Strategy Execution Life Cycle – Strategic alternatives for managing minority shareholder’s sell down and commercial negotiations support
Background context – A technology company servicing the mining industry has a strong track record of developing and commercialising new technology to improve the efficiency and effectiveness of the mining process. The company’s success led to strong interest by leading industry service providers and ultimately the sell down of a majority shareholding to an industry partner. This shareholding helped accelerate the commercialisation of the mining technology by opening scale channels-to-market through the acquirers’ customer network. With the imminent commercialisation of the next generation of technology solutions the majority shareholder was seeking to buy out the minority shareholders to move to 100% ownership of the technology company.
Strategic Challenge – There were several factors leading to a difficult buy-out negotiation of the minority shareholding. Firstly, the majority shareholder held significant negotiating strength in its control of the primary market channel for the technology. Their ability to support or dampen that market access could have a material impact on the full and fair valuation of the mining technology company. Secondly, the majority shareholder had Board control and could use this control to make changes to management and leadership; potentially to the detriment of the minority shareholders. Thirdly, the company needed an immediate capital injection to deal with a range of liabilities leading to potential further dilution of minority shareholders if they didn’t participate in the capital raise. Finally, a large portion of the value of the company was resting on the commercialisation of emerging technology that was yet to be proven in the market.
Strategic Activities – Guberno worked closely with the minority shareholders to support them in their negotiations to maximise the valuation of their shareholding, despite their difficult negotiating position. Key activities where Guberno provided support included;
- Company Valuation – Guberno supported the client in refining their valuation model and how to value a range of alternative transaction structures considering a range of potential market outcomes for the emerging mining technology.
- Alternative transaction structures – Guberno supported the client in identifying and giving structure to a range of alternative transaction structures that ranged from; up-front cash payments, a range of earn-out structures, delaying and aligning the transaction with a future external capital raising event, share swap, a reverse buyout, and finally to stay engaged in the business.
- Negotiations support – Guberno provided negotiations support and advice through a range of negotiations between the minority and majority shareholders. This strategic advice needed to balance the needs of the majority shareholder while maximising the value for the minority shareholders to reach mutual agreement on fair value for a transaction to proceed.
Outcomes – Following a robust negotiation, the minority shareholders reached agreement in principles to the terms of a sell down. The sell down agreement is in the final stages of legal documentation.
Key Learnings – There were a range of key learnings emanating from this project. Firstly, In a phased sell down of a company, it is important up front to build in protection mechanisms for minority shareholders before losing control of key Board decisions. Minority shareholders negotiating strength in an ultimate sell down reduces materially when meaningful control over critical board decisions is lost. Ideally, the principles to be applied for any subsequent buyout of minority shareholders should occur and be embedded in key shareholding agreements pre the sell down of majority control. Secondly, understanding the needs and motivations of the counterparty is critical to navigating a successful negotiation. The perspective of an independent external advisor to interpret a counterparties behaviours can be a valuable input into the negotiations and allow adjustment in the negotiation strategy accordingly. Should buyout of the minority shareholders be strategic to the majority shareholders then negotiation strength transitions from the majority to minority shareholders.