Capittal's view: how the price is split between shareholders

Quick answer

Capittal's view is that the sale price is not split by shareholding percentage but by what each shareholder contributes to getting the deal signed. And what decides that split is not fairness: it is the shareholders' agreement you signed years earlier. If that agreement contains a drag-along clause, the 60 per cent shareholder is in charge, the 30 and the 10 per cent shareholders are obliged to sell, and each receives the same price per share. If it does not, the 10 per cent shareholder can refuse to sell and block the entire deal. That power to block has a price, and the minority shareholder will end up collecting it.

Why does the buyer want 100 per cent, and what happens if they cannot get it?

A buyer of a mid-sized company wants 100 per cent of the share capital. This is not their lawyer being difficult.

A minority shareholder who stays inside keeps rights that constrain the new owner: information rights, a vote at the general meeting, the ability to challenge shareholder resolutions and, in most Spanish private limited companies (the sociedad limitada), a pre-emption right that conditions any future movement of the share capital. The buyer also inherits the risk of a dispute with a partner they never chose.

When a buyer cannot reach 100 per cent, they react in one of three ways.

• They cut the price. A clean 100 per cent is worth more per share than 90 per cent with an outside shareholder still inside.
• They impose a new shareholders' agreement. The remaining minority is required to sign a future call option, a drag-along right and voting restrictions.
• They walk away. Many private equity funds and trade buyers simply do not complete deals without full control.

What is a drag-along clause and how does it change the balance?

A drag-along clause is the provision in a shareholders' agreement that allows the shareholder, or group of shareholders, reaching a stated percentage to force the others to sell their shares on the same terms and at the same price.

If your agreement has a drag-along right that triggers at 60 per cent, the balance is settled in advance. The majority shareholder negotiates, decides and drags. The 30 and 10 per cent shareholders cannot block anything. All they can do is check that the price per share they receive is identical to the majority's, which is exactly what the clause guarantees them.

Three details of the drag-along decide whether it is worth anything on the day of the sale.

• The threshold. A drag-along that only triggers at 75 per cent is useless to a shareholder holding 60.
• Identity of terms. The dragged shareholder must receive the same price per share and the same payment structure, including deferred amounts and any earn-out.
• The scope of the warranties. You must set out whether the dragged minority is liable under the representations and warranties, and up to what cap.

What is a tag-along right and who does it protect?

A tag-along right is the mirror image of the drag-along. It protects the minority.

It lets the 10 per cent shareholder join the sale if the majority sells, on the same terms and pro rata. Without a tag-along, the 60 per cent shareholder could sell their block to a third party, collect a control premium and leave the other two inside with a new partner they did not choose and no way out.

In a sale of 100 per cent the tag-along is barely noticed, because everyone is selling. It becomes decisive in partial sales: a fund taking a majority stake, one shareholder being replaced, a reorganisation of the share capital.

What happens if there is no shareholders' agreement?

With no shareholders' agreement, nobody drags anybody. The 10 per cent shareholder can simply refuse to sell their shares, and does not have to justify it.

The articles of association govern share transfers and the pre-emption right, but they do not oblige any shareholder to sell. A majority at the general meeting is enough to approve accounts or appoint directors, not to sell somebody else's shares. Each shareholder owns their own.

• Sell the business rather than the shares. The company sells its assets and the proceeds are then distributed. This is decided by a reinforced majority at the general meeting rather than unanimously, but the tax bill is usually higher and it leaves behind contracts, licences and relationships the buyer wanted.
• Buy out the minority before selling. The other shareholders acquire their stake and go to market with 100 per cent. It works, but you pay for the same problem twice: first the minority, then the buyer, who already knows what it cost you.

Why does a minority who can block end up with more per share?

Because they are not selling 10 per cent of the share capital. They are selling the possibility of the deal closing at all.

If the buyer insists on 100 per cent and the 10 per cent holder can say no, their signature is worth more than their percentage. The price they ask is not measured against the value of their stake in isolation. It is measured against what the other two shareholders lose if the sale collapses. That gap is wide.

This is not an abuse. It is the price of the block, and it exists because the shareholders' agreement did not remove it when it could have done so in writing and at no cost. The 60 per cent shareholder who did not insist on a drag-along the day the equity was divided is paying for that omission years later.

When is a control premium or a minority discount justified?

A control premium pays for the ability to decide: appointing directors, setting the dividend, approving a sale. A minority discount is its reverse. A small stake, with no control and no liquidity, is worth less per unit than one that governs.

These adjustments are a common valuation guideline for minority stakes, not a statistic or a fixed percentage. And they have a clear limit: when 100 per cent is sold at once, all three shareholders are selling the same thing, a complete business, and a split by percentage is the natural starting point.

One factor weighs more than the theory: who keeps working in the business after completion. If the 30 per cent shareholder is the managing director the buyer needs to retain for two years, and the 60 per cent holder is a passive investor leaving on signing day, a strict split by percentage stops making sense.

Which asymmetric splits are legitimate?

A split that departs from the percentages is neither a favour nor a fudge when it answers to something real and documented. These are the usual cases.

• Staying on and earn-out. The shareholder who keeps running the business after completion carries the risk of the deferred consideration and a restriction on their own freedom. That is paid for with a market salary and with the share of the earn-out tied to their management.
• Non-compete. An undertaking not to compete is worth money, and the one given by the shareholder who knows the customers is worth more than the passive shareholder's. It can be priced separately.
• Personal guarantees. If a single shareholder guaranteed the credit facility or the lease with their own assets, they took on a risk the other two did not. That is compensated.
• Shareholder loans. Money a shareholder lent to the company is repaid before any price is divided. It is not price, it is debt.
• Outstanding remuneration. Unpaid salaries, dividends declared but never paid, expenses met personally and never reimbursed. These are settled separately and with documentary support.

The rule is simple: every asymmetric split needs an identifiable cause and a document behind it.

How is the split documented before negotiating with the buyer?

The conversation between shareholders is closed before the first offer arrives. Afterwards it cannot be: every disagreement among you is heard by the buyer and used.

These are the five documents worth having settled before the process opens.

• A review of the shareholders' agreement and the articles of association. Establish whether there is a drag-along, at what threshold it triggers, and what the pre-emption right says.
• A price allocation agreement. The base split by shareholding plus the agreed adjustments, each with its cause set out in writing.
• A rule for the deferred price. How the earn-out, the escrow and any holdbacks are shared, since they do not arrive on completion day.
• Allocation of liability. Who answers under the representations and warranties, in what proportion and up to what cap in euros.
• A single mandate. One adviser for all three shareholders and one voice facing the buyer.

What is the next step if there are three of you and you want to sell?

Put the shareholders' agreement on the table before anyone talks about money. Look for whether a drag-along clause exists and at what threshold it triggers, whether there is a tag-along right, and what the articles of association say about share transfers. Then write the split down: the base by shareholding, the adjustments with their cause, and the allocation of the deferred price and of the liability. And sign it between you before any buyer knows your name.

At Capittal Transacciones we review the shareholders' agreement and settle the price split before the process opens, as part of the confidential valuation we prepare for owners considering a sale. We are a mid-market M&A boutique operating in the approximate range of 3 to 250 million euros, with eight offices in Spain (Barcelona as headquarters, Madrid, Girona, Lleida, Tarragona, Palma, Zaragoza and Valencia) and we are part of the NRRO group. The partner handles each mandate directly, including the difficult conversation between shareholders about who gets what.

Keep reading

• Guide: every decision you face when selling your company
• Share deal or asset deal
• What happens if a shareholder refuses to sell

Settle the split between shareholders before opening the process: talk to Capittal