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Buying Stock From Distant, Inactive Relations

Dear Advisor: We are a third generation C Corporation with over two dozen family shareholders. Most of our stock is concentrated in the families of active owners, but about 25% is owned by distant cousins who live in another part of the country and are practically strangers. For many years, our business performance has been mediocre at best. We haven’t paid dividends nor had cash for stock buy-backs. Now, we’re turning the business around and making some money. We are considering dividends and expect the company’s value to soar. The non-active shareholders have contributed nothing to our turnaround and really don’t deserve dividends or additional value for their stock. We’d like to buy them out before the price goes up. How can we best persuade them to sell?


We certainly understand your desire to buy your cousins’ stock. We often encourage “pruning the family tree,” restricting ownership to active owners. After the transition to the second generation, however, the process becomes more complicated.

In your situation, we urge that you consider any buy-back offer as a strict business proposition. You owe a fiduciary duty to your minority stockowners. Using your insider information to their detriment would violate that duty and could land you in court. Consult your attorney about applicable securities law before taking any action. We recommend going forward on the basis of full disclosure and market value. Contact your cousins, perhaps letting them know that they have a rare opportunity to convert their illiquid asset to cash. You can also let them know that while you hope for improved performance, risk is always part of the reality of business. You should recognize and appreciate your cousins’ patience, as they have been holding their stock without reward for many years. Finally, you should point out the importance of ownership consensus on goals for a private company’s management.

Buyouts of inactive shareholders in older family businesses often become a long-term objective of active owners. Over time, various shareholders may opt for cash--particularly when they need money to settle estates. Under such circumstances, the active owners can simply communicate their willingness to buy at a fair price.

The Advisor

 

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