Unlocking Liquidity in Private Markets

The private equity landscape has witnessed a dramatic shift in how high-growth companies manage employee compensation and investor relations. Secondary share sales – transactions where existing shareholders sell their stakes to new or existing investors without the company issuing new equity – have emerged as a critical mechanism for providing liquidity in an era of extended private company lifecycles.

Two significant examples of this trend have been announced recently: OpenAI’s planned US$10.3 billion employee secondary share sale to institutional investors at a US$500 billion valuation, and Revolut kicking off an employee share sale process at a US$75 billion valuation.

Understanding Secondary Sales

Unlike primary fundraising rounds where companies issue new shares to raise capital for operations and growth, secondary sales provide liquidity to existing stakeholders – employees, early investors, or founders – without diluting the company’s capital structure or requiring the company to use capital for share repurchases.

These transactions serve multiple strategic purposes:

• For employees – secondary sales provide liquidity for equity compensation that might otherwise remain locked up until an initial public offering (IPO) or acquisition.

• For companies – secondary sales can help talent acquisition and retention, reduces internal pressure for premature IPOs, and provides price discovery through competitive investor processes.

• For investors – secondary sales provide an earlier opportunity for existing investors to realise returns on investments. For new investors that may have limited opportunities to participate in primary fundraising rounds, secondary purchases offer an alternative means of access to high-growth companies.

Legal Considerations

Legal factors affecting private companies considering initiating a secondary sale process include:

1. Contractual restrictions

Transfer restrictions may be built into the company’s constitution and agreements, for example:

• Right of first offer/ right of first refusal – insiders, such as founders, investors, other existing shareholders and even the company itself, may have the right to purchase shares before sales to outsiders.

• Co-sale rights – insiders may have the right to participate in secondary sales alongside employees, and/ or to compel sales under certain circumstances.

• Corporate approvals – share sales may require prior approvals, such as from the company’s board and/ or its remuneration/ employee share option scheme committee.

2. Due diligence

Institutional purchasers in secondary transactions may conduct due diligence and request information relating to the company’s financial performance, corporate governance, share capital and equity plans, and material risks. Such requests often require management cooperation.

Companies facing due diligence requests should consider entering into confidentiality agreements prior to disclosure of commercially sensitive information, and may also consider passing costs to the purchaser, if the requests are extensive.

3. Legal documentation

Secondary sales require sophisticated documentation. At the minimum, parties would be expected to enter into a sale and purchase agreement defining price, closing conditions, timelines, representations and warranties, and dispute resolution mechanisms.

4. Tax implications

Secondary sales may trigger tax obligations for selling shareholders, depending on, amongst others, how gains are characterised, and for employees, whether the shares were granted pursuant to a previous exercise of share options.

Transfers of shares in Singapore companies are also subject to payment of stamp duty.

Conclusion

Secondary share sales have evolved from rare, opportunistic transactions to essential components of private company capital and talent management strategies. As such transactions continue gaining traction in the market, it is essential for companies and stakeholders to understand its risks, benefits and best practices.

If you are require expert assistance in navigating secondary sale strategies or similar opportunities, please get in touch.