospects.

    - That is where those good discussions start. That is where you will eventually find in others the support you seek. Identify (& procure if needed) those folk, mentor them, work alongside them and one day you will joyfully cross the finish line of the Marathon.
    Last edited by FTG; 09-09-2021 at 03:51 PM.
    Success is a journey AND a destination!

  10. #10
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    The situation has arisen naturally through the retirement of founding directors (after 40yrs, and the first time this has occurred in the organisation). One has already sold 40% of his shares of one-third ownership to two new directors, and they now own 6% each from this year. I and another employee were sold the other third of the company, so I am on 16% with another mid-tier director retiring in ten years (say) and we bought them in 2016. The other founding director keeps his moves very hidden, and consequently is influential, but at a distance from the running of the office. The constitution states that you cannot own shares without employment in the company, so he will have to sell if he wants to retire from work. Should I pick up half of his remaining parcel of 33%? The other director has his remaining 60% to sell too.
    The above in bold is what sets the direction of the company as it really sets the tone. I say this because experience matters and usually there's no greater experience then the founding operators of the company (40 years is a long time). Age is one thing, but if something is too good to let go, I can assure you there are ways for founding members to keep the interest in the business.

    What surprises me is the sell off of the ownership. I'll give you the example my friend that devoted over 10 years with the company he worked for as a reflection of what normally can happen. Being on paid salary + commission, he assumed he had enough tenure to move to the next level which is a 'buy in' in the business partnership (buying shares of the business). As the founders strung him on year after year, it became clear that they really had no intentions of offering him the partnership deal. Unsuspecting? Not when the founders had plans to groom their next generation son & daughters to become part of the business. Plain and simple, he was an 'outsider' and the partnership makeup was tightly held by the family founders. So the writing was on the wall which left him nothing more than a peon serf for the contracting business. How does this relate to your situation? Well there's a world of difference if the founding members are selling out vs founding members that continue the business generation after generation. My friend knew the company he worked for was a gem at making money. The founders knew that too, but if the founding members suspected the business environment has changed for the worse, it's a lot easier to bail out and sell the shares, than to simply carry on.

    This kind of thinking applies to publicly traded shares of large corporations. However unlike private holdings, any bad information by companies with shares traded on the stock exchange, is quickly reflected in the share price.

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