Shareholders’ agreements and selling part of your company’s shares

Shareholders’ agreements – something every limited company, unincorporated partnership, and limited liability partnership should have in place.

But surely this is more legal than accounting so what’s it doing on our website?

Yes and no. We’ll have a glance at the legal aspects in this just for your reference but this is something we’d recommend you go to a solicitor you trust.

This article looks at what happens tax-wise and with reporting issues when a shareholder wants to divest themselves of their equity in a private limited company.

 

Shareholders’ agreements – a brief run-down

A shareholders’ agreement is there to do a number of things.

It’s there to define who owns what proportion of the business. One of the reasons that many companies are incorporated is that it divvies up who gets what.

If there are three of you in a company and one has fifty-two percent of shares and the other two have twenty-four percent of shares each, it means that, when it comes to dividend payout, the dividends are divided proportionately among the shareholders.

Smart Team Tip – assuming you all have the same class of shares, each member of this company could be paid equally in dividends. However, the majority shareholder would have to sign a board meeting and a declaration to say that he or she is waiving his or her entitlement above what the other two shareholders are paid.

Shareholders’ agreements can also provide mechanisms for dispute resolution. In the case of a shareholder not pulling his or her weight, the agreement can restrict their decision-making ability, whether they can spend company money, or even bar a director from the premises until a certain set of conditions have been met.

Some shareholders may own or control unrelated businesses and shareholders’ agreements can impose penalties on these shareholders poaching staff or operating as a competitor. Shareholders’ agreements which contain restrictive covenants like these will often be legally enforced upon the successful sale of a shareholder’s equity to protect the value of the company and the other equity stakeholders’ investments.

Shareholders’ agreements can contain vesting provisions which lay down rules on how and when shareholders can cash out their equity and to whom.

A shareholders’ agreement is there to offer protection to the equity stakeholders in a business and are primarily concerned with allowing the company to continue trading in times when leadership is turbulent and uncertain.

 

Shareholders’ agreements – shareholder changes

If one shareholder wishes to sell the company but the other shareholders do not, many shareholders’ agreements contain a mechanism requiring that shareholder to offer his or her shares to the current shareholders or to the company itself before they offer it to a third party. This is often referred to as a right of first refusal.

Along with the right of first refusal, the shareholders’ agreement may include an agreed mechanism on how to value the company. Once the value of the company is agreed, then the price of the individual’s shareholding will be known.

Client Tip – if it’s a small shareholding, the current shareholders may be able to secure a negotiated discount from the would-be seller for two reasons – a) the size of their shareholding means they have no meaningful decision-making power and, as a direct result of a), b) the value of the shareholding will be less to a third-party as they would essentially be buying a silent investment over which they had no effective control.

 

Shareholders’ agreements – who and what can buy the shares?

The other shareholders may wish to buy the shares of the person who wants to leave.

If the existing shareholders do not have the capital to buy, the company itself may purchase the shares.

For a company to buy its own shares, a shareholder resolution needs to be passed. A company can pay for its own shares out of available capital, even if it does not have sufficient distributable profits. However, this is very complex (due to potential issues with protection of your creditors) and this is something you need a lawyer for. (Smart Team tip – please do see a lawyer about this – in all seriousness).

 

Shareholders’ agreements – assuming everything is fine, what happens then?

The departing shareholder has his/her wish – they’re out of here. The remaining shareholders have their wish – they’re still there and in control, whether they or the company own the shares (definitely something we’ll cover in more depth in the coming weeks).

Now there has been a change in shareholding, these steps now have to take place –

 

Stock transfer form and stamp duty payment – this is filled in by the departing shareholder with details including the name of the company, the name of the transferor, the name of the transferee, the number of shares, the price paid, and the names and address of the person/people/entity receiving the shares. This, together with a stamp duty payment of 0.5% of the value of the transfer (rounded to the nearest £5 and above a minimum of £1,000 transfer value) must be sent to HMRC within 30 days.

 

Notify Companies House – you’ll need to deliver a completed statement of capital form to Companies House within 28 days detailing:

  • total number of shares in your company
  • aggregate nominal value of those shares
  • aggregate amount (if any) unpaid on those shares (whether on account of their nominal value or by way of premium)

If your company has different classes of shares, the following needs to be submitted:

  • prescribed particulars of the rights attached to the shares
  • total number of shares of that class
  • aggregate nominal value of shares of that class

And, finally, if your company doesn’t keep its register of members public on shareholding issues, you must also report the following:

  • the name of every person who was at any time during the confirmation period a member of the company
  • the number of shares of each class held at the end of the confirmation date by each person who was a member at that time
  • the number of shares of each class transferred during the confirmation period concerned by or to each person who was a member at any time during the period
  • the dates of registration of those transfers

 

Get ready to pay Capital Gains Tax with Entrepreneur’s Relief – if the departing shareholder has held his or her shares for more than 12 months, they are entitled to a discounted rate of capital gains tax on the value of the sale of the shares equivalent to 10% of gain (subject to their annual £11,000 capital gains tax allowance).

The shareholder can deduct all related expenses from the gross capital gain (in these types of case, they would generally be legal and accounting fees) to declare their net gain for tax purposes.

 

Shareholders’ agreements – speak to us

Shareholders do fall out. It’s unfortunate but it happens far more than you might think. It behoves you and your other shareholders to do everything you can to protect your own interests and the viability of the company in all situations.

On the legal bits in this piece, please consult your solicitor. For everything else, we’d absolutely love to help you. Please call us on 01202 577500 or email us at [email protected].

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