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Shareholder Dispute

I currently act for a small Ltd Co owned 70% by Mr A and 30% by Mr B (its two directors).

There has been a dispute, and Mr B has walked away to set up a competitor business.

The Company is marginally insolvent and Mr B owes the Company £3k. The Company makes marginal profits year on year, but certainly not 'super profits'.

Mr B is refusing to sign over his shares at par value to Mr A and is looking for £20k. Mr A has approached me for advice on what to do next.

As fars as I can see :-

- Mr A cannot force Mr B to sell his shares
- Mr A cannot put Co into Liquidation as 75% majority required for special resolution
- Mr B is entitled to 30% of future distributable profits

For the time being, Mr A has increased his salary in the company and cancelled any dividends.

Can the Company create a dividend-only alphabet share which vests only in Mr A?

What is the best way of dealing with this situation?

Regards

Fellowcraft

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By Anonymous
14th Jan 2009 17:12

splendid phrase...

I do like 'Volatile little weasel' and no doubt will find occasion to use it. The worst I've heard used here to describe a client is 'Mendacious toad'

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By Anonymous
14th Jan 2009 15:21

A touch more double entry...
As Euan says:
DR Share Capital, with nominal value of shares
DR P&L Reserve, with balance of payment for shares
CR Bank, with the payment for the shares

Then;
Dr P/L Reserve, with nominal value of shares
Cr CRR, with nominal value of shares

Where there are no distributable profits, or proceeds from fresh issues, you are looking at a Permissible Capital Payment. That is only permitted for private companies, and there are various hoops to jump through.

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14th Jan 2009 14:35

Double entry

DR Share Capital, with nominal value of shares
DR P&L Reserve, with balance of payment for shares
CR Bank, with the payment for the shares

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By Anonymous
14th Jan 2009 13:22

Much ado about nothing
I know this is a paltry case and I dont want to end up going down the legal path for such a small sum, but as you can probably tell, Mr B is a volatile little weasel.

Euan - yes that is an option I'll explore. For my own info, what actually is the double entry for a company buy back of shares?

And if he doesn't agree then Mr A's Newco will run concurrently until Oldco dies, and I'll execute a formal transfer of the business.

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By Anonymous
14th Jan 2009 13:14

A letter....
...perhaps a solicitor's letter to Mr B pointing out the error of his ways with regard to discharging his fiduciary duties in his capacity as a director, together with a prosposed settlement to the dispute (company purchase of own shares - perhaps for £3K), is the way forward.

These situations can sometimes escalate out of hand so legal advice at an early stage might be of use.

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14th Jan 2009 12:27

well, this is not.......
...a simple case of a difficult minority shareholder. B, as the "junior" partner in the enterprise, has declared war and walked off to set up a competitor.
No shareholder agreement, so left with the cumbersome and ineffective (for this type of problem) mechanisms of general company law (obviously read the Mem and Arts carefully word by word lest they do provide any effective relief mechanism).
B is presumably going to be as difficult as he can be
(you don't give us any ins and outs as to the dispute or why things have reached this stage).

It's over. A seems to have taken appropriate steps thus far, assuming he has genuinely tried to engage B in a constructive discussion to agree a civilised divorce. The next stage would be to go on war footing himself - but it sounds as if he's done so already. Extra salary (which will affect his pocket unfortunately) and no divis.
If B continues being bloody, it is not at all easy for A to shaft him by changing the existing company structure without leaving himself open to possible legal counter-attack. So it's not a route I would follow (it would need exact and expensive legal advice, and even then there is no guarantee an assured route could be found, depending on Mem and Arts).

A needs to set up his own company pdq, but probably keep existing company going whilst he does so and thereby enable him to transfer certain matters.
Both directors would be potentially failing in their fiduciary capacity as regards the existing company. A would need watch that more carefully than B and take care. But if handled properly this aspect should be manageable.

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14th Jan 2009 12:27

Capital redemption reserve?
I thought they went out with my textbooks many years ago.

By "the company is marginally insolvent", you presumably mean that it has no retained profits which could be used to buy back B's shares. If it is insolvent, it cannot reduce its share capital under the Companies Act 2006 by making a solvency statement.

However, it is not really a case of the company buying back the shares - it is a case of Mr A buying Mr B's shares. If he is prepared to pay £3k for them, Mr B would have the money to repay the loan and you would then have the basis of a deal.

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By Anonymous
14th Jan 2009 12:01

Buy back
Thanks for your opinions Geoffrey & Simon.

The shares are worth a negligible amount, as the company has no assets and profits are minimal.

I will ensure the company demands the loan account back from Mr B. Hopefully we can negotiate that the company buys back his shares for £3k. Just for my own purposes, would the debit entry be £3k to capital redemption reserve?

If he doesn't agree then I'll close it.

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By pawncob
14th Jan 2009 11:44

WYSIWYG
So he's a shareholder (minority).
Lots of companies have "difficult" shareholders and live with the problems they bring.
Do it by the book and demand repayment of the loan.
It's tougher for A to be a minority shareholder than it is for the company to have one.

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14th Jan 2009 11:09

problem
I think you are stuck with Mr B in all sorts of ways.

If the company is successful in future he may require an audit evern though turnover is below audit threshhold. You will need some sort of resolution to issue shares that change rights. Mr A needs to decide how much aggravation he is prepared to put up with gong forward

What do you think the shares are worth? Without the benefit of accounts and knowledge of the business it is difficult to be more specific.

As Mr B is competing with the company his life could be made difficult. Why not suggest he be made to repay the loan of £3k.

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By Anonymous
14th Jan 2009 10:00

Reply
Sorry, I meant 30% [ques edited]. There is no shareholders agreement in place.

Mr A wants Mr B to sign over his shares at par, and I am acting for the Company and Mr A only.

Can the company issue a dividend only share to Mr A, or does this require 75% approval?

I agree that perhaps the best way of dealing with this is to form a fresh Newco however I would like to avoid doing this if possible.

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14th Jan 2009 09:48

First of all
Why is mr B only entitled to 20% of any future profit distribution when he holds 30% shares?

2.This suggests that there is a shareholder agreement in place. If that is the case does the agreement raise the question of arbitration as to share valuation?

3. Alternatively i would put Mr B to the expense of getting a third party to value his share

4 Changing the share structure at this stage would still require Mr B's agreement.

5 The other way is for Mr A to form a new company and cease the trade of the existing one. There will still be a need for a valuation but it would get things moving.

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