Percentage of shares
The percentage of shareholding taken in the target business will dictate the risk and rewards you face. A minority shareholding may not give you any control of the business or produce the financial returns you anticipate; a majority shareholding will bring you a seat on the board and day to day control, if you want it, but also brings a greater share of risk.
Types of shares
What types of shares are you buying? Are they ordinary shares with voting rights? Has the company issued any other type of share with differing rights to vote or share in profits? Does your investment require a new class of shares to be issued? Are there any restrictions on the transfer of the shares being sold? All questions a prudent purchaser should be asking.
Rights and restrictions
Do the articles of association or any shareholders’ agreement contain rights or restrictions that may impact your investment. For example, if you buy a minority shareholding and there are drag along or pre-emption rights in the either, this could impact your right to sell or not sell.
Another important question to ask is whether the shares tie you into any other obligations? Buying any shares in a company means you are taking on the liability risk of a company as well as the asset benefits. If your share purchase requires you to take on responsibility for the company’s previous shortcomings and liabilities, this could wipe out the value of your investment and place an unpalatable level of risk upon you.
Having a clearly defined purpose for your investment and level of acceptable risk will be key in navigating the purchase process successfully. A thorough due diligence exercise is a key part of the process.