In a building materials company group in Germany, two hostile family tribes were locked in fierce dispute. The two families each owned half of the shares and appointed their members to the joint board. The founders’ friendship turned into enmity with their children in the 2nd generation. In business terms, one side was more willing to take risks and invest than the other. Their management styles and treatment of employees also differed.
There was also open animosity on a personal level. This was compounded by the fact that families lived around the administration building. For example, one side lit up the other family’s house at night and installed extensive video surveillance.
For example, each side rejected the other’s proposals and investment decisions, introduced resolutions to dismiss and expel the other, challenged resolutions in court, and sought injunctions to approve the distribution of profits. Private disputes arose over breaches of bilateral contractual relations, and the authorities were also used, for example, by filing criminal complaints with the tax authorities.
The group suffered significantly from this deadlock. They learned that things could no longer continue as they were, and one side would have to relinquish their shares. However, the animosity was so intense that neither side begrudged the other for the continuation of the company. Other options, like dividing the group firms among shareholders based on different building material business areas, were also not feasible for the same reason.
Consequently, both parties’ proposals to sell their shares increased even further. Additionally, the exorbitantly high purchase offer prevented third-party sale of the shares.
I then proposed a Mexican Shoot-Out procedure, which the opposing family faction rejected because I was the representative of the other family tribe. Nevertheless, after several more injunctions and reports to the (tax) authorities that exceeded the pain threshold, the opponent saw no alternative.
A Mexican shoot-out is a variation of a Texas shoot-out, except that the lower price determines the purchase price of the selling party’s shares. Both parties must submit a sealed bid. A notary unseals the envelopes. The party who dared to call the higher number will be the purchaser. Consequently, the other party is obliged to sell and transfer the shares, but at the price of the lower number. Determining the purchase price by the lower number avoids the risk of a Texas shoot-out, in which one party offers too high a price simply because he wants to ensure he keeps the company. At the same time, the other party is prevented from offering an imprudently low price without serious consideration because he is speculating on the other party’s greed (for the company).
Since no one knows if he will be the acquirer or the transferor, neither party will ask for exaggerated warranties, undue covenants, and, most notably, a deterrent purchase price. Conversely, the transferring shareholder is happy to sell his shares because he will ultimately receive a higher payment for half the company group than he would have paid himself. With the proper legal support, the sale and purchase agreement will be easy to draft and not aggressively negotiated because no one knows which side they will be on. Finally, the parties avoid going to court. The economic motive is the judge.
When the notary unsealed the bids last month, both parties rejoiced. My clients bid the higher amount. They were thrilled to have acquired the group. In addition, the other party was happy to be free of the issue and to be able to sell the group at the price they were offering for its purchase. Because you are more than satisfied financially when you get the price you wanted the group for. It was the most emotionally charged signing I had ever experienced.