How to get rid of an investor
Article Date: Nov 24 2005
Many companies owe their success to the wisdom and cash injection of an outside investor, but what can you do if your shareholder is no longer the right backer for your business?
Securing an outside investor can be both a blessing and a curse for growing firms. On the plus side, new shareholders can bring cash, experience and sound counsel. But external investors don’t back companies because of their heightened sense of altruism – they want to make money. The downside is that relationships can become strained if your business strategy doesn’t pan out as planned. In the end, you may decide your current shareholder is more trouble than they’re worth.
Prolonging a troublesome investor relationship past the point at which you clearly should have parted company can backfire. In the worst-case scenario, investors could launch the ultimate commercial coup d’état and oust you from the enterprise you started.
This, of course, is the fate that befell advertising agency darlings Maurice and Charles Saatchi in the early 90s. The brothers had embarked on an audacious acquisition programme (culminating in an improbable and ill-fated bid for Midland Bank), all the while making their eponymous agency Saatchi & Saatchi one of the biggest firms of its kind in the world. But as the acquisitions mounted, so did the debts and a colossal wave of investor disdain. Unsurprisingly, both brothers eventually departed.
Because their company was listed on the stock market (and the siblings were fantastically famous) the Saatchi soap opera was played out in the full glare of the media spotlight. But private ventures are prone to the same problem of negative publicity, even if, as Alan Bristow, managing director of corporate finance firm Icon, points out, ‘Private companies don’t tend to make the headlines.’ So it’s best to resolve shareholder strife before it threatens to bring down your empire.
The dangers of disillusionment
Tension between a business’ management team and its shareholders can arise for a plethora of reasons. As Andrew Millington, corporate finance partner at business advisory group Mazars, elaborates, ‘The business may be underperforming, missing key targets, being consistently in breach of its facilities or offering limited exit opportunities.’ Alternatively, relations between the two parties may simply break down on personal grounds.
Regardless of the circumstances, such tensions can be severely damaging, at the very least because they will almost certainly distract a management team’s focus away from running the venture. ‘Significant time and effort can end up being devoted to managing tricky investor relations and that usually means the boardroom becomes less effective,’ Millington continues. ‘In a difficult trading position it can make an already precarious situation worse.’
Eviction agreements
The situation can become even more unstable if the investor has a significant or majority stake in the business. With a 25 per cent holding, for instance, a shareholder will have the right to block any special resolutions the management team is trying to put through, while a 50 per cent interest grants an investor a wealth of additional powers, including the ability to hire and fire directors. Should a shareholder’s stake exceed 75 per cent, they would have the clout to do more or less whatever they wish.
The rights a company has to oust a problematic investor are not clear. Alasdair Steele, partner at law firm Travers Smith, notes that, ‘The starting point will always be to look at what agreements are already in place.’ If the initial agreement signed when an investor joined the business stipulates the criteria through which that investor must exit, the company will have a chance of legally removing them. If not, they will struggle, as ‘the law generally doesn’t take kindly to the removal of assets or property from an individual,’ says Steele.
‘It’s probably best to specify from the start how you’ll remove someone if you have to in the future, drawing up a contract everyone signs. That way, you start with a blank piece of paper and you can write what you want that’s most suitable for your business,’ he explains.
But the downsides are twofold. Firstly, any ground an investor concedes to you through such an agreement is likely to be reclaimed by them elsewhere – through veto powers over management appointments, plans, budgets and the like. Moreover, possessing an easy route to ditching an investor may be counterproductive. Such agreements can make it all too easy for management to protect their own interests and apportion blame for problems by making the shareholder a scapegoat, leaving the real issues at the heart of the problem unaddressed. That’s not likely to go down well with fellow investors.
On balance, says Steele, such agreements are ‘definitely worth thinking about, but it’s very much down to personal taste and they should only be exercised as a last resort, when directors and shareholders really aren’t talking to each other.’
