A company started 3 years ago with 4 equal shareholder directors wishes to rebalance the shareholdings to reflect the fact that two of the founders wish to carry on growing the company and two do not.
They have proposed that the 2 non-active shareholders transfer part of their shareholdings to the 2 active shareholders. That approach might have personal tax implications for the individuals – it’s therefore been suggested that instead of transfers between shareholder directors the same effect could be achieved by the non-active shareholders giving back part of their shares to the company for a nil consideration.
Does anyone have any broad thoughts on these two approaches please? The company could be valued anywhere between £100k & £400k. Obviously professional advice will be taken but thoughts or opinions would be welcomed.
Thanks in anticipation.
Replies (11)
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Yes - the company can follow the s. 641-644 reduction of capital rules to either cancel or simply repay the unwanted share capital. It's a simple process.
Yes a rights issue that the outgoing shareholders don't take up is much simpler than a capital reduction.
Yes that's what I meant by a rights issue. But it's to the shareholders as a whole, not just to a subset of them. So in this case it depends on the other shareholders not exercising their rights, which if the outcome is one that all have bought into should not be a problem.
There is a possible problem with the rights issue route...
.... in that it could fall foul of the Employment Related Securities legislation and result in a tax charge on the active shareholders.
Undervalue
.... in that it could fall foul of the Employment Related Securities legislation and result in a tax charge on the active shareholders.
But only if they are issued at undervalue surely?
Please can you tell me
.... in that it could fall foul of the Employment Related Securities legislation and result in a tax charge on the active shareholders.
Which chapter of part 7 would catch this and why? It is relevant to something I have to look at.
@ John and @ Portia
:@John - I was working from BananMan's suggestion of a rights issue at par - which would appear to be an undervalue.
@Portia : I confess I haven't looked at the technical detail, but I don't think there can be much doubt that the new shares would be made available by reason of the employment. The definition, as we all know, is very widely drawn and we know that founder shareholders are caught.