Can a Company Buy Out a Shareholder?

Yes, a company can buy out a shareholder. This process can be driven by various business needs, such as going private or facing a hostile takeover. Understanding the mechanics of these buyouts is crucial for both shareholders and companies.

Buying Back Shares for Going Private

A publicly traded company may decide to go private, a situation where the shares traded on the stock market are bought back by the company itself. This decision usually requires a proposal at a shareholder general meeting, where a majority of shareholders must agree to the buyout proposal and the stock purchase price. Often, the company offers a premium to the current market price to incentivize acceptance. After the proposal is accepted, there is a transition period during which the stock price typically moves towards the buyout price. During this time, shareholders may choose to sell their shares into the market or wait for the buyout to complete, with the company ultimately depositing cash or sending a check for the value of the shareholder's stock holding once the buyout is officially recorded.

Stock Buyback During Takeovers

Another scenario where a company can buy back shares is during a takeover. A recent example is the acquisition of Kansas City Southern Railroad (KSU) by Canadian Pacific Railroad (CP). In late 2021, CP offered a combination of cash and stock for every share of KSU. The company's shareholders approved the offer at a meeting, leading to a successful acquisition.

Buying a Shareholder Out through Voluntary Agreements

In some cases, a company will buy out a particular shareholder voluntarily. This can be to address specific issues or conflicts, such as when an activist shareholder is greenmailing the company (seeking to pressure the company into buying their shares at a premium). In such situations, the company and the activist shareholder may negotiate a fair price and buyout terms.

Utilizing Shareholder Agreements

For companies, it is advisable to have a unanimous shareholder agreement (USA). This document typically includes a formula for calculating a fair price and a procedure for buying out a shareholder. If a company lacks a USA, it can be considered a valuable lesson to create one for future ventures. This way, all shareholders agree to the terms upfront, reducing future disputes.

Key Points

Company buyouts of shareholders require the agreement of a majority of shareholders and are usually tied to specific business objectives. Voluntary buyouts, such as those during a takeover, are driven by the needs of both the company and the activist shareholder. Having a unanimous shareholder agreement can provide a fair and transparent process for buying out a shareholder.

Understanding these processes and having the right agreements in place can help both shareholders and companies navigate the complexities of share ownership and corporate acquisitions.