DEATH OF A SHAREHOLDER NO SHAREHOLDER AGREEMENT
One of my clients died suddenly he was a Shareholder owing 33% of the shares which are left to his his widow who already hold the 1% shareholding.
The Directors vote monthly dividends and the situation would be that it would be uneconomical for them to pay the widow and employ someone to take over the deceased work load.( the dividend is normally 2k per month)
The company has approx.150 k of undisturbed cash reserves and there was a meeting held just before the shareholder died to agree an interim dividend of 14k. This was to be put as an entry to the DLA and would be drawn when cash flow allows.
With the reserves I have suggested that the company buy back his shareholding and the widow seems agreeable to this for about 36k, however this would put a considerable strain on cash flow I have done some reading and wondered if anyone could clarify as to whether we could do the following:
1 The company pays the widow 36k she then lends the other 2 shareholders 36k which they then lend back to the company, we would then need to do a personal guarantee between the other two shareholders and the widow…..the company would be in a position to repay the deceased DLA immediately.( this removes any connection with the company ) it should be noted that one of the shareholders is her son in law .
2 Can I clarify the situation regarding an Auditors certificate re this I assume it will be the nearest month end that the shareholder died.
I dont luckily deal with this on an everyday basis and i am really looking for input or any other suggestions ...its one of those i need to chat to someone else about this moments i need to get the detail right before i propose it.
Replies (11)
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If the company has £150k of cash reserves why does it not just repay the DLA and buy the widow's shares back for the agreed price of £36,000. What is the difficulty?
Cashflow issues
I confess to being as confused as john about the cashflow issues. You say the company has £150k cash reserves which would seem to be more than enough to clear the figures mentioned. Is it possible that when you talk about "cash reserves" you don't mean money in the bank? If not, can you clarify why you think there are cashflow issues please.
Keep outside company?
Is selling the shares to the existing shareholders not an option? If they agree a sale with a 50/50 split (17% each) then that would appear to solve the problem. If she agrees the transfer of the shares now for the agreed price, but agrees to a payment plan of the sale price, then this is equivalent to her lending the proceeds as suggested in point 1. No cashflow issues for the company because the company is not involved in the share transfer.
I would be careful about just advising the widow to do this though. As has been suggested already, she should take separate legal advice on these arrangements. Even siblings have been known to fall out, so relying on current goodwill between all parties to continue is not wise. If she simply takes your advice and ends up losing out down the road, who do you think she is going to come after?
So...
We seem to be talking about a profitable trading company with a net asset value of £150K, where a 34% shareholder is prepared to sell those shares back to the company for £36K. From the information given I think the other shareholders should get a grip on reality, be thankful for the widow's accommodation and pay up.
Beware
There's a huge conflict of interest here. It's an unfortunate situation but I think that the remaining directors will just have to put up with the situation until it's resolved. The widow does have some rights attached to her inheritance.
So many issues
On the face of it there are a lot of issues here.
I agree with lionofludesch, there is a huge conflict here for the OP. If I were them I'd be carefully considering my position incase of a later fall out, especially if the OP acts for the individuals involved.
Pesuming the directors declaring the dividend are also the shareholders, this is being used as a form of remuneration as the OP states that the widow can't be paid £2,000 a month for making tea. She isn't being paid to make tea, she is making a return on an investment made by her late husband, who along with the other two directors have presumably taken a smaller salary as a sacrifice to grow the business.
The OP states prior to the death of the shareholder there was a meeting to agree a £14,000 interim dividend. Presumably if this took place, minutes and dividend vouchers were drawn up and the DLA will appear in the shareholder's estate. As the widow wants the best for the company she may agree for these to be paid as company cashflow allows, the same arrangement as her late husband.
The most obvious point is that a company with £150k reserves declaring dividends of around £72k per year (£2k per month x 3 shareholders) is likely to be worth more than £36k. This doesn't stop the widow selling the shares at a lower rate, but if you manage the share transfer and sale what stops her taking action against you later on? IMHO I'd be advising each shareholder to take independant legal advice, and advising the company solicitors are involved to some degree also.
*NB Apologies for any typos - iPads and fat fingers don't help!
Indirect loan
Whilst agreeing with the comments re conflict of interest, etc. I have used the indirect loan route more than once before to allow a purchase of own shares to be treated as capital. HMRC clearance team is happy with it provided the terms of the loan do not allow the widow to demand repayment at short notice and thereby put the company at risk (given that the individuals would ten b looking to the company for cash).