Considerations in a Management Buy-Out – Part 3: Roles & Responsibilities & Shareholder Agreements

Welcome to Part 3 and our final post on the Considerations in a Management Buy-Out series, Roles & Responsibilities & Shareholder Agreements.  While we specifically do not advise clients in these areas, we have been involved in many conversations and know how they can lead to major pitfalls if not done correctly.  Being aware of conflicting interests and trying to address potential points of contention early on will further set you up for success in your MBO journey.

Employee Hat

Owning a minority or majority interest in a company where you work means that you must wear two hats, one as an Employee and one as a Shareholder. While the Management Group typically does not foresee their roles changing drastically once they become Owners in the Company, aside from a more significant leadership role, it can come as a surprise the level of responsibility that now rests on their shoulders. 

If the management buy-out involves a group of employees, many may find that their day-to-day roles will not change.  The group will designate 1-2 individuals to lead the business (i.e., CEO/President, COO) and decisions will not automatically be made by consensus.

The Management Group’s ownership interests will be managed via the Unanimous Shareholder’s Agreement (“USA”).

Shareholder Hat – Your Rights

Shareholders’ rights are outlined in a Shareholders Agreement and differ from your rights as an employee.  At a minimum, shareholders should expect to have:

1. The right to vote at the shareholders meetings
2. A portion of profits (distributed by way of dividend)
3. A share of the assets/property of the corporation upon dissolution
4. The ability to elect or dismiss directors
5. The ability to approve by-laws and amendments to the by-laws
6. The ability to appoint the auditor of the corporation and the right to examine a copy of the corporate records, financial statements, and directors’ reports
7. A copy of the Company’s financial statements before each annual meeting
8. The right to approve major or fundamental changes in the business (major decisions to be defined)

Key Shareholder Clauses

To minimize conflict in the future, the rights of all Shareholders should be agreed to in advance in the Shareholder’s Agreement.  Some of the fundamental clauses include:

1. Directors and Officers: Powers and duties (i.e., capital expenditures, dividends, debt, etc.)
2. Conflicts of interest and how they will be resolved
3. Company/shareholder loans: are they allowed; will they bear interest?
4. Shareholder meetings: frequency and how decisions will be made
5. Individual sale of shares

1. Voluntary vs involuntary (i.e., termination of employment)
2. First right of refusal
3. Financing/payout terms
4. Valuation of company/calculation of the purchase price
5. Incapacity; death of a shareholder
6. External sale of shares: consensus vs majority

6. Family law provisions (divorce)
7. Non-competition

As we noted in Part 2 of our series on Considerations in a Management Buy-Out, seeking the advice of professionals including your human resource and legal teams is key to ensuring the roles & responsibilities of the management group and the rights of each new shareholder are clearly understood.

The Journey

Without a doubt, navigating a MBO is a complex process with a lot of considerations for both the exiting owners as well as the management team buying into the ownership of the Company. From valuation, financing to deal structuring, Welch Capital Partners is here to help guide stakeholders through these momentous milestones and support them along this journey.  We are passionate in our efforts to help you understand, maximize, and capture the value that you’ve created, and will continue to create for decades to come.