Costly Mistakes Selling Shares in a Private Company

Shares, the fundamental units of equity ownership, represent a stake in a company’s future. Shareholders hold influence and decision-making power, collectively steering the direction of the business.

However, selling shares—whether to new investors or existing shareholders—can be a complicated process. It requires careful consideration of legal obligations and financial details. A misstep could lead to costly legal battles or financial setbacks.

In this article, we cover the key aspects of selling shares in a private company, highlighting five common mistakes to avoid. Whether you’re an owner or an investor, understanding these crucial points can help ensure a smooth and legally sound transaction.

Five Common Mistakes to Avoid When Selling Shares

1. Proceeding Without a Proper Share Valuation

   One of the most important factors when selling shares is determining the right price. Setting the value too high could deter potential buyers, while pricing too low could devalue the company.

   In public companies, market forces determine share prices. However, in private companies, the process is more complex. The price must be determined carefully, typically by working with a professional business valuator. They consider the company’s management, assets, and future earnings to assess a fair market value for the shares.

2. Misrepresenting the Company’s Financial Health

   Buyers are particularly interested in the financial health of a company before purchasing shares. A company’s financial statements and business records should provide an accurate picture of its profits, assets, and liabilities.

   During due diligence, buyers will carefully review these records to ensure the company’s financial situation matches their investment expectations. Sellers must be truthful in presenting this information, as any misleading statements could expose them to legal risks, including claims of fraud or negligent misrepresentation.

   Misrepresentation can lead to serious consequences, including legal liability, civil or criminal penalties, and damage to the company’s reputation.

3. Ignoring Confidentiality in the Transaction

   Selling shares involves sharing sensitive business information with potential buyers. This may include financial statements, revenue projections, ownership structures, and other confidential details.

   To protect this information, sellers should insist on a confidentiality agreement before disclosing any business information. This agreement ensures the buyer cannot misuse or share the data without permission.

   If a buyer breaches this agreement, the seller can take legal action to recover damages or prevent the buyer from further using the confidential information.

4. Overlooking Minority Shareholders’ Interests

   Minority shareholders—those holding less than 50% of the company’s shares—may have less control over company decisions but still have legal rights. Both the Ontario Business Corporations Act (OBCA) and the Canada Business Corporations Act (CBCA) provide protections for minority shareholders.

   One significant legal protection is the oppression remedy, which allows minority shareholders to challenge decisions they feel are unfairly prejudicial or harmful to their interests. Ignoring the rights of minority shareholders during a share sale could lead to disputes, delays, or even court intervention.

   Before selling shares, sellers should address any concerns raised by minority shareholders to avoid potential legal challenges.

5. Not Seeking Legal Counsel

   Selling shares in a private company involves navigating complex legal agreements and potential pitfalls. Failing to seek legal counsel can result in costly mistakes, from misinterpreting contracts to facing shareholder disputes.

   An experienced lawyer can review the sale agreement, ensure compliance with legal requirements, and protect your interests throughout the process. If a dispute arises, such as a shareholder oppression claim, a lawyer can provide essential guidance and defence.

Understanding the Statutory Freeze

In Ontario, there is also a statutory freeze on major business decisions during unionization campaigns or negotiations with unions, as outlined in section 86 of the Ontario Labour Relations Act. This freeze prohibits employers from making unilateral changes to wages, working conditions, or other key terms without the union’s consent.

Employers should be cautious during this period, as even legitimate business decisions can be challenged if they are made without proper authorization.

Conclusion

Selling shares in a private company is a complex process that requires careful planning. Avoiding common mistakes—such as misrepresenting the company’s financial health, failing to protect confidential information, and overlooking minority shareholders’ rights—can help ensure a smooth transaction.

Additionally, seeking legal counsel early in the process will safeguard your interests and help you navigate potential legal challenges. A lawyer can also provide guidance on valuation, negotiation, and the legal documentation needed for a successful sale.

Contact Achkar Law for Help with Share Sales

Selling shares in a private company is a complex process that requires careful planning and legal expertise. Avoid costly mistakes and ensure a smooth transaction by seeking professional guidance.

At Achkar Law, our experienced team of corporate and commercial lawyers can help you address the intricacies of share transactions with confidence.

• Accurate Share Valuations: We collaborate with professional business valuators to ensure a fair market value for your shares.
• Legal Compliance: Our lawyers ensure that all legal requirements are met and that your interests are protected.
• Confidentiality Protections: We draft and enforce confidentiality agreements to safeguard your business’s sensitive information.
• Minority Shareholders: We provide strategies to address the concerns and rights of minority shareholders.
• Experienced Legal Counsel: We guide you through every step, from negotiations to documentation and resolving potential disputes.

Contact Achkar Law today for a confidential consultation and let us help you achieve a successful and legally sound share transaction.

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